The Low Down on High Risk Merchant Accounts
Table of Contents
- What Is a High Risk Merchant Account?
- How Do Payment Processors Determine a Merchant Is High Risk?
- What’s Different about High Risk Merchant Accounts?
Risk is an inescapable part of any business venture, but not all risks are created equal. Some industries and business practices promise high sales, but at the cost of increasing your exposure to fraud and chargebacks. Merchants who operate in these markets may find themselves classified as high risk, and their payment processors may require them to obtain high risk merchant accounts.
These accounts carry higher fees and restrictions designed to reduce the risk to the processor. What qualifies a merchant for a high risk merchant account, and what should merchants do if they find themselves placed in that category?
A merchant account is one of the most important financial tools available to a retailer. In order for your business to accept card payments, you need a merchant account in good standing, provided by your acquiring bank or payment processor. Obtaining a merchant account is seldom a simple task, but it can be even more complicated for merchants in high risk industries or those who have had trouble with fraud and chargebacks in the past.
Merchant accounts with high levels of fraud and chargebacks can be hazardous for payment processors. If the merchant account doesn’t carry funds sufficient to cover losses caused by chargebacks, the payment processor ends up having to cover those costs until the funds can be recovered from the merchant. If a merchant goes out of business while still in the red, the processor can end up losing a significant amount of money.
Merchants who reach an unacceptable rate of chargebacks or fraud can be placed into a chargeback or fraud mitigation program by one or more card networks. There are certain requirements imposed on the payment processor when a merchant is placed in one of these programs, and if the problems go unresolved for too long, the processor may even face fines from the card network.
In order to avoid these potential consequences, many payment processors simply refuse to deal with merchants who they consider to be high risk for one reason or another. Those that will deal with these merchants will typically offer them a high risk merchant account.
What Is a High Risk Merchant Account?
If a merchant's account is terminated because an excessive rate of fraud or chargebacks went unaddressed for too long, they may be stuck seeking out a payment processor that specializes in high risk accounts.
Other merchants may find that their regular payment processor offers high risk accounts and may be willing to continue doing business with them if they switch accounts.
Because a merchant account is such a vital part of being able to accept payments, it’s important for merchants to understand where their chargeback ratios are from month to month and be in good communication with their payment processors about the standing of their accounts.
How Do Payment Processors Determine a Merchant Is High Risk?
Regardless of the merchant’s industry or chargeback ratio, the following criteria may be used to designate them as high-risk:
- Total monthly sales volume $20,000 or higher
- Average credit card transaction amount $500 or higher
- Accepts transactions in multiple currencies
- Operates in countries with high rates of fraud
- High rate of returns
- Bad credit history
In most cases, however, the merchant’s high-risk status is predetermined by their merchant category code. The following is a non-exhaustive list of industries that may be automatically considered high-risk by card networks, banks, and payment processors:
- Adult entertainment
- Credit repair
- Dating services
- Direct marketing
- Multi-level marketing
- Pharmacies and drug stores
- Prepaid cards
- Recurring subscriptions
- Smoking and vaping
- Travel agencies
For other merchants, the most likely way to end up in the high risk category is by having a merchant account terminated due to excessive chargebacks and ending up on the MATCH list, an industry blacklist maintained by Mastercard and used by most banks and processors.
For most payment processors, a chargeback rate of 1% or greater is considered excessive. Most card networks have chargeback mitigation programs that kick in at this level, although Visa's program begins at 0.9%. If your payment processor ends up terminating your account because you exceeded this threshold for too long, it is likely that a high risk merchant account will be your only option going forward.
What’s Different about High Risk Merchant Accounts?
As with any business solution, there’s a wide range of quality on offer when it comes to finding a high risk merchant account. While there are predatory companies who take advantage of struggling merchants, many industries are designated high risk by default, and there's a lot of demand for high quality payment processing services in the high risk sector.
A high risk payment processor should provide excellent service and competitive rates—but there are some negative aspects of high risk merchant accounts that are unavoidable.
The first thing most merchants will notice is higher fees. This may include per-transaction and chargeback fees as well as setup, cancellation, and other one-time costs.
Many processors will also require a reserve as part of a high risk merchant account. This is a fund that the processor can draw from to pay for any costs they might incur on behalf of the merchant. Often, the processor will maintain a “rolling” reserve by withholding a percentage of the merchant’s daily revenue and releasing it after a certain amount of time.
Having to get a high risk merchant account isn’t the end of the world, but the last thing you want is to be forced into it because of a chargeback situation that has gotten out of control.
Keep track of your chargebacks so you know if you’re getting close to that 1% threshold, and make sure you understand the terms of your agreement with your payment processor so that you know exactly what will happen if you exceed it.
Protecting your merchant account is one of the most important objectives of chargeback defense. When you’ve got a reliable, affordable payment processor, the last thing you want to do is lose that business relationship to a bad run of chargebacks. Carefully monitoring your chargeback activity can help ensure that a rising chargeback rate won’t sneak up on you.