Unless you’re one of those merchants whose business has stood the test of time as a cash-only establishment, accepting credit card payments (or debit cards) is standard practice these days.
However, if your business is considered high risk, trying to obtain a merchant account to accept electronic payments may not be so standard.
Grab a cup of coffee (or tea if that’s your thing) and let’s take the next five minutes and explore the world of what it means to be a high-risk merchant and how to snag a high-risk merchant account even when it seems impossible.
What is a High-Risk Merchant Account?
First and foremost, if you want to accept credit cards as a form of payment, there is going to be a cost associated with doing so. The major card networks (Visa, Mastercard, Discover, and American Express) charge interchange fees to use their network and the Merchant Service Providers (MSPs) charge processing fees to connect the card issuing bank to the acquiring bank via payment processors like First Data or TSYS.
Since the merchant account provider and the processor assume the majority of the risk during a transaction, they charge fees for their services on top of the interchange fees that the card networks charge. As any smart business that takes on risk would do, these companies try to their minimize risk by imposing higher premiums on merchant accounts that are deemed risky.
Typically, a high-risk merchant account is a business or an industry that is notorious for chargebacks and fraud, borders on the legality or is considered risky by association. Don’t worry. We’re going to get into the details of what all that means shortly, so keep reading.
How do I Know if I’m a High-Risk Merchant?
Now that you have a general idea of what a high-risk merchant account is let’s dig a little deeper and examine how MSPs determine your business’ risk level.
Much like applying for a loan, when a business owner applies for a merchant account, there is an underwriting process the account provider (or loan provider) will go through to estimate the risk of adding your account to their portfolio. Some of the points taken into consideration when applying for a merchant account are:
- Your personal credit history
- Company financials
- Number of years in business
- Merchant account history such as if you ever had a merchant account before. If so, do you have a history of chargebacks and have you been blacklisted on the MATCH list or Terminated Merchant File (TMF). Are you in good standing?
- Type of business or merchant category code
It’s the last one that’s the kicker. The type of business you operate will have a significant impact on the rates you pay per credit card transaction.
What is Considered a High-Risk Business?
Lucky for you, we’ve done the heavy lifting and put together a list of high-risk industries and business types that will most definitely be flagged for high-risk credit card processing to some degree. Some of these are obvious, but others may surprise you.
- Pharmaceuticals. Since we are talking about controlled substances and medications that can have an irreversible effect if misused, it makes sense to find pharmacies on this list. Additionally, one of the biggest markets in this category to come under fire recently is the cannabis industry. Although many states are legalizing the medicinal and recreational use of marijuana, financial institutions that are backed by the federal government aren’t so quick to hand over a merchant account. When you have a difference of opinion between national and local authority, the former usually wins.
- International business. Any business that crosses international lines is going to be considered higher risk because it increases the likelihood of fraud. If your company’s headquarters are overseas with an offshore merchant account, but the majority of your customers are in the U.S., that’s going to raise some red flags.
- Gaming. Gaming is an industry that is notorious for fraud and chargebacks; it’s also one that borders on legality with federal and state laws, yet again on different pages. However, just last month, the U.S. Supreme Court overturned a 1992 ruling of the Professional and Amateur Sports Protection Act (PASPA) that effectively banned sports betting in most states. The landmark ruling will allow intrastate sports betting in the U.S. states that allow it (Delaware, Nevada, and New Jersey) with more states to follow. This ruling is going to pave the way for changes in legislation in regards to sports betting, online gambling, and how payment processors serve this industry.
- Firearms. While there are fraud and legal matters to consider in this industry, there is also a risk by association. Although our country was built on the right to bear arms, our recent cultural climate places a stigma on guns and ownership of firearms. Therefore, banks are often criticized and penalized for doing business with these types of merchants.
- Adult entertainment. Finding a merchant account for adult content is also considered risqué business. These businesses can be anything from pornography distribution to dating websites.
- Travel and Lodging. Unfortunately, in the hospitality industry, hotels and travel agencies are also flagged as high-risk merchant accounts because there are a lot of chargebacks initiated by unsatisfied customers.
- Network marketing. If your business is often perceived as a scam, you might be in danger of qualifying as a high-risk merchant. Pyramid marketing schemes or multi-level marketing products like skincare lines or utilities require a credit card on-file to become a ‘preferred customer.’ The downfall is when the customer ‘forgets’ to cancel their premium status and then disputes the subsequent charges. Resulting in, you guessed it, a chargeback.
- All card-not-present transactions. Last but not least, we have card-not-present transactions or CNP for short. CNP transactions include businesses where the physical payment card is not present at the point of purchase. Traditionally, these were all Mail-Order/Telephone-Order (MOTO) transactions. However, in the digital age, this also includes ecommerce transactions. So yes, even if you own a perfectly legal online ecommerce store that sells shoes strictly in the U.S., you can be flagged as a high-risk business. While the adoption of EMV for U.S. merchants and cardholders has helped combat in-store fraud, it has also pushed more than half (52 percent) of payment fraud attack volume online — where EMV becomes a moot point.
- High-volume transactions. As a business owner, the more sales and transactions you process the better off you are. After all, more sales volume means more revenue. However, when it comes to credit card processing, more volume isn’t always so favorable. As transaction volume increases, so does the chance for chargebacks; which is why merchants that process a lot of transactions are deemed high risk.
- High average ticket amount. This is another instance when more money for the merchant is considered high risk for acquiring banks. If your average ticket size is hundreds or even thousands of dollars, expect your business to be regarded as a risky investment by merchant service providers.
I’m a High Risk Merchant, What are My Options?
If your business falls into one of the high-risk categories we mentioned above, don’t worry, not all is lost. You’ll likely still be able to obtain a merchant account. However, your rates and terms of your contract may be less desirable in comparison to your low-risk counterparts.
The good news is, there are a lot of merchant service providers that specialize in high-risk merchant accounts. And as online gambling and the cannabis industry make a push towards national legalization, we wouldn’t be surprised if more high-risk account providers pop up in the future, or if these types of businesses lose the high-risk tag altogether.
While many MSPs openly advertise their standard, low-risk merchant rates, high-risk account fees are usually less transparent because there are more variables to take into consideration. However, generally speaking, high-risk merchants can expect to pay anywhere from one to two percent more per transaction.
Additionally, if you’re deemed as a high-risk business, your account provider will likely require you to keep a reserve. There are three types of reserve accounts you can expect from MSPs, and they are:
- Rolling Reserve. A rolling reserve is a risk management strategy the acquiring bank uses to protect themselves from potential fraud, chargebacks, or other incidents where the acquirer may lose money. Think of it as a buffer or an insurance policy on the high-risk nature of your business. Based on the terms of your merchant agreement, the payment provider will withhold a percentage of your daily revenue for a specified term, and then gradually release the funds.
- Up-Front Reserve. If you’re a new business or have other less than ideal qualifying factors, some MSPs will require starting with an up-front reserve. Based on expected transaction volume, an up-front reserve is the amount of money that must be placed in escrow at the start of the merchant agreement — or allow the MSP to withhold 100 percent of credit card funds until the reserve balance is met.
- Capped or Fixed Reserve. A fixed reserve is when the acquirer withholds a percentage of every transaction until the reserve reaches the cap agreed upon in the merchant agreement. Unlike a rolling reserve where the acquirer takes a portion of every sale indefinitely, in this model, once the cap is reached the acquirer will not take any additional funds. However, if the MSP needs to withdraw from the reserve for any reason, the withholding percentage will kick in again until the cap balance is replenished.
One last thing to note because of the high-risk nature of your business, you may also be susceptible account freezes. During this freeze, you cannot continue to process credit or debit cards until the hold is lifted.
If there’s suspicious activity with your merchant account, a payment processor may temporarily freeze your account to analyze your processing habits and decide whether or not you’re operating within the terms of your agreement or are in breach of contract.
If it’s the latter and you’re fulfilling your side of the agreement, expect the MSP to do one of the following:
- Rewrite the merchant agreement based on the assessment findings.
- The temporary freeze will lead to a permanent termination.
- The worst case scenario when a high-risk merchant account provider freezes your account and intentional fraud is found, the merchant can face fines or have criminal charges brought against them.
While account freezes may be unavoidable from time-to-time, the best way to avoid termination is to be honest on your merchant application. Be upfront about the types of products and services you offer and your expectations for credit card volume.
The Low Down
Whether your company is considered high risk because of the nature of the business or if your account qualifications are less than stellar, don’t lose faith. In the end, if your business is flagged as a high-risk merchant account, it may be more challenging and require stronger cash flow to obtain a processing account, but it’s not impossible.