Accepting debit card or credit card payments has become the standard these days. Gone are the days when merchants could operate as a cash-only business. However, if the business is considered to be high risk, it can be difficult to obtain a merchant account to be used for electronic payments.
What is a High Risk Merchant Account?
First of all, there would be costs associated to accepting credit cards as a form of payment. Some of the major card networks such as American Express, Discover, Master Card and Visa charge interchange fees for using their network and the Merchant Service Providers (MSPs) also charge processing fees for the connection of the card from the issuing bank to the acquiring bank through payment processors like TSYS or First Data.
Since the processor and the merchant account provider assume the majority of the risk for a transaction, they would charge fees for the services, including the interchange fees which the card networks charge. High premiums are charged on merchant accounts to minimize the risks associated with risky merchant accounts.
Generally, a high-risk merchant account is one for an industry or business which is notorious for fraud, chargeback and is considered to be risky by association.
How to Know if One Is a High-Risk Merchant?
Now that you have an idea of what a high-risk merchant account actually is, the risk level of businesses as determined by MSPs would be examined. When applying for a merchant account, there would be an underwriting process which the account provider would use to eliminate the risk of adding the account to the portfolio. Here are some of points that are taken into account.
- The personal credit history.
- Number of years in the business.
- The company financials.
- Merchant category code or type of business.
- Merchant account history.
The type of business that one operates would have a significant impact on the rates that they would have to pay for each credit card transaction.
The following are some of the high-risk businesses.
- Pharmaceuticals: Perhaps, it is considered to be one of the most risky businesses out there. Controlled substances that have an irreversible effect are taken into account. Pharmacies are on the list. The cannabis industry is also a high-risk business. Although, there are many states which have started to legalize marijuana for medicinal and recreational purposes.
- International Business: Businesses which cross international lines are considered to have a higher risk as the likelihood of fraud increases.
- Gaming: The gaming industry is notorious for chargeback and fraud. One of the issues is that of betting.
- Firearms: There is a risk by association, besides just fraud or legal matters in the industry. Due to the stigma on gun ownership, banks are criticize or even penalized for conducting business with such merchants.
- Adult Entertainment: Adult content is also considered to be risky.
- Travel and lodging: Hotels and travel agencies are also considered to be high-risk merchant accounts. Unsatisfied customers have even initiated chargeback.
Options Available for High Risk Merchant Accounts
If a business falls within any of the high-risk categories as mentioned above, there is still hope. It is still possible to obtain a merchant account. However, the rates and terms of the contract would be less desirable as compared to other low-risk accounts.
However, there is still good news because there are plenty of merchant service providers which specialize in accounts, that are high-risk. Besides, as the cannabis industry and online gambling makes it way towards national legalization, it wouldn’t be a surprise for more high-risk account providers to prop up in the future. It is even possible for these types of businesses to lose their high-risk category altogether.
Although, most of the MSPs advertise low-risk and standard merchant rates, when it comes to high-risk account fees, they are normally less transparent as there are more variables which need to be considered. However, one thing is for sure and that is the fact that high-risk merchants are expected to pay about 1-2 percent or more for every transaction.
In addition to the above, it is likely that the account provider would require a reserve to be kept by you if you are deemed to be a high-risk business. MSPs offer three types of reserve accounts.
- Rolling Reserve: It is a risk management strategy which is used to protect the account provider from chargebacks, potential fraud or any other incident. It is like a buffer or even an insurance policy. A certain percentage of the daily revenue would be withheld by the payment provider and it would be released later.
- UP-Front Reserve: It is for new businesses.
- Fixed or Capped Reserve: A certain percentage of every transaction is withheld until the cap amount is reached.
How to Keep Safe from Chargebacks
The following methods should be used to prevent chargebacks.
Be Transparent and Upfront
Whichever product that you sell, it is important to describe each component of the product in complete detail. Although, this seems obvious, many businesses fail to completely disclose the information about their products. It is advised to show interactive demos, images or free trials. It offers customers with plenty of information. Chargebacks can be mitigated by allowing customers to make more informed decisions.
Have a Clear Merchant Name
It is the name which appears on the customer’s bank statement or credit card. You would be more likely to receive chargeback if the name is listed other than the business name when the transactions occur. The customer would question their transactions if they are not able to recognize the company name.
Learn to Spot Fraud
If you run a local shop, then there would be regulars. It means that if they use their spouse’s card or parent’s card then you might not be as alarmed. However, if you use an online storefront, then there would be extra legwork involved.
Pay attention to suspicious details such as a mismatch between shipping address and billing, or incorrect credit card codes.