High-Risk Merchant Account — What it is and How it Works
If you run an online business with a higher risk of chargebacks and want to process credit card transactions, you need a high-risk merchant account. But what is a high-risk merchant account and how do you know you need one?
To open a high-risk merchant account you need to find an acquiring bank that will underwrite your business. However, to increase your chances of getting an account it’s better to ask a reliable payment service provider for assistance.
But first things first.
Table of contents
- What is a high-risk merchant account?
- What are the differences between low-risk and high-risk merchant accounts?
- Who needs a high-risk merchant account?
- High-risk merchant account fees
- How do I apply for a high-risk merchant account?
- The pros and cons of a high-risk merchant account
- What to consider when looking for a high-risk merchant account
A high-risk merchant account is a payment processing account for businesses considered to be of high risk to the banks. As high-risk businesses are more prone to chargebacks, they come with the need for paying higher fees for merchant services.
If a business comes with a high potential of chargebacks, or the history shows many chargebacks and refunds, the bank may put a rolling reserve on your account. It’s the amount of money that will cover the possibility of chargebacks or fraud.
Before you apply for a merchant account, it’s good to know whether you’re a high-risk merchant or a low-risk one. Merchant account providers have their criteria for categorizing businesses in terms of their potential risk, but there are several things characteristics for both groups of merchants.
So, what are the differences between low-risk and high-risk merchant account?
What is a low-risk merchant?
Note that every payment processor has its own set of guidelines, but there are some characteristics common for all the players on the market.
General indicators for low-risk merchants are the following (but there are many other factors, and it’s based on compliance’s general evaluation):
What is a high-risk merchant?
The more chargebacks a business comes with, the higher the risk. Hence, the main factors that matter are industry reputation and processing history (it’s recommended to keep your chargeback ratio lower than 0.9% of your total transactions).
Here are overall characteristics of a high risk merchant, but note that it widely differs based on a certain payment processor’s guideline:
There are many other industries or business models that are prone to chargebacks, so here’s the list of the most common types of businesses that need high risk merchant accounts.
So, if you run a business in the industries mentioned above and similar, you need a high-risk merchant account to accept credit card payments on your website. If you are a high-risk merchant, you need to deal with higher costs of merchant account than regular merchants.
Speaking of fees, the harsh truth is that high-risk merchant accounts cost more than accounts for low-risk businesses. There are inevitable costs that you have to face, so you need to prepare to pay more in processing charges and account fees.
But you should be aware that high fees for high-risk merchant accounts were set as a standard many years ago and today you can find payment processors that offer competitive rates tailored to your business. 15% commission rate or even higher fees stick to the dated approach. You don’t have to be stuck in long contracts running three to five years. The same goes for extra costs.
Several high-risk payment providers still may charge you a setup fee, monthly and annual fee, or even a PCI fee, so read the contract properly. In addition, an early termination fee may apply when you want to close the account before the date on the contract. The details regarding the termination fee should be included in the contract, so be sure to read it carefully before you sign the agreement.
The payment processing industry is moving forward, so look for high-risk payment processors that charge you only for transactions that happen on your website or in the app.
A rolling reserve for high-risk merchants
Another expense characteristic for a high-risk merchant account is a rolling reserve. It is an additional layer of protection for the bank against chargebacks or unexpected activities (such as fraud cases) on your side. So, a certain part of the credit card processed volume is secured (usually 5-10%), and it depends on the business model and processed volume. It’s kept on hold for a defined period, usually up to 6 months, and after this time reserve is released.
The higher the risk that the business comes with, the higher the rolling reserve is calculated by the acquiring bank. After the given time, the money is released and automatically settled in one of your weekly statements.
Note that the rolling reserve can also be offered to low-risk merchants that are just starting and have no credit history.
Also, remember about chargeback fees that may apply when a cardholder files for a chargeback and asks the bank to dispute the charge. It’s the money that covers the administrative costs of processing the chargeback.
Overall, high-risk merchant account fees may cost you twice as much of the amount that applies to low-risk merchants. But, if you run a business that processes numerous daily transactions, you can negotiate rates with a payment processor.
To get a high-risk merchant account, you need to fill out an application online. Of course, to accept card payments you also need to find a reliable high-risk payment processor.
The process of applying for a high-risk merchant account is short and simple. For instance, if you choose SecurionPay as your payment partner, we will help you find a bank that matches your business needs. Once your business is approved by the acquiring bank, you can start processing payments online or mobile.
Here’s what you should prepare before you apply for a high-risk merchant account:
- Incorporation certificate
- shareholders’ certificate
- organizational structure chart (Shareholders)
- copy of your passport and utility bill of local directors and shareholders holding more than 15%
- incorporation certificate and shareholder certificate of other firms in case of being a shareholder
- processing history for the last 6 months (total volume, number of transactions, chargeback percentage)
- test user credentials with premium access to the platform
- the license number and name of the organization that issued the license (if you run a business that requires a license).
Plus, prepare your website based on website compliance requirements.
Get ready for due diligence run by risk management experts. They will decide whether your business qualifies for a high-risk merchant account. Your business will also be verified whether it’s on the TMF (terminated merchant file) list.
The credit card processing history is thoroughly reviewed according to the acceptable chargeback thresholds. So if your history is not good enough, contains incidents of fraud, or you lost your previous account due to a high chargeback ratio, you may have difficulties with getting a high-risk merchant account.
Keep in mind that payment platforms with years of expertise take the case by case approach, so there could be various factors that determine whether you’ll get a merchant account. It’s also based on the general evaluation and card network guidelines of compliance.
One of the most common disadvantages of high-risk merchant accounts is that you need to pay higher fees and processing rates. Moreover, banks might request a reserve — it’s because of higher risk.
It seems that running a high-risk business is hard and comes with many limitations. So, are there any benefits of having a high-risk merchant account?
On the other hand, it’s easier to keep a high-risk merchant account in up and running condition, as a single chargeback exceeding doesn’t have to come with closing an account. But it also doesn’t mean that you can neglect chargeback management.
There are many high-risk credit card processors on the market, so conduct thorough research before you choose your future payment partner. There are many things you should consider before making the final decision, and these could be the following:
When you apply for a high-risk merchant account, remember that its terms might be stricter than those of a regular merchant account, so always read your contract thoroughly. Check for hidden or extra fees, rates, and how high is the rolling reserve.
Depending on the processor or acquirer, the risk is calculated differently, but it’s based on the bank’s underwriting guidelines.
The main factors that allow the acquiring bank to give you a high-risk merchant account are a history of chargebacks, the frequency of returns, industry reputation, or your credit score.
Finding a high-risk payment processor that will be a perfect fit for your company is never easy. Look for a payment platform that delivers top security level with a multilayered approach to effectively reduce suspicious activity and the number of false positives.
High risk merchants not supported by SecurionPay
- Health and wellness products
- ISP and hosting services
- Credit repair
- Money Transfer
- Banned / illegal goods and services
As you can see, there are many reasons why your business can be considered a high risk. But if you set up a high-risk merchant account through a reliable payment platform, the process will be simplified without headaches.
There are businesses with a higher chance of disputes, so it’s obvious that they come with stricter terms. However, when you accept payments through a reliable high-risk payment processor that keeps security at the forefront, you can rest assured that the risk of chargebacks and fraud will be minimized.
Wondering whether your business needs a high-risk merchant account? Contact us for pre-approval.
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