Many businesses that seem totally safe and uncomplicated to you and me, can sometimes be considered high risk by banks and card processing companies.
The cumulative effect is that the cost of payment processing services is higher for those businesses than for low risk “regular,” businesses.
You may be surprised to learn that old-fashioned bricks and mortar furniture stores are considered high risk! Read on to find out why.
Why are processing costs greater for high risk merchant accounts?
Here’s the thing. Banks and card processing companies know that high risk businesses cost more to handle. If fraud or chargebacks occur and the business cannot or will not make the necessary refund, additional resources are employed to assist both the consumer as well as the merchant. Procedures are put in place and sponsoring banks start working on mitigating any potential losses that might follow.
That’s why big ticket businesses are always considered high risk.
Even if only a limited number of businesses get into difficulties that cannot be resolved, it could potentially represent major losses for the card processor. You can see why costs are higher than for regular “low risk” business merchant accounts, as they will need to cover those occasional losses.
What percentage, fees and charges will I pay for a high risk merchant account?
It’s important to be very clear about what to expect before you sign a contract with a service provider. Yes, you do need a merchant account to do business but you don’t want to pay excessive charges that will simply erode your profits excessively.
There is no straight answer to what you will pay. It really all does depend on what terms and conditions a service provider offers you. However, you can usually expect costs to be an additional 2% to 5% more than for a low-risk merchant.
Be prepared for actions that could impact your cash flow as well as your overall charges and fees:
8 elements of the percentage you pay for a high risk merchant account
- Interchange-plus pricing – The card processor adds a fixed amount (e.g. $0.35-2.00%) to every transaction in addition to the percentage paid to the card networks (e.g. 2.0%-3.5%).
- Tiered pricing – The most common pricing structure for high risk merchants. It may have tiers such as non-qualified, mid-qualified and qualified with different percentage rates.
- Early termination fee – This applies if you want to exit from your contract early. Pay particular attention to this cost because sometimes it can be quite large and catch you off guard.
- Liquidated damages – Quitting a contract early may also make you liable for what the card processor perceives to be lost profits. This tends to be in the form of a monthly minimum charge or minimum processing fee. Check the contract carefully for this clause.
- Automatic renewal – Some contracts trigger automatic renewal unless you give adequate notice that you do not wish to renew after the expiration date. Early termination fees usually don’t apply after the initial term but you will want to look into this as well.
- High chargeback fees – Although high risk merchant accounts may be expected to have more chargebacks than low risk equivalents, some payment processors may apply high fees.
- Retained reserve – Although not a cost as such, the card processor may keep a portion of each transaction as a buffer against possible future loss-making incidents. Rolling, up-front and capped reserves are very common and can impact your cash flow significantly.
- Frozen account – If your business shows signs of raised risk through excessive fraud or chargebacks, the card processor may simply freeze it to protect itself. Eventually the merchant account may be terminated.
High risk merchant account Vs a regular card processing account
Any business that does not fit the profile of regular or “low risk” is placed in the high risk category by banks and card processing companies. It’s a binary thing – your business is either one or the other.
Several Factors that can classify your business as high risk for a merchant account:
- The industry you operate in – Adult services, dating, firearms sales, pharma, nutraceuticals or e-cigarette sales are all immediately considered to be high risk industries. The list is long and contains some that will definitely surprise you, such as music concerts and travel tickets.
- Potential for fraud – some industries attract fraudulent activities more than others.
- International sales – selling abroad carries a greater risk of fraud and higher chargeback costs
- High ticket items – Sales of fine jewelry, furniture, automotive or even “respectable” services such as marketing and property management all involve large dollar amounts. Customers are more likely to query expensive items than $10 purchases.
- High monthly volume – Businesses with a high number of sales transactions and dollar volume obviously carry a higher risk of something going wrong.
- Recurring billing plans – These must be totally transparent and fully agreed to by the customer. Repeat cancellations must be minimized by all means possible.
- Poor credit or no credit history – Merchant account applications are assessed in a very similar way to applications for loan financing. Banks and card processors apply similar criteria when looking at the company and/or business owners making the application.
- Trading history – long-established businesses may have an edge over start-ups when it comes to proving a track record of satisfactory trading and payment processing.
- Chargeback ratio – Anything over 2% can put your business in the high risk category because chargebacks and refunds add to the costs of handling your account for the bank or card processor. High chargeback ratios are the most common cause for merchants to have their card processing account terminated. High risk merchant accounts usually have a higher tolerance for chargebacks built in to the business model and agreement than regular “low risk” accounts
The takeaway message is . . .
The extra charges of a high risk merchant account are worth it to enable your business to flourish. Think of them as simply a cost of doing business.
The key things are, “be aware of them before entering into a contract” and ensure your business margins can handle the fees and potential cash flow impact of the reserves.
Your next step is to apply for a high risk merchant account today. Click here for our online application form. Or call us on 1-800-419-1772 to speak to one of our payment system experts.