Are you a high risk merchant? Getting a high risk merchant account be tricky, but it’s not impossible. Running any business these days requires you to give your customers the option to pay with either credit or debit cards.
If you’re an e-commerce entrepreneur, credit cards are literally your only option for getting paid. Small businesses can get by with a provider like PayPal or Square, but once your business reaches a certain size – you’re going to need to upgrade to a full service merchant account.
Unfortunately, credit card processors don’t treat all businesses equally. Larger, high volume, businesses get lower processing rates and better terms. All processors will look at you carefully in order to determine whether you fall into the high risk category or not.
If for whatever reason, your business is determined to be high risk, the consequences are terrible. Many will refuse to approve you for a merchant account. Others will charge higher rates and fees than you’d like. There are also many merchant service providers that will deliberately market to high risk businesses, and then rip them off with high fees and rates.
Delancey Street is a premier solutions provider than can help you get a risk higher merchant account.
In this article, we’ll discuss the factors that lead to a business being labeled high risk, and how this could impact your ability to get a merchant account. We’ll also give you some tips on avoiding providers that bait and switch you.
High Risk Merchant Account Categories
The most important thing to understand about high risk businesses is your processor is the one that determines whether you are considered one or not. Either you are high risk, or not. It can be very complicated, every processor has their own guidelines. Some types of business, like drug paraphernalia, will always be placed in the high risk group. Some merchant account providers have strict guidelines on determining whose high risk and whose not. Others have a more relaxed criteria.
Factors used to determine high risk merchant account status
- High chargeback: If your business has shown a high rate of charge backs or fraud, you’ll be deemed high risk. This is based on the behavior of your customers, not your personally.
- Offshore business in USA: If your business is based primarily outside of the USA, but you sell to people in the USA, you could be considered high risk. The potential for fraud is strong here.
- Question business practices: If your business is considered a scam, then by association you’re guilty as well.
- Bad credit: If your personal credit is bad, then you’re more likely to be placed in a high risk category. Even though this sounds unfair, it’s part of the decision making process.
- High average ticket: If your business accepts high ticket items via credit card, then you could be considered high risk. This affects businesses in the furniture industry, and companies who process a lot of B2B transactions.
Businesses traditionally considered high risk
Below is a list of types of businesses that are usually considered high risk. This doesn’t cover every single possible high risk business, but does include most of the usual suspects.
High Risk Merchant Account Fees and Rates
If you’re reading this, it’s because your business is considered high risk, and it needs help with a merchant account. Unfortunately, merchant accounts for high risk businesses usually cost more than those for non high risk ones. In fact, they cost a lot more. You’ll pay more in account fees and processing charges. Some providers might even get you with a long term contract. In fact, merchant accounts for high risk businesses cost MUCH more than those for non high risk ones. Most non-high risk businesses have the ability to negotiate the length of their contracts, with the average industry term being 3 years, with an automatic renewal clause which extends for 1 year periods after that. These contracts have become very unpopular with merchants. Your contract will usually include an early termination fee which applies if the account is closed before the contract term. You could also face the liquidated damaged clause which will raise the price of breaking the contract even more.
The high risk merchant credit card processing industry is moving towards lower monthly fees and annual account fees. You can expect that some of your recurring fees, especially your basic monthly account fee, which will be higher than it would be for non high risk merchants. Higher credit card processing costs are an unfortunate reality for high risk merchants. It’s likely you’ll be offered an expensive tiered pricing plan. Even if you are given an interchange-plus plan, you’re likely to be a higher % markup, and higher per transaction charge. The rates will vary from one processor to the next, and you should expect to pay twice as much as what a non high risk business with the same processing volume would pay.
Another expense you’ll have to deal with is a rolling reserve. This is sometimes also imposed on non-high-risk businesses that are starting up. This is because startup businesses are considered high risk too. Rolling reserve is usually set aside from your sale proceeds to cover expenses like chargebacks, and as a safety insurance against you going out of business. Rolling deserves decrease over time, and usually go away if your business is successful. This can present short term cash flow issues and even force you out of business.
We highly recommend you review your proposed contract before signing up with a processor. The fine print may contain the most important things about what your business is about to get charged in terms of rates and fees.
What is a low risk merchant?
Every payment processor has his, or her, own risk guidelines. Merchant account providers categorize businesses in terms of their potential risk. There are characteristics for both groups of merchants.
What’s a low risk merchant?
Every payment processor has its own set of guidelines. There are some common factors for all players though.
Generally speaking, low risk merchants have the following in common
- Less than $20,000 processed per motnh
- Avg transaction is less than $500
- Operates in a low risk industry
- Zero to low chargebacks
- Operates in a low risk industry
How do I apply for a high risk merchant account?
To get a high risk merchant account, you have to fill out an online application. The process of applying for a high risk merchant account is very simple.
Here are a list of documents you should have prepared before applying:
- Incorporation paperwork
- Shareholder information
- Copy of your passport, and utility bills
- Incorporations certificate
- Processing history for the last 6 months
Pros and Cons of a High Risk Merchant Account
One of the most common reasons why people don’t like high risk merchant accounts is because you have to pay higher fees and processing rates. Banks also might request a reserve if they think there’s a high risk.
As a high risk merchant, you can grow your business by accepting transactions in multiple currencies and sell to people outside of your USA. It means you can have a larger market.
Another benefit of having a high risk merchant account is that you have a higher chargeback protection. You have a bigger chance of keeping your merchant account in good health. For example, when a merchant with a low risk account crosses the chargeback threshold, they may end up with a terminated merchant account. With a high risk merchant account, you have a higher threshold.
Another benefit of high risk merchant accounts is that you can expand your business and sell products or services not allowed to be sold with a low risk merchant account. Another benefit of a high risk merchant account is that you have increased profits due to a wider possibility of products and services you can sell.
What to consider when looking for a high risk merchant account?
There are many high risk credit card processors. Conduct your research before you choose your future partner!
Responsive support is one of the most important things to look for in a credit card processor. Conduct your research before you choose your future partner. There are many things you should consider before making a final decision. If the future partner doesn’t seem like they’ll be able to rapidly respond to your issues, you should consider working with a different partner. You want a high risk merchant account that will give you a guarantee every issue will be handled.
Another thing to consider is how flexible and customizable is your processing experience? Ideally, you want a high risk processor who lets you implement different payment scenarios that are tailored to your needs. Make sure you can customize every element of your payment processing, including rates, conditions, and features.
Transparent pricing is another big thing to look for when you’re considering payment processors. You should search for information about fees, and potential added costs.
Technology is one of the most important things to consider when you look at payment gateways. You should ask for the payment platform’s API so that you will have full control over your payment processing and setting it up. What also matters is how fast they will onboard you. You should avoid payment processors with legacy technology, and no functional API.