If you are considering starting an online business, you know that your enterprise must move beyond the idea stage in order to be successful. Beyond having a well-thought-out business plan and business model, you will need a way to bring in a reliable source of income.
Most successful online business owners know that they need a way to take payments and process those transactions quickly, efficiently, and safely.
This is where the business owner must seek a trustworthy merchant account provider to equip them with the necessary tool to process these payments. This tool is known as a merchant account.
A Merchant Account Defined
A merchant account is a type of account that is issued by an acquiring bank that allows businesses to accept both credit and debit card payments. Sales can take place both onsite and online.
When opening a merchant account, the acquiring bank will request a detailed merchant account agreement that will detail the relationship between the merchant and the bank. This will include all fees and transaction costs that will be charged by the bank. Some base fees can be payable monthly or annually.
What Is A High-Risk Merchant?
A high-risk merchant is a business owner that operates within certain verticals that typically are prone to fraud and unusually high incidences of chargebacks. It is commonplace for both payment service providers and banks to not service high-risk merchants with a merchant account due to great financial risks involved. Two of the most prominent verticals that are flagged as high-risk businesses are those in the adult/pornography material and online gambling.
Some of the most common high-risk merchants include:
- Health and wellness products
- Prepaid phone cards
- Multi-level marketing
- Software downloads
- Gym memberships
- Multi-level marketing
- Travel accommodation
There are many considerations that go into determining whether or not your business falls into the high-risk category. It basically comes down to two categories: the red zone (you are operating a business within an industry that is high-risk, regardless of business history) or the grey zone (businesses considered high risk due to their own performance or processing history).
Further characteristics within each category are as follows:
- The sector is listed on a High-Risk Industries List
- You are not in compliance with the security regulations of your industry
- Your sector has high chargeback ratios
- There’s a high employee turnover rate
- You conduct business in countries where the risk of chargeback runs high (such as Mexico, Russia, Brazil, etc)
- Your business is just starting out, with little to no credit card processing history.
- You have a high number of chargebacks (above 1%)
- You are operating as an international merchant with a multi-currency business
- You’ve been classified as a Terminated Merchant (TMF), which says that you’ve previously lost a merchant processor due to an excessive number of chargebacks.
- You have a bad credit card history (late payment on bills or not providing collateral for loans as high risk).
- You have a high volume of returns and refunds
If your business falls under the Grey Zone category, your business history will play a significant role in the type of credit card processing that will be accessible to you. When a business is just starting out and lacks a processing history, it places them at a disadvantage since card-not-present transactions increase the risk for fraudulent transactions.
Conversely, Grey Zone businesses that have a stable and good processing history will have no trouble finding a processor.
Red Zone businesses can usually find a provider as there are many in the industry that specializes in helping merchants that operate within high-risk industries.
What Are Considered High-Risk Businesses?
This is certainly not an exhaustive list of industries that are considered high-risk businesses. It really depends on the specific criteria laid out by the individual processor. Here are a few standard categories:
- Sports Booking
- Online Gambling, Online Gaming, and Casinos
- Subscription-based services
- Travel and Advanced Booking
- Bitcoin Mining or Forex Trading
- Telemarketing services
- Online Dating and Adult services
- E-cigarettes and tobacco
- Cannabis Products / Head Shops
What Is A High-Risk Merchant Account?
A high-risk merchant account is a type of merchant account given by a provider after the merchant has been determined to be at greater risk of experiencing fraud and chargebacks. Most providers grant this designation based on the merchant’s type of business, location, and financial history.
High-risk merchant accounts typically have these characteristics:
- They accept multiple currencies
- Their average credit transaction is over $500
- The business owner has a bad credit history
- Their average monthly sales volume is more than $20,000
- They provide recurring or subscription payments
- They sell to countries typically associated with high levels of fraud (anywhere outside of the US, Canada, Western Europe, Australia, or Japan).
- They sell high-risk software
The Benefits Of Opening A High-Risk Merchant Account
Opening a high-risk merchant account brings some helpful benefits for merchants. Here are a few to consider:
- Lower risk of account termination
If your business were to experience a temporary period where chargebacks and transaction volumes were to suddenly increase, your account will not be in danger of termination.
- Chargeback and fraud protection
High-risk payment processors are equipped with the latest chargeback mitigation tools and other security measures to keep your account safe. This protection benefits the provider, the customers, and the merchant.
- Access to international markets
“Standard” payment processors tend to shy away from merchants who deal with overseas transactions and multiple currencies. However, high-risk processors are much more adept at working with international markets.
There are many elements to consider when you receive the high-risk merchant classification. In order to acquire the best high-risk merchant account provider, do your due diligence in researching for the ones who have the integrity and expertise you need to move your business forward.
Ensure that they offer services where you can remain PCI-compliant and 3D Secure. Most importantly, a reliable and reputable provider will offer you a wealth of chargeback management tools to help dramatically lower your chargeback ratios. All of these measures will help your business manage risk efficiently and responsibly.