Many businesses may seem totally safe and uncomplicated to you and me. However, some of these businesses can often be considered a High-Risk business type by sponsoring banks and credit card processing companies. Learn the ins and outs of High-Risk Merchant Account Rates & Fees. Learn why a chargeback can be your worst enemy. High-Risk Merchant Account Rates and Fees are determined by Region, Processing History, Business Type, Volume Processed, Chargeback Percentages and more. Help insure you are making the best decision when choosing a High-Risk Merchant Solution for your High-Risk Business.
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 loses for the payment service provider.
Additionally, credit card processing acquirer’s that are allow merchants to have too many chargeback’s 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 Merchants Business 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. High-Risk Merchant Account Rates & Fees are charged to help cover those occasional losses.
What Percentage Rate, Monthly 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. Understanding High-Risk Merchant Account Rates & Fees will help you make the right decision when choosing the right 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 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 on average.
Be prepared for actions that could impact your cash flow as well as your overall charges and fees:
8 Basic Elements of what you can expect to pay for a High-Risk Merchant Account
- Interchange-Plus Pricing – The card processor adds a fixed percentage (e.g. $0.35-2.00%) to every cost associated with that particular card type being processed. This being the buy-rate percentage paid to the card networks (e.g. 2.0%-3.5%).
- Tiered Pricing – The most common pricing structure for a very high-risk merchant. 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 all together and you are put in a very unique situation frantically looking for another merchant account.
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.
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, e-cigarette, travel & entertainment, 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 regards 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 loses. 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. 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.
The Takeaway Message is . . .
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 them before entering into a contract” and ensure your business margins can handle the fees and potential cash flow impact of the reserves.