Whether your business falls into a certain industry category or has a high chargeback or refund ratio, it can be considered high-risk. However, most business owners don’t realize they are high-risk until they start applying for a merchant account to process their monthly transactions for ACH, debit and credit cards.
According to Bankcard, chargebacks increase by 41% every two years – a threat that should be on every entrepreneur’s radar. Chargebacks aren’t only due to fraud; they can also occur from general cardholder claims, such as “merchandise was not as described” or “the merchandise was not received.”
Once your company is denied a merchant account from traditional banks, it can be overwhelming to navigate high-risk credit card processing and merchant account providers. Read on for basic information, along with pro tips to help you choose the right provider for your company.
What is a high-risk merchant account?
A high-risk merchant account helps high-risk businesses, whether by industry or business practices, have top payment processing services.
If your business has a large number of chargebacks and refunds every month, you may be subject to a rolling reserve on your account, which can help cover transaction issues and fraud.
To get approved for a high-risk credit card processing and merchant account, you will need to have all of your business financials organized. Be prepared to provide financial statements, banking records and tax returns for review.
High-risk vs. low-risk merchant accounts
Before you apply for a credit card processing and merchant account, you will need to decide whether you are a low-risk merchant or a high-risk one. While merchant account providers generally categorize businesses into one or the other, several factors can differentiate the two.
High-risk merchant account
Your processing history – and, more specifically, your chargebacks – can put you in the high-risk category. Merchant account providers can add their own characteristics to the list, but here are a few that will characterize your business as high-risk:
- $20,000 or more in monthly sales
- Credit card transactions that average over $500
- Business with countries known for high levels of fraud
- History of poor credit
- Frequent chargebacks
When applying for a high-risk credit card processing and merchant account, be as detailed as possible in your industry description. If you try to sugarcoat your company practices, you may receive an inaccurate rate quote.
Low-risk merchant account
A low-risk merchant may need to meet many requirements; however, the most important are: low revenue, few transactions, and low chargebacks and returns. These are additional characteristics of a low-risk merchant:
- Credit card transactions are $500 or less.
- Transactions add up to less than $20,000 monthly.
- The industry is considered low-risk – such as essential goods, clothing, household and baby items.
- The chargeback ratio is low – less than 0.9% of total transactions.
- Business is completed in low-risk areas – such as the United States, Europe, Japan, Canada and Australia.
- The rate of returns is low.
What types of businesses need high-risk merchant accounts?
|List of industries that require a high-risk merchant account|
- 1-800 chat sites
- Adult content
- Airlines or airplane charters
- Annual contracts
- Attorney referral services
- Automotive brokers
- Bankruptcy attorneys
- Banned or illegal goods and services
- “Business opportunities”
- Car parts
- Casinos, gambling or gaming
- Chain letters
- Check-cashing services
- Cigarette, e-cigarette, vape or CBD shops
- Coins, collectible currency or autographed collectibles
- Collection agencies and other debt collection services
- Coupons or reward-points programs
- Credit protection, counseling or debt repair services
- Dating services
- Direct-response marketers
- Drug paraphernalia
- E-books (copyrighted material)
- Event-ticket brokers
- Extended-warranty companies
- Fantasy sports websites
- Finance brokers, financial consulting or loan modification services
- Furniture sellers
- Indirect financial consulting
- Game codes and hacks
- Get-rich-quickbooks and programs
- Health and wellness products
- High average ticket sales
- How-to websites
- Horoscopes, astrology or psychic services
- Hype products or services
- Hypnotists or self-hypnosis services
- International shipping, cargo or import/export services
- Internet service providers and hosting services
- IPTV services
- Life coaches
- Lingerie sales
- Lotteries or sweepstakes
- Magazine sales
- Mail or telephone order sales
- Medical care programs
- Membership-based companies
- Money transfer services
- Merchants on the Terminated Merchant File (TMF) or MATCH list
- Merchants with poor credit
- Modeling or talent agencies
- Multicurrency sales
- Multilevel marketing (MLM)
- Music, movie, or software downloads or uploads
- Nightclubs or cabaret bars
- Offshore corporation establishment services
- Pawn shops
- Phone-locking services
- Prepaid calling cards
- Prepaid debit cards
- Real estate
- Replica handbags, watches, wallets and sunglasses
- Self-defense, pepper spray or mace
- SEO services
- Smartphones – sale, resale and spare parts
- Social networking sites
- Sports forecasting or betting
- Sub-acquiring/merchant aggregation
- Subscription-based billing
- Technical support and web development
- Timeshares or timeshare advertising
- Tour operators
- Travel clubs, services or agencies
- Vacation planners
- Vacation rentals
- Vitamin and supplement sales
- VoIP services
- Weapons of any kind, including parts
What makes a business high-risk?
Here are a few reasons why your business may be considered high-risk.
- New business: If your company was recently established, you can’t present an extensive transaction history to the financial institution.
- Not enough transactions: A merchant account provider needs to calculate your chargeback ratio. If you don’t complete enough transactions each month for an average score, this could put your business in the high-risk category.
- Industry type: Certain industries – such as travel, gambling and adult sites – are specifically known for excessive chargebacks because of a high number of cancellations.
- Many chargebacks, refunds and fraud: After your business has achieved a large number of monthly transactions, your risk goes up if you have a high average of chargebacks, refunds or fraud.
Pros and cons of high-risk merchant accounts
These are some benefits of a high-risk merchant account:
Here are some of the downsides of a high-risk merchant:
- Higher processing fees
- Potentially mandatory reserve account, which can be as high as 50% of the monthly volume
- Rolling reserve that can be held up to 180 days after account closure
What to consider when looking for a high-risk merchant
As you search for a high-risk merchant account, you will notice that there are several options available. It’s important to do your research before choosing one, as it can impact how much time you spend monitoring transactions and the effect it can have on your future finances.
Here are a few features you should look for when choosing a high-risk credit card processor:
- Timely support: Any bad transaction through your website can cause issues that snowball quickly. Choose a provider that offers proactive support and has your back when a problem arises.
- Custom payment options: Your provider should be able to meet your complex business needs by enabling custom payment forms that allow for multiple payment scenarios.
- No hidden fees: Make sure you are aware of all fees upfront. The monthly cost of a high-risk credit card processing and merchant account should be easily found on the provider’s website. If not, a quick phone call or chat should be able to answer all of your questions.
- Up-to-date technology: Your payment partner should be current on payment trends and offer an open API. Onboarding should be seamless and take days, not weeks. Avoid high-risk payment processors that have an outdated website, excessive downtimes and lack the tech knowledge needed to meet your business needs.
- Anti-fraud tools: Since high-risk accounts are more subject to fraud behavior, look for a merchant account that has enhanced security measures – including chargeback prevention and multifactor authentication.
- Market leadership: Choosing a high-risk merchant account can take time, and you also need to factor in the time for onboarding and customization. Selecting a reputable company protects not only your time, but your money too.
- Customer support: If your business works with a certain industry, multiple industries, or a diverse group of countries, choose a credit card processor that can meet all of your unique needs. Industry and country support should be readily accessible on the website.
Many high-risk merchant account providers try to lock their clients into long-term contracts. Just because you need this service now doesn’t mean you will always need a high-risk credit card processing and merchant account. Choose a company that allows you flexible contract terms, such as a month-to-month contract.
Since a high-risk merchant account tends to be stricter than a low-risk one, always read the contract provided before signing. The fine print can affect your rates, fees and penalties.