Your Bank Says You’re a High-Risk Merchant. Now What?

High-Risk Merchants

Getting a new business off the ground is a monumental undertaking. One of the key steps in this complicated process is setting up the merchant accounts needed to facilitate payment processing, specifically for credit card payments. In many cases, these can simply be set up through a bank or a credit card company itself, but things aren’t quite that easy when it comes to “high-risk” merchants.

What is a High-Risk Merchant?

For many small businesses unfamiliar with the category, being labeled a high-risk merchant may come as a bit of a shock. The designation may feel arbitrary or overly judgmental, leaving owners to wonder if it may affect the way customers look at their business. Fortunately, being classified as a high-risk business isn’t anything unusual. In fact, a surprising number of seemingly mundane ventures, such as legal firms, travel agencies, and software companies, are categorized as high-risk by financial institutions. Generally speaking, a business is considered high-risk if it operates within an industry known for volatility or a high rate of merchant failure. Simply put, merchant service providers such as banks and credit card companies worry that businesses in high-risk industries will end up costing them money over time because they are less likely to generate consistent revenue. In the world of payment processing, there is no “in-between” when it comes to risk assessment. Businesses are either “low-risk” or “high-risk.”

How Processors Determine Risk

Payment processors and banks consider a number of factors when determining risk. There is no comprehensive list of high-risk businesses and some processors may be more risk-tolerant than others, but they all have a clear idea of what types of customers are more likely to cost them money in the long run. Generally speaking, however, there are a few key qualities that will usually get a company labeled as a high-risk business.

High Chargeback Rates

A chargeback is a payment dispute that occurs when a credit card holder questions the validity of a transaction and requests that it be reversed. This is distinct from a refund, which is strictly a return of funds directly to the customer. From a processing standpoint, refunds are initiated by the merchant, but a chargeback is initiated by the customer and requires the processor to get involved to determine the validity of the request. Since chargebacks involve more work on the part of the processor, a business in an industry associated with high chargeback rates is usually labeled as high-risk.

Overseas Business

While many businesses are headquartered overseas and sell to US customers, the complications imposed by differing banking regulations and national laws make the potential for fraud much greater. If something goes wrong and a processor needs to recover money from an overseas business, there is a good chance that it will have to engage in complicated legal maneuvering to do so. Merchant services typically account for that possibility by labeling such businesses as high-risk even if they’ve never been associated with fraud.

Poor Credit History

As with any financial service, payment processors evaluate an applicant’s credit history when assessing risk. They will want to know if the business has a history with other merchant accounts and whether or not it repays its creditors and financial partners on time. This extends beyond the company itself to focus on the business owners. A business that operates in a traditionally low-risk industry may still be labeled a high-risk merchant if the processor has concerns about the owner’s personal credit.

Company Longevity

Startups and newer businesses are inherently riskier than more established companies that have been around for many years. That’s because new ventures lack a track record of good business practices and financial viability. A processor can reasonably expect a company that’s been in business for a decade to still be around five years from now, but it may be warier of a new merchant that’s just getting underway and could go bankrupt within a year.

Known High-Risk Industries

Rightly or wrongly, some industries have an established track record of high risk. Even a well-run business in these sectors is more prone to chargebacks, volatility, and regulatory scrutiny. Businesses that rely on low-volume, high-cost purchases may also fall under this category. Some examples of traditionally high-risk industries include:
  • Pawn shops
  • Furniture sellers
  • Payday lenders
  • VoIP services
  • Travel agencies/tour operators
  • Firearms dealers

What Makes High-Risk Merchant Accounts Different

When a payment processing service labels a merchant as a high-risk business, that doesn’t mean it won’t work with them. Instead, it provides services through a special high-risk merchant account, which differs from a standard business account. In order to protect the processor from risk, these accounts typically come with a few specific conditions. High-risk credit card processing fees are typically much higher than the rates offered to merchants in less risky industries. These fees are in place to account for the greater risk of chargebacks and often come with strict terms and conditions that limit how many chargebacks can be processed before fees are increased. Since high-risk merchants typically have less bargaining power when it comes to choosing a payment processor, they are often forced to agree to long term contracts that limit their flexibility. While low-risk merchant accounts are typically short term (sometimes even month to month), high-risk merchant accounts often run between three to five years and feature automatic renewal clauses and early termination fees. The other way that payment processing services hedge against risk is to require high-risk merchants to maintain reserves. A merchant account reserve ensures that the processor will always get paid, even if the merchant encounters problems of some kind. There are typically three types of merchant account reserves:
  • Up-Front Reserve: The processor withholds all funds from credit card transactions until a predetermined reserve balance is met.
  • Rolling Reserve: Processors hold back a percentage of daily revenue for a period of time, releasing it to the merchant as more funds arrive in the future.
  • Fixed or Capped Reserve: Similar to a rolling reserve, this approach withholds a percentage of transactions until a reserve cap is reached. Future revenue will not be withheld unless the reserve needs to be tapped to cover fees or other payments.
For all their disadvantages, there are some benefits to high-risk merchant accounts. For one, they’re often the only choice high-risk businesses have when it comes to accepting credit card payments. Many banks and processors are unwilling to take on high-risk merchants at all due to the high likelihood of chargebacks. A high-risk merchant account, however, is designed to account for excessive chargebacks with fees and reserves.

Signs That You May Need a High Risk Merchant Account

Based on the industry you operate in or the types of transactions that you have, you may benefit from a high risk merchant account. You might be able to get by without one, but you’ll also be paying higher fees and have greater processing delays if you’re trying to make that traditional merchant account work for your business.  However, all it not lost with a high risk designation. With the right processing partner, you can achieve instant bank verification and easy online credit card processing even with a high risk merchant account. That designation may make it harder to qualify for a loan or to work with typical merchant accounts, but it doesn’t have to mean an endless array of problems and hurdles to jump over.

What Is a Merchant Account?

For most businesses, a merchant account is a necessary evil. Unless you operate like a bank and can process your own payments on your own, you’ll need a third party to help bring that money in. You could always opt for an online credit card processing partner like PayPal or Square, but they’ll nickel and dime you to death with fees if you have any kind of substantial volume. Instead, most businesses turn to merchant accounts, which is basically a bank account that allows you to accept various types of payments, such as debit or credit cards, as well as eChecks and other online payments. Essentially, it’s an agreement between your business and your payment processor for the processing of payments. When a customer pays you, that transaction first goes to your merchant account for processing, eventually depositing into your account after a predetermined period.

How To Get a Merchant Account

Now that you know you need a merchant account, it’s time to line one up. That said, just because you’re open for business doesn’t mean that providers will necessarily offer you a merchant account that is an ideal fit for your business. In general, merchant account providers are all looking to reduce their risk, and if they authorize a purchase that is fraudulent or that may be subject to a chargeback down the line, that means more work for them. Instead, most merchant accounts are split into two different designations based on the type of business, your transaction and business history, previous merchant accounts and the credit history of the business owner. Through all that, you’ll get a designation that will govern whether or not you need a low risk or high risk merchant account, which will dictate the terms of your agreement with your processing partner and will affect your fees, delays and other requirements. Here are a few reasons why you may want to opt for a high risk merchant account.

You Run a High Risk Business

The most common reason why businesses need a high risk merchant account is that they’re deemed a high risk business. Once you receive that designation, no amount of appealing to your payment processor will have an effect — you’re operating a high risk business.  Businesses that operate in certain industries or that have higher rates of chargebacks and fraud may be seen as high risk, even if other factors don’t suggest it. But all is not lost. A high risk designation actually goes great with a high risk merchant account as long as you’re working with the right financial partner. In fact, the right merchant account can actually help you lower your fees and generally reduce all the barriers implemented by a traditional merchant account with a high risk designation.

You Have Lots of Chargebacks

If your business receives lots of chargebacks, you’ll probably find that a high risk merchant account is better than an account that doesn’t give you the flexibility you need to run your business. It’s not like you can tell that those chargebacks are coming from a mile away, but after getting slapped with fees for each one of your chargebacks, odds are you’ll end up paying more than you would with a high risk merchant account. However, if you have a regular merchant account and keep getting those chargebacks, those fees and associated costs could rise even higher. With a severe enough problem, you could even risk having your account frozen or terminated, which could jeopardize access to the funds that make your business tick, as well as having to find another partner to take you on and provide you with a high risk merchant account.

You Process Lots of Recurring or Large-Sum Payments

Two of the main red flags that often require a high risk designation are recurring and large-sum payments. Ironically, that may mean that as your business grows, you’ll be more likely to trip those limits. And if your processing partner is giving you hard time about recurring or large payments, you may need to opt for another provider. With a high risk merchant account, you’ll be able to grow your business and up your sales volume without worrying about limits. Instead of artificial limits of $20,000 a month in gross sales or difficulty in collecting recurring payments or large payments over $500, a high risk merchant account will help you earn more and grow you business how you see fit, not to fit the limits of your payment processing partner.

You Want More Secure Payments

Some high risk businesses are deemed as such because of the industry or vertical that they operate in. Others may require a high risk merchant account due to a prevalence of fraud. If your business is experiencing a higher than normal volume of fraud, you may want to be proactive about it before your merchant provider hits you with fees and other requirements that can make it difficult to do business. Since a high risk merchant account typically comes with upgraded fraud protection and other measures that can prevent those fraudulent charges in the first place, you should be able to reduce your overall fees while making it more difficult for those who wish to deceive you from being able to do so. By blocking fraudulent transactions, it’s a win-win for you and your financial partner.

You Want to Expand

For businesses that are looking to expand and to do significantly more business, it often makes sense to take a look at your merchant account. The account that you set up when you were doing a few hundred dollars a month in sales will hardly meet your needs when you’re doing tens of thousands a month in sales — and a high risk merchant account can help make it happen.

How Transcend Pay Can Help

As an all-in-one payment gateway solution for high-risk merchants, Transcend Pay has built up a diversified network of banks and financial institutions that allows us to mitigate risk more effectively and provide payment processing services without the traditional fees and reserve requirements. Whether you’re using our standalone payment platform, our robust API that integrates into your existing payment portal, or our innovative Tpay software to manage payments directly through your website, our payment processing solutions deliver unmatched flexibility, visibility, and control. Having the right partner can make all the difference when it comes to payment processing. Contact our team today to find out how we can help you transcend the competition and set your business up for long-term growth. 2021-Guide-to-Lending-Blog