Getting an ideal high-risk merchant account provider is crucial for any business planning on accepting electronic payments in an unpredictable market space. Understanding the details on what is considered “high-risk merchant accounts online” will assist you in securing the correct payment processor for your high-risk online business.
High-risk businesses operate in volatile industries. And because of this, their payment processing requirements are different from regular merchant businesses.
The term “high-risk merchant accounts online” is used mostly by sponsoring banks and payment processing companies that provide irregular services to these unique business types. This designation also helps describe higher-risk merchants who tend to accept high-risk credit card transactions while selling online products or services.
These financial companies use this high-risk category to classify these unique businesses to help them get ahead of the challenging scenarios usually associated with them.
Examples of some of the challenges these high-risk industries are exposed to include fraud, high chargebacks, age verification, legal restrictions, and subscription billing.
What is Considered a High-Risk Business Model?
Certain business types will earn the tag of “high-risk” for different reasons. And each reason attracts a different set of challenges. Below are the major reasons why businesses are declared high risk.
Chargebacks: Chargebacks occur when customers ask for money back after payment has been made. When the merchant does not refund payment, the customer files a dispute with the bank that issued the credit card account. A processing history with over 1% chargebacks will often require a high-risk merchant services account with some type of chargeback prevention plan in place.
Reasons for filing for a refund can vary from accidentally ordering the wrong product to having buyer’s remorse after purchasing a product. Whatever the case, too many chargebacks make the business a candidate for a high-risk merchant account.
Fraud: This illicit activity goes beyond criminals using stolen credit and debit cards and perpetrating identity theft for personal gain. It also includes friendly fraud, a scheme particularly common with high-risk businesses online.
Friendly fraud often occurs when customers make a false claim to ask for money back. An example is a deceptive customer claiming a product never arrived or that it got damaged during shipping.
Subscription: This is a convenient payment model for services like tech support, software vendors, and magazines. But it often results in recurrent chargebacks because customers get billed ahead of time.
Sometimes, people forget about canceling their subscriptions and only remember and then ask for refunds when they are billed. Any high-risk businesses using this billing model are often classified as high-risk merchant accounts online by credit card processors and acquiring banks.
High ticket Items: High ticket sales carry a greater threat of fraud and chargebacks than low ticket items. Jewelry vendors, precious metal shops, antique dealers, and travel merchants belong to this category.
E-commerce sites selling luxury goods are among the worst hit because online criminals love targeting them. In this case, stolen cards are usually used to buy expensive electronics and jewelry. And by the time the real owner of the credit card realizes this, the goods are untraceable.
Merchants are responsible when these losses occur. And if the merchant cannot cover the cost, it is passed on to the payment processor or banks.
Tight regulations: Industries like adult entertainment and CBD are hemmed in by tight regulations that financial institutions do not like.
For example, a farm bill that permitted hemp production for agriculture was signed in 2018. The same bill facilitated insurance cover for hemp.
However, these federal laws do not have the desired effect at the state level. This is because states can still go ahead and ban hemp production without any consequences. There is also the confusion of moving hemp products across state lines.
No clear-cut directions or guidelines address cross-state transportation. This is always a nightmare for businesses with strict or tight regulations looking to procure merchant account services.
Public Perception: Most banking institutions and payment processors value their brand name and do not want it associated with controversies.
And so they avoid businesses that can put their reputation at risk. This is the reason why payment processors like Stripe and PayPal have no dealings with the porn or firearms industry.
We now live in a digital age, when a controversy in a quiet town can go viral in a matter of hours, companies do their best to avoid bad publicity and negative perceptions about their brands.
Unfortunately, some high-risk businesses come under this umbrella and payment companies steer clear of them.
What is a High-Risk Merchant Account Online?
A high-risk merchant account is a special merchant bank account managed by a payment processor for high-risk businesses. These merchant accounts specialists assist companies with high-risk online businesses that tend to operate in volatile business environments, with high-risk niche-specific business verticals, and unstable market conditions.
How Does a High-Risk Merchant Account Work?
This type of high-risk merchant account has to go through a detailed approval process before it can be opened.
The first step is to find a payment processor for high-risk merchants that has the expertise and experience in your market space or industry. While payment processors like Square and Stripe offer quick approvals, they do not do business with many high-risk merchants.
For example, Stripe bars CBD businesses from accepting payment with their services. While Square wants nothing to do with over 30 high-risk businesses including escort services, credit repair agencies, betting, and firearms.
The bigger problem with these payment processors is that they can open an account but still go ahead to label a merchant high-risk and close down the account.
When filling out an application, there is a demand for information bordering on chargeback rates, sales volume over the last 6 months, and any other vital information that will help the processor decide if you are worth the risk or not.
High-Risk Merchant Account Underwriting
The underwriting process is the last stage before an account is opened. It entails reviewing all information submitted and asking for additional documentation if required.
The extra documentation can include approval product testing certificates, bank statements, or even details invoices supporting the sales. Underwriters might also need to take a look at your website to make sure the security and web copy is in line with regulations.
What to Look for in a High-Risk Merchant Account
Here are some important features to consider when looking to open the right high-risk merchant account
- Fast approval
- Proficient sales agents
- Reasonable processing rates and affordable monthly fees
- First-rate customer service
- Provisions of the merchant account in the country of application
- Excellent ratings and reviews
- ETA & BBB accreditation
- Effortlessly integrated payment gateway and virtual terminal
- Strong grasp of industry or market space
- Credit card processing know-how
- Chargeback expertise
- An impressive network of banking connections
- A lengthy record of successful applications
- Room for discussions over fee reduction in future
Opening a Bad Credit Merchant Account
Individuals with a credit score of 580 or less have bad credit. This means your chances of getting approved for a high-risk merchant account are low.
However, with a bad credit merchant account, it is still possible for a business owner to open an account even with a low FICO score.
Hiding a poor credit score is not something you can keep away from a payment processor. When they review your financial information, they will see it and if you have not submitted it, they will ask for it.
For an online businesses owner with a poor credit score looking to apply for a merchant account, it is essential to have the following:
- Government-issued and valid ID
- Pre-printed voided check or letter from the bank
- Processing bills of last 3 months
- Bank statements of last 3 months
- Employer Identification Number or Social Security Number
- Well protected and fully operational website
- Chargeback ratios less than 2%
Companies with a poor credit history need to prove they are running a legitimate business and show they simply went through a bad patch.
Underwriters evaluate the risk of a business and determine if the merchant is complying with the rules and regulations before endorsing the opening of an account.
Underwriters need the following if they are to make a decision in your favor.
- Your credit scores
- Bank statements
- Credit card transaction background
- URL of your website
The best solution to this is to settle all outstanding bills and invoices. And if you have a sizable amount of money in your bank account, say so in your application.
Always be transparent and upfront with underwriters when applying for a bad credit merchant account.