The Low Down on 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. By definition, it’s a type of account that is able to receive credit card payments.
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.
Merchant accounts that incur 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 can end up having to cover them.
They’re also responsible for fees and mitigation programs imposed by the card networks, who likewise have a big financial stake in maintaining a healthy payments ecosystem that isn’t compromised by disputes and fraud.
Merchants whose activities invite unusually high levels of fraud or chargebacks may be required to obtain high risk merchant accounts, which are designed to insulate the payment processor from harm by placing additional financial responsibilities upon the merchant.
What are High Risk Merchant Accounts?
A high risk merchant account is a merchant account offered to businesses that have been categorized as “high risk” either because their merchant category code specifies that they work in a high risk industry, or because their fraud or chargeback ratio crossed a certain threshold, usually 1%, that places them in the high risk category.
If your merchant account is terminated because you carried an excessive rate of fraud or chargebacks for too long, you 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 your merchant account is such a vital part of being able to accept payments, it’s important to understand where your chargeback ratio is from month to month and be in good communication with your payment processor about the standing of your account.
Under a high risk merchant account, the merchant can go on accepting credit card payments as usual, but the account is likely to be more expensive and restrictive.
How Do Payment Processors Determine How Risky a Merchant Is?
Payment processors set their own standards for what constitutes “high risk,” but they use a lot of factors in common. 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
However, it’s often the case that the merchant’s high-risk status is predetermined by their merchant category code. The following is a non-exhaustive list of industries that may automatically be 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
The surest way to qualify for a high risk merchant account is to incur excessive fraud or chargebacks and end up on an industry blacklist like the Terminated Merchant File or MATCH List. This means that fraud and chargebacks are an ever-present threat to your risk profile.
For most payment processors, the acceptable chargeback threshold is 1% of your total transaction volume. Above this level, the card network mitigation programs begin to take effect. 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 is 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.