Many businesses may seem totally safe and uncomplicated to you and me. However, some of these business types can often be considered high-risk by sponsoring banks and credit card processing companies. A better understanding of high-risk merchant account fees when entering into a merchant agreement will go a long way. High-risk merchant account fees and rates are determined by region, processing history, chargeback percentages, business type, and credit card volume processed. Learn why a chargeback can be your worst enemy and help ensure you are making the best decision when choosing a high-risk merchant solution for your higher-risk business model.
However, you may also be surprised to learn that old-fashioned brick-and-mortar furniture stores are also considered high-risk! Read on to find out why these merchants’ business types pay higher merchant account rates & fees.
Why are Processing Costs Greater for High-Risk Merchant Accounts?
Here’s the thing. Banks and credit card processing companies know that high-risk businesses cost more to manage on many different levels. If fraud or chargebacks occur, bad things happen. If the business cannot or will not make the necessary refund, additional resources are employed. These resources assist both the consumer as well as the merchant while also preventing losses for the payment service provider.
Additionally, credit card processing acquirers that allow merchants to have too many chargebacks can eventually lose their ability to service their merchants overall. Heavy fines are often imposed, and sponsoring banks simply will no longer risk doing business with processors that take on these riskier business types. Proper management and loss prevention procedures have to be in place. Special teams are assigned to help mitigate any potential losses that might follow when approving these high-risk Industry types.
Even if only a limited number of businesses on a specific portfolio get into difficulties that cannot be resolved, it could potentially represent major losses for the credit card processor and sponsoring bank. You can now see why costs are higher than for regular “low-risk” business merchant accounts. Initially, elevated high-risk merchant account rates & fees are charged to help cover those occasional losses. Once a solid relationship has been established, these fees can often be re-negotiated.
What Percentage Rate, Monthly Processing Fees and Charges will I pay for a High-Risk Merchant Account?
It’s important to be very clear about what rates & fees 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. A solid understanding of high-risk merchant account processing rates & fees will help you make the right decision when choosing a payment processor to handle your credit card processing needs.
Unfortunately, there is no straight answer to what you will pay. It really depends on what overall terms and conditions you are offered and accept. However, you can usually expect costs to be an additional 2% to 5% more on average, than for a low-risk merchant account.
High-Risk Merchant Account Rates in General
High-risk merchant account rates are elevated because they reflect the financial risks associated with these high-risk business types. However, high-risk merchant accounts offer more security than traditional merchant accounts.
High-risk merchant account fees can often include application fees, annual account maintenance fees, and early termination fees. Additionally, high-risk merchant accounts may have higher monthly fees.
To help illustrate, many high-risk merchants have a history of disputes, chargebacks, and other types of payment problems which can result in high levels of lost revenue during every payment cycle. Therefore, high-risk merchant account processing fees are sometimes set at a higher rate to cover the potential costs of these disputes.
When looking to open a high-risk merchant account, it’s important to understand the costs involved. In addition to the application and annual account maintenance fees, there may be processing fees or other additional costs associated with the processing of transactions.
High-risk merchant accounts are typically reserved for businesses with a high level of risk, such as large e-Commerce companies or businesses with a large customer base.
If you’re interested in opening a high-risk merchant account, make sure you understand the costs involved before applying.
High-risk merchant account processing fees range from 2% to 12% of a sale. Make sure to find a seasoned payment provider that will help you renegotiate your fee structure after a relationship has been established.
There are pros and cons to merchant accounts, so it’s important to keep in mind which type works best for your business before deciding which to use.
8 Basic Elements of What You Can Expect to Pay for High-Risk Merchant Account Fees
- Interchange Plus Pricing – The card processor adds a fixed percentage (e.g., $0.35-2.00% BPS) to every cost associated with that particular card type being processed. Interchange is the buy-rate percentage paid to the card networks (e.g., 2.0%-3.5%).
- Tiered Pricing – A common pricing structure for lower volume, very high-risk merchants. This pricing consists of tiers such as qualified, mid-qualified, and non-qualified, all with different percentage rates.
- Early Termination Fee (ETF) – 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, especially if you are not processing volume.
- Liquidated Damages (Monthly Minimums) – 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 service charge or monthly minimum processing fee. Check the contract carefully for this clause and understand what these are before signing any contract.
- 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 a high-risk merchant account and high-risk credit card processing may be expected to have more chargebacks than low-risk equivalents, some payment processors may apply high fees to help persuade you from getting too many.
- Retained or Rolling Reserve – Although not a cost as such, the card processor may keep a portion of each transaction as a buffer against possible future losses. Rolling, up-front, and cash 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. This is very common when doing business with aggregators like Stripe, Shopify & PayPal. Eventually, the merchant account may be terminated altogether, and you are put in a very unique situation frantically looking for another acquiring bank and merchant provider.
High-Risk Credit Card Processing Merchant Account Fees Are Those Accessed by High-Risk Payment Providers
These include merchants that sell expensive items such as luxury goods, jewelry, or electronics; merchants with very high transaction volumes; and merchants that do not have a track record of showing consistent financial performance.
High-risk merchant account rates are fees that banks, credit card service providers, and other financial institutions charge merchants who accept high-risk credit cards.
There are two main types to consider when discussing high-risk credit card processing merchant account fees: These include interchange fees and non-interchange fees.
1) Interchange fees are generally a small percentage of the total fee a merchant pays to process a credit card or debit card. This can range anywhere from 20 to 40 Bps (basis points) to around 3%).
2) Non-interchange fees are generally fees accessed by the payment processor. These fees are in addition to interchange. They usually consist of transaction fees and monthly service fees.
Banks, credit card companies, service providers, and other financial institutions charge both interchange and non-interchange fees to process high-risk transactions. A common example of this pricing model is interchange plus pricing. There are often other fees or percentages added, based on account risk.
High-risk merchant accounts come with higher fees than other types of merchants. This is because there is more risk involved in processing payments for these business types
Fees can include monthly account fees, reserves, maintenance fees, transaction fees, chargeback fees, payment surcharges, and more.
Some high-risk merchant account providers also request additional security measures beyond what traditional banks normally ask for before accepting an account application. This can also be added to your bottom line.
What are High-Risk Merchant Account Fees?
High-risk merchant account fees are payment processing fees charged to businesses that have an elevated risk of processing those payments.
High-risk merchants require special attention because they tend to have a higher risk of chargebacks and fraud than traditional merchants.
To reduce fraud, high-risk merchants are required to pass more stringent background checks and they are also charged higher fees for their merchant accounts.
High-risk merchant account fees are fees that banks or credit card processors charge when you open an account for your business. These charges are no different than standard charges accessed by any financial institution.
High-risk merchant account fees can include monthly fees, application and processing fees, monthly maintenance fees, interchange fees, card brand fees, late fees, returned check fees, chargeback, and retrieval request fees, early termination fees, and more.
Various factors determine the level of risk associated with a merchant account. Some of these factors include customer profile, demographics, payment history, and business type. Others include online vs. traditional, specific industry, ratio, or credit card vs. debit card. Additionally, the volume of transactions, location of the business, and country of origin are always factors.
High-risk merchant account fees are often charged by banks and providers to recoup the costs involved. In exchange for the convenience and security offered, many businesses agree to pay a monthly service fee for their merchant account to help cover the costs associated with providing those services.
There are 2 Main Reasons Why High-Risk Merchant Accounts are Offered
1.) To help ensure uninterrupted processing by protecting successful businesses from chargebacks and fraud
2.) To allow start-up businesses to properly scale and grow their operations without the risk of getting shit down.
High-risk merchant accounts typically come with higher fees and higher deposit requirements than other types of merchant accounts. It is primarily designed to cover the initial risks associated with the business.
How Does a Processor Determine High-Risk Merchant Fees?
When a processor charges high-risk credit card processing merchant account fees, it is because of the risk associated with accepting payments from customers.
A processor may look at factors such as a merchant’s payment history, credit score, and transaction volume to determine whether a merchant is likely to incur fraud or chargebacks.
In addition, payment processors and acquiring banks that specialize in high-risk can look at transaction data to determine whether a merchant has a high level of future risk.
High-risk merchant fees are those that include additional charges or fees for merchants who have higher transaction volume. These fees can be based on factors such as the number of failed transactions, the number of account chargebacks, or the amount of time it takes to process a transaction.
Processors charge higher fees for high-risk accounts based on these factors. They will do this to help cover their costs should there be any additional risk of fraud. By charging higher merchant service fees, processors ensure that they will have sufficient resources to cover such losses. Therefore, even though they may appear unfair at first glance, they are designed to protect both merchants and consumers.
High-risk merchant fees can also be based on other factors including the type of payment method used, whether or not a card is required, and whether or not a transaction is processed through an ATM.
These fees, however, can be added to the sale price and passed along to the customer at checkout.
High-Risk Merchant Account vs a Regular Merchant 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. However, you can often start processing as a regular low-risk merchant and if you are not careful, be put into a higher-risk business type category for many reasons. Most often, this is due to your inability to prevent and manage your chargeback ratios.
High-risk merchants are considered to be any type of business that is found to have a higher risk of returns, chargebacks, and fraud.
Online merchants tend to have a percentage of returns, chargebacks, and fraudulent payments, meaning the number of questionable payments is substantially higher than expected for this type of transaction. Often, these merchants have a rolling reserve established to cover any future risks that might occur. This in turn results in increased high-risk credit card processing merchant account fees.
What Specific Factors Can Increase my High-Risk Merchant Account Fees When accepting Payments?
Some factors can increase the risk associated with your business. For example, if you sell high-value items that can be used as weapons or contraband, you will likely be flagged by fraud prevention systems as a high-risk merchant.
High-risk merchants also include most businesses that sell high-value items, such as jewelry, electronics, and cars. They can also include businesses that sell items with lower value, but where there is a high chance of relative fraud or a reversal of payments.
Because of these risks, high-risk merchants must take extra precautions to prevent fraud and reduce their chargeback exposures. These precautions can include establishing call centers for support, recommending training for employees to recognize suspicious behavior, using payment algorithms, and setting payment rules to stop fraud from happening in the first place.
This is all combined to assist high-risk merchants in processing large amounts of transactions while helping offset some of the risks.
It’s important to note that not all high-risk merchants are necessarily problematic; some legitimate businesses simply process more transactions than average.
Yet, it’s crucial to understand how you’re different from other merchants in your field and a good idea to train your staff to help stay ahead of possible breaches before they happen.
These Main Factors Can Classify Your Business as High-Risk
- The Specific Industry You Operate In – Adult services, dating, firearms sales, pharma, nutraceuticals, e-cigarette, travel & entertainment, and high-volume sales are all immediately considered to be high-risk industries or high merchant business types. The list is long and contains some that will definitely surprise you, such as music concerts and travel bookings.
- Potential for Fraud – Some industries attract fraudulent activities more than others.
- International Sales – Selling abroad carries a greater risk of fraud and higher chargeback ratios
- High Ticket Items – Sales of fine jewelry, furniture, automotive, or even “respectable” services such as marketing and property management all involve larger dollar amounts. Customers are more likely to query expensive items than $5.00 & $10 purchases.
- High Monthly Volume – Businesses with a high number of sales transactions and higher dollar volumes obviously carry a higher risk if something goes wrong.
- Recurring Billing Plans – These must be totally transparent and fully agreed to by the customer. Repeat billings without proper authorizations and cancellations must be minimized by all means possible.
- Poor Credit or No Credit History – High-risk credit 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 applying for the merchant account.
- Length of Time in Business / Trading History – Long-established businesses may have an edge over start-ups when it comes to proving a track record of satisfactory business practices and trading history with regard to payment processing.
- Chargeback Ratio – Anything over 2% can put your business in the high-risk category. Chargebacks and refunds not only add to the costs of handling your payment processing but also put the processors and sponsoring banks at risk for fines and losses. High chargeback ratios are the most common cause for merchants to have their card processing accounts terminated. High-Risk merchant accounts usually have a higher tolerance for chargebacks built into the business model and agreement than regular “low-risk” accounts. This is why it is extremely important to do business with those acquirers that have an appetite for risk. Doing so will ensure your success in the long run.
How are High-Risk Merchant Account Fees & Rates Calculated?
High-risk merchant accounts are those that are considered to be high-risk by the credit card company. This may include merchants with poor payment histories or a history of chargebacks.
The standard method of calculating high-risk merchant account rates is based on the risk involved in processing payments for a merchant’s business. High-risk merchants are typically those that are involved in volatile industries, such as Internet sales of pharmaceutical drugs, firearms and ammunition sales, cannabis sales, adult business types, and many more.
A payment processing company uses many factors to determine whether a merchant account is high-risk. These factors include the volume of transactions, the number of chargebacks, and how long a customer has had an account with the bank.
The credit card processor first assesses the overall risk factor of the merchant using many variables. Once the credit card processor has calculated a Merchant Risk Rating (MRR), it then multiplies that MRR by the amount of money the merchant is trying to charge to determine the total high-risk merchant account rate.
How Will My Credit Card Processor Determine What My High-Risk Merchant Account Rates Will Be?
Most payment processors use a risk score to evaluate high-risk merchant accounts. The score measures the likelihood that a customer will file a complaint or chargeback with the bank or the credit card company. The higher the risk score, the higher the cost for the merchant account.
All of these factors can make it more difficult for a small business owner to obtain a merchant account. Whether these factors affect you depends on your business model and personal circumstances, so it is important to understand which factors apply to you. Here are some examples:
• How much money do you have to cover losses? A large international enterprise that makes millions of dollars a year may not have the same risk as a small business that only processes a few thousand dollars in sales per month.
• How many transactions do you process? A high-volume merchant that processes hundreds of thousands of transactions each month may be at greater risk than a small business with only a few hundred transactions each month.
• How much is your daily revenue? A low-margin business that generates $10,000 in sales per day may be at greater risk than a high-margin business that generates $100,000 in sales per day.
High-risk merchant accounts may also have other fees associated with them. These fees can be added on top of your normal merchant account fees. This may include fees for things like monthly statements, chargeback fees, and more.
As you can see, many factors could affect your high-risk merchant account rate. If you find yourself having trouble getting approved for a high-risk merchant account, or have any questions pertaining to fees, consider calling our sales team at 800-419-1772 or sending us an email.
In Conclusion – Call the Experts at SecureGlobaPay
The extra charges for a high-risk merchant account are well worth it to enable your business to flourish when operating a higher-risk business model. Think of them as simply a cost of doing business and make sure to factor this into your price points and service fees.
The key things are, “be aware of Rates & Fess 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 speak with one of our seasoned sales professionals to help guide you along the way. Click here for our online application form or call us at 1-800-419-1772 to speak to one of our payment processing professionals.