There are certain industries and business types that are considered “high risk” by payment processors and banks due to factors like higher chargeback rates, compliance issues, and the potential for fraud. If your business operates in one of these industries, obtaining a standard merchant services account can often be challenging. This is where a high risk merchant account can help.
High-risk merchant accounts are tailored payment processing solutions designed specifically for businesses deemed high-risk. These accounts have higher fees and stricter requirements but provide the ability to accept credit card payments, which is essential for most businesses. Industries that often require high-risk merchant accounts include adult entertainment, online gambling, cryptocurrency exchanges, firearms dealers, and some travel agencies.
In this article, we’ll explore what precisely qualifies a business as “high risk,” the benefits of high-risk merchant accounts despite the heightened costs and regulations, key security measures processors may require, and how to find a reputable provider that meets your business needs. Our goal is to give you an in-depth yet accessible understanding of what a high-risk merchant account entails and how it can help your business operate securely while still accepting essential credit card payments.
There are several factors that payment processors consider when determining whether a business is high-risk:
Business Type or Industry
Certain industries are automatically flagged as high risk due to their nature. This includes adult entertainment, online gambling, crypto exchanges, firearms dealers, and medical and pharmaceutical businesses. Even seemingly benign industries like travel agencies, non-profits, and online retailers can be at high risk in some cases.
Higher Chargeback Rates
Merchants with chargeback rates above 1% of total sales are typically considered high-risk by processors. Chargebacks occur when customers dispute transactions and request refunds from their banks.
Higher Refund and Cancellation Rates
Refund and cancellation rates that are significantly above industry averages may also raise red flags for processors and indicate compliance issues or fraud.
History of Fraud or Compliance Violations
If a business has a record of non-compliance with banking regulations or a history of fraudulent activity, processors will likely see them as a high risk.
New Businesses with Little or No Credit History
Startups and newly formed businesses have not yet established a credit track record, so processors may be hesitant to take them on as clients without additional protections in place.
Age of Business
Older, well-established businesses with a history of consistent sales and low chargebacks are generally seen as a lower risk compared to newer ventures.
While these risk factors do not automatically disqualify a business from acquiring a standard merchant account, they make it far more difficult. A high-risk merchant account allows businesses in high-risk industries or with the above risk factors to still process credit card payments securely.
Despite the higher costs and stricter regulations, high-risk merchant accounts provide several key benefits for qualifying businesses:
Greater Ability to Accept Credit Cards
For businesses in high-risk industries, a high-risk merchant account often provides the only viable way to accept credit and debit card payments. This significantly expands a business’s payment options and potential customer base.
Easy Setup and Management
Most high-risk merchant account providers offer straightforward setup processes and user-friendly merchant portals to manage transactions, refunds, reporting, and more.
Ability to Operate and Grow
By providing a means to securely process credit card payments, high-risk merchant accounts allow qualifying businesses to legitimately operate and potentially grow their customer base.
Offset Higher Fees with Increased Revenue
The higher processing fees charged by high-risk merchant account providers are often offset by the additional revenue enabled by accepting credit card payments. As a business grows, overall processing costs as a percentage of revenue may decrease.
Complying with the additional security and compliance measures required by high-risk account providers helps reduce chargeback risk, fraud losses, and the potential for regulatory fines – offsetting the cost of higher fees.
Despite the higher costs and requirements, a high-risk merchant account can provide the means for qualifying high-risk businesses to legitimately operate, expand their payment options, and potentially grow by securely accepting credit card payments. The benefits ultimately depend on an individual business’s needs and goals.
High-risk merchant account providers generally charge higher fees compared to standard merchant accounts due to the perceived risks of high-risk businesses. Common additional costs involved with high-risk merchant accounts include:
Higher Setup and Monthly Fees
High-risk providers typically charge higher initial setup fees ranging from $100 to $500 or more. Monthly or statement fees are also usually higher, from $25 to $75 per month.
Higher Transaction and Processing Fees
Per transaction and processing fees are normally 1% to 3% higher for high-risk businesses compared to 1% to 2% for standard merchants.
Higher Reserve Requirements
Providers often require high-risk merchants to hold a portion of future transaction amounts (up to 25%) in a reserve or holdback account as an additional buffer against potential chargebacks or losses.
Lower Approved Transaction Limits
High-risk merchants may have lower maximum approved transaction amounts due to fraud mitigation policies.
Additional Security and Compliance Fees
Providers may pass on the costs of additional security and compliance measures to high-risk businesses through separate monthly or per-transaction fees.
These higher costs are meant to offset the perceived risks and added management associated with high-risk merchant accounts. However, as discussed previously, the benefits of accepting card payments often make these costs worthwhile for qualifying businesses.
High-risk merchant account providers typically implement stringent security measures and compliance policies to mitigate risks and protect themselves from chargebacks, fraud losses, and fines. Common additional security requirements for high-risk merchants include:
Business and Owner Identity Verification
Providers often require high-risk businesses to verify identities, business ownership status, and operational details to ensure legitimacy.
Mandatory Business Licenses and Registrations
Businesses may need to produce and maintain all applicable business and facility licenses, tax registrations, and regulatory permits.
Strict Data Security and PCI Compliance
Providers may require high-risk merchants to comply with advanced data security and PCI compliance standards like network scanning, encryption, and tokenization.
Fraud Monitoring and Prevention Tools
Providers may require high-risk merchants to install and actively use fraud detection and prevention solutions to monitor and flag suspicious transactions in near real-time.
Real-Time Transaction Approval Systems
For high-risk businesses, providers often utilize systems that approve or decline high-risk transactions in real time based on risk indicators and fraud rules.
Strict Chargeback Management Policies
Providers commonly have zero-tolerance chargeback policies for high-risk merchants, requiring active chargeback monitoring and prevention plans.
These heightened security measures and compliance policies help protect high-risk merchant account providers from losses while also helping to mitigate risks for the businesses themselves. While involving additional costs and resources, complying with required security standards is essential for high-risk merchants to legitimately operate and grow their businesses.
Choosing the right high-risk merchant account provider is critical to the success of your business. Consider the following factors when evaluating potential partners:
Specialized Industry Experience
Look for providers that have extensive experience working with businesses in your specific high-risk industry. They will better understand your unique needs and risks.
Fees and Pricing Transparency
Compare all fees, including setup, monthly, and transaction fees. Negotiate if possible and ensure all costs are clearly disclosed upfront.
Understand what security and compliance measures the provider requires and evaluate if your business can meet those standards.
Reputation and Trustworthiness
Research the provider’s reputation, history, leadership, and reputation with industry groups and regulators. Check the Better Business Bureau and other review sites.
Technology and Support
Ensure the provider offers robust technology and platforms that meet your business needs as well as reliable customer support.
Personalized Service and Attention
Consider whether the provider can offer more customized service plans and assistance tailored to your unique risks and requirements.
Review contracts closely for hidden fees and restrictions. Negotiate terms when possible to get a fair and flexible agreement.
Recommendations and Referrals
When possible, ask other businesses in your industry for recommendations of proven high-risk merchant account providers they trust.
Onboarding and Transition Process
Understand how the provider will onboard and transition your business, especially if changing from another account. Look for providers that make it seamless.
Overall, focus on finding a high-risk merchant account provider that has been proven effective in your specific industry, has a track record of transparency and trustworthiness, offers flexible plans tailored to your individual needs, and can make onboarding and ongoing management as easy as possible. Do your research and ask the right questions to find the partner that will best help you securely grow your business.
In summary, a high-risk merchant account provides payment processing services specifically designed for businesses deemed high-risk by traditional providers. While these accounts come with higher fees, stricter security requirements, and additional risks, they also offer the ability for qualifying businesses to accept essential credit card payments.
With careful research and planning, businesses can find high-risk merchant account providers that meet their unique needs, minimize risks, and help them operate and grow securely. The right partner can help offset costs through business growth while ensuring compliance with necessary security measures.
Obtaining a high-risk merchant account requires navigating additional complexities and risks. But for businesses that fall within high-risk categories, these accounts provide the most viable option for accepting credit cards and gaining the benefits that come with processing electronic payments.