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A high-risk merchant account is a merchant account given to a business that the payment processor deems to be at greater risk of fraud and chargebacks. Payment processors determine if a business is “high risk” during the underwriting process for a merchant account. Factors they consider include the nature of the business, its financial history, and its location.
Almost every business needs to be able to accept credit and debit card payments, which means almost every business needs a merchant account. But did you know not all merchant accounts are created equally? The type of merchant account you get depends on a variety of factors, including the type of business you operate, where your business is located, and your personal financial history.
In the end, you’ll either be given a low-risk merchant account or saddled with a high-risk merchant account—and this designation has a huge impact on how much it will cost you to accept credit and debit card purchases. So let’s take a look at how payment processors decide who gets a high-risk merchant account. We’ll also provide you with some tips on what to do if you are considered a high-risk merchant.
But the best way to get started is to learn about how payments are processed, and why merchant accounts exist in the first place.
A merchant account is an account provided by your payment processor in which funds from your business’s credit and debit card transactions are deposited after a payment has been processed. From there the funds are deposited into your business bank account. The benefit to merchants is that most payment processors will deposit funds into their account within one to two days of the transaction, while they wait to receive the actual funds from the issuing bank (which can sometimes take longer).
Payment processors require customers to have merchant accounts to mitigate the risk they take on in processing payments. There’s actually quite a bit that can go wrong when a payment is processed—the payment could be deemed fraudulent, the customer could demand a chargeback, or the purchase could be a violation of the processor’s terms of service (among other issues). When this happens, the payment processor will require that the holder of the merchant account deal with the issue—but there is always a chance that the account holder will refuse, or simply disappear.
If this happens, the payment processor is left holding the bag, so to speak. The funds from the transaction have already been transferred to the merchant’s business bank account, meaning the payment processor has no way of recouping their loss. A merchant account and the fees associated with it are essentially a hedge against that happening.
About those fees: There are two types associated with merchant accounts—interchange-plus and tiered pricing. Interchange-plus pricing is expressed as a small percentage of a transaction (paid to the credit card network) plus a small fixed fee (paid to the payment processor). For example, if you use Shopify as your payment processor you’ll be charged a 2.6% + $0.30 fee on every credit and debit card transaction. Interchange-plus pricing is usually negotiable, with low-risk merchants getting more favorable terms.
Tiered pricing is a bit more ambiguous. Basically, your payment processor will charge you a different per-transaction processing fee depending on how “qualified” it deems the purchase to be. Essentially, the more risky the processor deems the purchase, the higher the processing fee you will pay. How the processor qualifies the purchase can often be unclear to the merchant. In general, tiered pricing is more expensive than interchange-plus pricing.
Now that we know what a merchant account is and why payment processors use them, let’s see what happens when a merchant is considered “high risk.”
When you apply for a merchant account, you’ll need to provide business and tax information and, often, submit to a credit check. If anything in your application signals to the payment processor that you might be a high-risk merchant, you’ll either be refused a merchant account or given a merchant account with high rates and fees to compensate for the fact that the payment processor believes your account is more likely to experience fraudulent charges, chargebacks, and other issues.
It’s also important to note that every payment processor has different standards for what they consider “high risk,” so just because one payment processor deems you risky does not mean all payment processors will. But if you do end up having to take out a high-risk merchant account, you can expect to pay a lot more to process payments. According to the merchant services provider ShopKeep, high-risk merchants can pay up to 1%-2% more per transaction than low-risk merchants. In particular, here is what you can expect with a high-risk merchant account:
If all of this sounds less than ideal, that’s because it is. But as a high-risk merchant, you don’t have a lot of bargaining power because there isn’t a large market for your business.
As we mentioned earlier, when you apply for a merchant account you essentially go through an underwriting process with the payment processor. Although different processors have different standards, here are some things that may be considered red flags, and lead to your business being designated as “high risk.”
Businesses that may be considered high risk by a payment processor come in all shapes and sizes. Examples include airlines, escort services, casinos, e-cigarette vendors, collection agencies, fantasy sports websites, weapons vendors, life coaches, pawn shops, vacation planners, and furniture or electronics stores.
If most payment processors identify you as a high-risk merchant, it can be hard to find a good deal on processing. To help, here are some best practices to keep in mind:
Unfair as it might be, if you’re considered a high-risk merchant, payment processing is going to be more expensive for you. However, that doesn’t mean you need to be ripped off. Major payment processors may not want to work with you, but there reputable services out there that will take your business. Do your research, evaluate your options, and read your terms closely before signing any contract. Ideally, the benefits of accepting credit card payments will far outweigh any costs incurred.