All businesses that offer payment processing services allow a certain level of risk with every transaction. If a transaction is challenged or proved fraudulent and the merchant lacks funds to reimburse the cardholder, the payment processor must compensate the customer. Due to this risk, merchant account providers take specific steps to reduce this risk by imposing restrictions on the accounts they offer. They are careful about the kinds of business they are ready to work with, considering some industries are too inherently susceptible to fraud or chargebacks.
Let us assume the payment processor detects some “unusual” transaction patterns or decides that a business has had too many chargebacks in a given month. In that case, they may terminate the merchant’s account, leaving the business high and dry without a means of accepting customer payments.
The only solution to these problems is high risk merchant accounts providers. Some payment processing institutions are willing to take the risk of working with merchants with “high-risk” profiles by offsetting the risk in other ways that don’t leave a merchant with the fear of account termination. The terms of a high-risk merchant account are generally different from those you would find in a more standard payment processing agreement, but the advantages for a business that needs a high-risk merchant account more offset any inconveniences.
Types of businesses considered high-risk.
When you register for a merchant account, you will go through an underwriting process with the payment processor. Although different processors have varying standards, the following are some things that may be considered red flags which will lead to your business being designated as “high risk.”
- Merchant account history: If your account has a history of fraud or chargebacks with another merchant account provider, your application is at a disadvantage.
- Bad business or personal credit score: A bad credit score shows the payment processor that you may not manage finances or are more susceptible to fraud.
- Years in business: Merchant account providers are wary of customers with lesser experience with payment processing.
- Questionable products or services: This varies by the payment processor, but the exceptional industries are pornography and drug paraphernalia.
- Where your company is headquartered: If you sell to customers in one country, but your company has its headquarters in another country, you pose a higher risk of fraud.
- High-cost purchases: If your average purchase amount is unusually high, you could be considered high risk—the more expensive the purchase, the greater the chance of fraud.
Benefits of High-Risk Merchant Account
When it comes to international transactions, low-risk merchants are limited and severely restricted. High-risk merchant accounts have fewer restrictions that might limit their goals for global expansion. International and offshore merchant accounts are ideal for high-risk businesses, allowing for generous volume caps and the capacity to open one’s doors into worldwide markets. By accepting transactions in multiple currencies and selling to clients outside countries considered low risk, you can grow your business performance as a high-risk merchant.
One of the many benefits of a high-risk merchant account is that there is more flexibility regarding chargebacks. With a high-risk merchant account, you have a better chance of keeping your account in good shape. For instance, a merchant with a regular account may end up with a terminated account if he crosses the chargeback threshold. He will have to look for a high-risk merchant account that usually equals a pause in taking credit card payments. Conversely, it is easier to keep a high-risk merchant account in an up and running condition because a single chargeback exceeding doesn’t have to come with closing an account. But it also doesn’t mean that you can neglect chargeback management.
Although the merchant may be subject to higher fees due to chargebacks, their business isn’t perpetually in danger. High-risk merchant accounts are rarely terminated due to high chargebacks.
Volume caps are everyday occurrences in low-risk merchant accounts. It goes back to the predictability factor equated by many banks with financial stability. Unfortunately, some business models are not built to have the same volume every month.
One of the important advantages of a high-risk merchant account is the ability to transact freely without worrying if you will surpass the expected volume for the month. It allows the merchants an unlimited earning potential. Merchants that benefit from this include those that:
- Offer high ticket products ($500+ per item)
- Have a recurring billing pattern
- Processing of over $20,000 in transactions each month
Subscription and recurring merchants especially have a lot to gain with a high-risk merchant account. They are not forced or limited to restrict transactions and can enjoy recurring revenue with the potential to grow.
4. More Earnings.
With a high-risk merchant account provider backing your payment processing, you may potentially uncover a sustainable source of long-term growth for your company. In reality, some merchants regularly rely on recurring payments or large-sum transactions to provide a steady stream of earnings that drives their company forward. By having a high-risk merchant account provider, you can continue to use this company model without much difficulty.
Eventually, a question arises if there are any positive effects to being a high-risk merchant? The short answer is yes. The long answer is that it may take a blending of some traditional concepts.
Firstly, it’s essential to understand the label “high risk”. For a business to allow credit card payments, it must obtain a merchant account from an acquiring bank. Many merchants get merchant accounts through payment processors, which specialize in their industry or business model. In any event, getting a merchant account requires the merchant to present the business’s history and financials, the owner’s financial information, and the type of products and services being sold.
The bank considers this information when determining whether to issue the merchant account. If a merchant is deemed high risk, a traditional bank may deny a merchant account. One of the leading factors that contribute to this high-risk designation is an increased inclination to chargebacks.
Acquiring banks look for stable and predictable businesses with shock value that is little to none. The bottom line is, the lesser predictable a business’ financials are, the less likely it is to receive a merchant account. Those who obtain and end up in the high-risk category often find their merchant accounts terminated without warning and see that they are added to the Terminated Merchant File (TMF). At this point, it may seem hopeless that a high-risk merchant may ever be able to operate and accept credit cards ever again.