Whether you are a fledgling business or one that has been in operation for several years, your ability to take both credit and debit card payments is imperative to long-term profitability and even survival. In order to accept payments, you will need to have a merchant account.
The type of merchant account issued will largely depend on the type of business you operate, the location of the business, as well as your financial history. Once that is determined, you will be offered either a low-risk or a high-risk merchant account. Depending on the classification, you will either pay higher or lower fees for the privilege of accepting credit and debit card payments. Low-risk merchant accounts tend to enjoy more privileges, such as lower processing fees for every transaction and the ability to negotiate for more favorable pricing and contract terms.
What Is A High-Risk Merchant Account?
A payment service provider can make the determination if a business is a high risk if they have a higher than average risk of fraud and chargebacks.
Other criteria that payment providers use to categorize merchants as high risk are the following:
- Poor personal credit score
- Current business finances are in disrepair
- History of chargebacks or fraud
- Businesses that have just opened their doors and therefore have little to no financial history
- You operate your business from overseas
- You sell your products and services to high-risk regions
- You sell “risky or questionable products and services” (i.e., firearms, adult entertainment)
- You sell luxury goods and services
The Downsides Of Being Designated As High Risk
Take note that every payment processor will have different guidelines to determine whether a business is a high risk. If you do happen to receive the high-risk classification, here are the likely consequences to keep in mind:
- Higher fees for every transaction
- Long-term contracts that only favor the payment processor
- Higher chargeback fees for every chargeback
- Automatic contract renewals and early termination fees
- Rolling reserves (a portion of your sales are kept by the processor to protect against fraud).
- “Unusual processing patterns and risk behavior” will result in the payment processor freezing or terminating your account.
Can You Avoid Being Classified As A High-Risk Merchant?
There are some strategies you can employ to avoid being classified as a high-risk merchant but look at this as a long-term strategy. One thing you can do is take the necessary steps to raise your credit score. You can also do whatever you can to protect yourself against chargeback fraud. In addition, aim to build a positive relationship with your merchant account and keep it free of any blemishes.
If none of these strategies are in place, yet, then you will need to come to terms with the aforementioned terms and conditions. In the meantime, do what you can to build up a positive merchant account history.
Being a high-risk merchant can be filled with obstacles and pitfalls, however, they are manageable. It starts with seeking a trustworthy, reputable high-risk merchant account provider who is well-informed and familiar with your high-risk industry and its challenges. Take the time to read reviews, ask for recommendations, and review contracts before you agree to any long-term partnership.