If you operate an online business that is subject to chargebacks and would like to accept credit card transactions, it is highly suggested that you open a high risk merchant account. This article will discuss the things you need to know about a high risk merchant account and help you determine whether you need one or not.
High Risk Merchant Account: An Overview
A high-risk merchant account is a merchant account for businesses that pose a high risk of fraud and chargebacks by the processor. Some high-risk business categories include: firearms, ammunition, subscription services, adult content (including dating websites), alternative medicine products or treatments, online gambling, credit repair services and mail order pharmacies.
The high risk provider can either be an independent high-risk processing company or may belong to a larger firm who provides high risk services as part of their portfolio.
How do you know if your business is “high risk”? Here are some common signs that your business presents high fraud risks for the payment processor:
- high return rates
- high chargeback rates
- high rate of credit card use
- high percentage of big ticket items
If a business has a high risk of chargebacks, or if the bank’s history indicates a high rate of chargebacks as well as refunds, the bank would establish a rolling buffer on your account. It is the sum of money necessary to cover the risk of fraud and chargebacks.
The Difference Between a High Risk Merchant Account and a Low Risk Merchant Account
A merchant account is essentially a tracking mechanism for credit card companies to track retail transactions made by their customers. Each time a customer uses his/her credit card, the transaction information is entered into the system, which automatically deducts the sale amount from the customer’s available credit. This is why when you pay with your debit or credit card in a store, the cashier will “run your card” through a terminal.
Merchant accounts are generally classified as high-risk or low-risk. A high risk merchant account is an account that’s been issued to companies that do not have a very good track record of credit repayment with their customers -or any credit at all- or have high fraud risks for the payment processor (as mentioned earlier). Low-risk merchant accounts, on the other hand, are issued to companies that have a good track record of credit repayment with their customers and pose low fraud risks. The classification your business falls under depends not only on your payment history as an individual but also the payment history of your company as a whole.
High-risk merchant accounts often come with fees and high APRs (annual percentage rates). The reason why they’re higher is because the issuing bank of the high-risk merchant account takes on more risk. So, if you run a high-risk business, it might be your only option. If it’s not, it’s best to get a low-risk merchant account instead of paying all those extra fees associated with a high risk account.
Before applying for a merchant account, it is a good idea to determine whether you are a high risk or low risk business. Merchant account companies have their own standards for categorizing businesses according to their potential risk, although both groups of merchants have numerous characteristics.
Low Risk Merchant
While each payment processor has its own set of criteria, there are several characteristics shared by all market players.
The following are general characteristics of low risk merchants (although there may be many more):
- Monthly processing of less than $20,000
- The typical credit card transaction does not exceed $500.
- The industry in which a merchant operates is deemed to be low risk (these are, for example, low risk-clothes and shoes, baby products, and household goods)
- Chargeback ratios ranging from 0 to 1
- The country in which a business operates is deemed to be low risk (The United States of America, Canada, European Union countries, Japan, and Australia)
High Risk Merchant
The more chargebacks an organization receives, the greater the risk. As a result, the primary considerations are the reputation of the company and processing history (it is recommended that your chargeback percentage is less than 0.9 percent of total transactions).
The following are the general criteria of a high risk merchant account, but keep in mind that they vary significantly depending on the payment processor’s guidelines:
- Monthly sales volume of more than $20,000
- The average credit card purchase exceeds $500.
- A company provides goods and services to countries with a high rate of fraud.
- Poor credit history and a high rate of chargebacks.
High Risk Merchant Account: Who Needs It?
The travel sector is an example of a high risk business, as there are numerous factors that can result in cancellations. This typically results in a large number of refunds and clients filing chargebacks. Other examples include adult-themed websites, gambling, and forex trading.
Fees For High Risk Merchant Accounts
The sad reality is that high risk merchant accounts are more expensive than low risk merchant accounts in terms of cost. But this cost is unavoidable if you’re a high risk business, so you should budget for increased processing and account fees.
You should be aware that while hefty fees for high risk merchant accounts were formerly the norm, you can now find payment processors which provide reasonable rates tailored to your business. 15% commission rates or possibly greater costs are relics of the past. You are also not required to sign three- to five-year contracts.
Many high risk payment providers still charge you a startup cost, monthly and annual fees, or even a PCI compliance fee, so carefully read the contract. Additionally, an early termination charge might apply if you wish to close the account before the contract’s expiration date. The details of the termination fee must be mentioned in your contract, so study it well before signing.
Due to the fact that the payment processing market is evolving, search for high risk payment processors who charge you exclusively for transactions that occur on your website or app.
Rolling Reserve That is Exclusive For High Risk Merchant Accounts
A rolling reserve is another fee associated with a high risk merchant account. It provides the bank with an additional layer of security against chargebacks or unusual activity (such as fraud) on your part. Thus, a portion of the credit card volume processed is safeguarded (often 5-10%, based on its business model as well as volume processed). It is held in reserve for a specified amount of time, typically up to six months, and then released.
The greater the risk associated with the business, the greater the rolling reserve (this would be determined by the acquiring bank). After the specified time period has passed, the funds are released and automatically credited with one of the weekly statements.
Notably, the rolling reserve could be extended to low risk merchants who are just getting started and lack credit history.
Fees For Chargeback
Note that chargeback fees may apply if a cardholder files a chargeback and requests that the bank contest the charge. This money is used to offset the administrative costs associated with chargeback processing.
In general, high risk merchant account charges may be double with that of low risk merchant account fees. However, if your business processes a high volume of daily transactions, you could discuss the rates and negotiate with your payment processor.
Pro Tip:
If you are planning to have a business that is considered high risk you will probably need a high risk merchant account. Your best bet is to consult with experts in the field who can guide and help you on what you must do to handle this kind of business.
You may be interested in: 6 Points to Keep in Mind About Offshore Merchant Accounts
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