What is a high risk merchant account? The very term itself – “high risk merchant” – is paradoxical because risk is at the very heart of business. The only reason businesses exist today is because at some point in the past, someone, somewhere, took a risk. And so, businesses are established in this way.
But in order to grow, businesses must share risk with creditors, banks and payment processors. Financial institutions must evaluate these prospective partnerships to determine which pose the highest risk(s). These “high-risk” partners (or, merchants) receive less preferential treatment to those considered low risk. The first step to entering the second category is to understand how certain merchants end up in the first.
Banks and payment processors may label you as “high risk” for reasons due to your specific industry or clientele. You can also become designated high-risk for reasons directly related to your business practices.
Reasons for the label
Some businesses are just plain risky to begin with. Industries like agriculture, logging and construction not only suffer a disproportionate share of fatal and nonfatal accidents, but also top the list of industries with the most fatalities in the US. For these reasons, they are automatically considered “high-risk.” Other businesses such as casinos, adult services, cryptocurrency trading and debt collection also have their share of “accidents” and are considered high-risk.
But the biggest risks come from high-volume transaction businesses that suffer from a high rate of chargebacks, fraud and credit card disputes. Banks and payment processors can be left on the hook for a merchant’s failure to produce refunds or cover costs under such circumstances.
This problem is compounded when the buyer/seller interaction moves to on-line transactions where there is no physical credit card present at the time of the sale. Because there is no physical interaction, all online merchants are usually regarded as high-risk.
In the case of some businesses, their high risk designation is the result of internal factors – most usually their business practices.
The easiest way to become labeled “high risk” by a bank or traditional financial institution is to have a history of compromised partnerships with similar organizations. If your merchant account has been terminated in the past for irregular or illegal activity, your business will receive a “high-risk” designation on the TMF or MATCH lists.
Similarly, if your business principal has a poor or compromised credit history, your business will likely be deemed “high-risk.”
Businesses that have a history or late payment or non-payment of bills present an immediate red flag to banks and online payment processors. Payment processors tend to rely on timely payment of fees and interest in order to sustain their businesses.
If a merchant is deemed high-risk, that merchant will face difficulty establishing a merchant account with a bank, traditional financial institution or online payment processor.
The effects of being deemed high risk
Just because a merchant is deemed high risk doesn’t necessarily mean that they will be completely unable to obtain financial or payment processing services. Any number of online payment processors are willing to provide accounts to high-risk merchants. But those accounts come with strict terms and severe limitations, especially if you have had previous merchant accounts terminated for nonpayment or violation of terms.
The banks and providers willing to work with you will, first of all, demand higher-than-average fees to establish a working relationship. These will be enforced by contracts with very strict terms. Merchants must abide by these terms or risk termination of the account and another black mark on the MATCH or TMF lists.
The processing account for high risk merchants will usually include a safeguard in the form of transaction volume caps or monthly reserves. Once a certain number of transactions are reached for the month, no more are possible until the following month. Limiting the number of transactions slows merchant income growth. It also increases the likelihood of an escalating chargeback rate which is a percentage of total transactions that can be kept in check by maintaining a high monthly volume.
Such accounts also can be levied a small rolling reserve. This act, which involves holding back a certain percentage of your profits to offset risk, also limits your growth potential and further reinforces your “high risk” status.
Your determination to grow involves a willingness to overcome obstacles. The first step is to understand why you have been designated a high risk merchant. The second is to recognize that dozens of industries from adult entertainment to bail bonds, firearms dealers, software companies and travel agents share the high risk designation. And yet these industries continue to flourish.
Best practice among successful merchants in high-risk industries involves partnering with online processing firms that understand the challenges you face and are willing to offer custom solutions suited to your business.
The major concern of underwriters evaluating merchants who are deemed high-risk is to ensure the business they run is legal and follows all appropriate regulations governing activity in its parent industry.
Additional steps are also possible.
High-risk merchants seeking to succeed in an online environment must recognize the limitations they face when seeking relationships with banks and online payment processors. These can be overcome with effort and preparation.
The first step is to select an online payment services provider that specializes in working with “high-risk” businesses. Secure Global Pay has a strong track record of providing custom solutions and quality services to merchants in traditionally high-risk fields.
We welcome your inquiry. You can begin the process by completing our easy on-line application form. Completing an application does not guarantee acceptance. However, pending approval by our underwriters, you can usually begin processing online payments in as little as 24 – 48 hours. Apply now!
Maximize your chances of a favorable evaluation by SecureGlobalPay underwriters by doing the following:
- Pay all outstanding debts and bills
- Provide proof that you have some capital in the form of bank savings
- Nominate a principal in the business with a sound credit history to apply for the merchant account
Underwriters seek to ensure that merchants do not have a history of suspicious or questionable activity so that risk is not passed on to the credit card processor. Resolving any such outstanding issues prior to application will increase the likelihood that your business will receive approval.