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If you have a business, you need a way to accept payments from your customers – and ideally more than one. A merchant account allows a business to process credit cards and other online payments. In this article, we’ll look at high-risk merchant accounts, high-risk payment processing, how to select a high-risk payment processor, and what it takes to qualify for one of these accounts.
Key Points
• A high-risk merchant account is designed for businesses considered more likely to face fraud or chargebacks.
• Industries like travel, gambling, cannabis, and adult entertainment may be deemed higher risk due to regulatory scrutiny and dispute potential, among other factors.
• Companies with poor credit histories, new businesses, and startups without established credit records may also be classified as high risk.
• Drawbacks to high-risk merchant accounts include steeper startup fees, monthly charges, and transaction fees, along with stricter terms and slower fund availability.
• Applicants for high-risk merchant accounts must undergo a rigorous approval process often involving risk assessment, credit checks, and a chargeback management plan.
What Is a High-Risk Merchant Account?
A merchant account is a specialized bank account in which a business’s electronic payments are kept until they’re confirmed and moved to the business’s primary account. Along with a small business checking account for daily transactions, a merchant account may be a necessity for businesses when it comes to accepting payments from customers. A high-risk merchant account is a merchant account that’s designed for businesses that are considered to be at higher risk for issues like fraud or chargebacks.
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Common Characteristics of High-Risk Businesses
High-risk businesses have some common characteristics that differentiate them from standard-risk businesses. High-risk businesses typically run a higher risk of disputes about transactions or chargebacks. Certain industries have a reputation for being risky in this respect, including travel, memberships, media streaming, and industries with regular high-value transactions of $100 or more.
Businesses that involve a large number of international transactions and businesses in industries that are prone to high levels of fraud may also be at higher risk.
Finally, industries that are heavily regulated or subject to changing legal environments – like cannabis, tobacco, or ammunition – are also considered high risk due to the potential for legal issues and compliance risks.
But industry is not the only reason that a company may be considered high risk. Businesses that have poor credit history, new businesses, and startups without any established financial records may also be classified as high risk because they lack proof of profitability and stability.
Businesses with poor credit history can try to apply for bad credit business loans if they need access to credit.
Common High-Risk Industries
Industries that are often deemed high risk include the following:
• Adult entertainment: The adult entertainment industry (including adult video streaming sites, sex toy shops, and strip clubs) is considered high risk because of legal implications, age restrictions, and high chargeback rates.
• Cryptocurrency: Cryptocurrency is volatile, making it high risk.
• E-commerce: Some e-commerce retail stores, including shops that sell jewelry or electronics, are thought to be high risk because of the potential for fraud and chargebacks.
• Financial services: Businesses that offer credit repair, loans, or debt collection can be high risk due to the potential for financial instability.
• Gambling and casinos: Gambling has a reputation for high risk due to the potential for fraud, regulatory concerns, and high chargeback rates.
• Legal services related to bankruptcy and personal injury: These law firms are considered high risk because of the potential for disputes and the nature of their billing.
• Pharmaceuticals: The pharmaceuticals industry experiences high levels of regulatory scrutiny and risks related to product safety.
• Telemarketing: Telemarketing businesses reputedly tend to have high chargeback rates and regulatory scrutiny.
• Tobacco and vaping: Businesses selling tobacco and vaping products typically face high risks due to regulatory issues and health concerns.
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Pros and Cons of High-Risk Merchant Accounts
High-risk merchant accounts have advantages and drawbacks that businesses should consider before deciding whether to use a high-risk merchant account.
One of the biggest pros to high-risk merchant accounts is the fact that they enable businesses in high-risk industries to accept credit and debit card payments when they might otherwise not be able to use standard merchant services. This can expand the business’s market reach and customer base.
Another benefit of high-risk merchant accounts is access to global sales, since high-risk accounts often support transactions in multiple currencies. High-risk merchant accounts also tend to be more tolerant of industries with higher chargeback rates and often come with more lenient sales volume restrictions. Providers of high-risk merchant accounts may also employ enhanced fraud protection and security measures to help mitigate the challenges associated with high-risk industries.
One of the biggest downsides of high-risk merchant accounts is the steeper costs that these accounts usually come with, including higher startup fees, monthly charges, and transaction fees. High-risk merchant accounts may also have stricter terms and conditions, and funds from transactions may not be available as quickly as with standard-risk accounts.
Being classified as a high-risk business could also potentially have a negative effect on a business’s relationships with partners and business financial institutions. High-risk merchant status might also negatively impact business credit, which could make it harder to get approved for small business loans.
How To Qualify for High-Risk Payment Processing
To qualify for high-risk payment processing, businesses must go through a more rigorous application process than they would for a regular merchant processing account.
The first step is to gather the documents you’ll require. You might need your business’s financial statements, business licenses, processing history, and business plan. You will likely need to show that your business is financially stable with your bank statements or evidence of consistent revenue.
Because high-risk accounts have a higher chance of chargebacks, you should prepare a plan to reduce and manage chargebacks as part of your application.
Next, it’s a good idea to compare merchant service providers that specialize in high-risk accounts to find the one that best fits your needs and criteria. You should also be prepared to pay higher fees and potentially a rolling reserve as part of your high-risk payment processing account. However, you can still negotiate terms with the provider you choose. But when applying for a high-risk payment processing account, always be honest about your business operations, financial status, and history.
After you apply, the provider will review your application. This might involve a risk assessment and credit check. It can take between one and five business days to get approved for a high-risk merchant account. If your business is approved, you will receive the terms of your account. You should then review them carefully before signing.
Choosing a High-Risk Payment Processor
When choosing a high-risk payment processor, you’ll want to consider several factors. First, look for providers that specialize in your business’s industry. They may be more understanding of the unique challenges that your business faces. It’s also smart to research the provider’s experience, reputation, and customer support options.
When looking at high-risk payment processors, you should also make sure the provider is transparent about all costs, since high-risk merchant accounts typically have higher fees. Because high-risk accounts are susceptible to fraud and chargebacks, it can be practical to confirm that the provider has strong security measures and fraud prevention tools. Of course, you’ll probably also want to make sure that the provider’s payment processing solutions are compatible with your business’s online platforms.
The Takeaway
High-risk merchant accounts allow high-risk businesses to process electronic payments, though these accounts often come with higher fees and stricter terms. Be sure to compare the options before deciding which high-risk merchant account is the best fit for your business.
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FAQ
What fees come with a high-risk merchant account?
High-risk merchant accounts typically have higher fees than standard merchant accounts. These may include higher processing fees and chargeback fees, as well as setup fees, monthly charges, and other transaction fees.
Can a high-risk merchant account be closed without notice?
Yes, a high-risk merchant account can be closed without notice if there are excessive chargebacks, fraud reports, or compliance violations.
How long does it take to get approved for a high-risk merchant account?
It can take between seven and 10 business days to get approved for a high-risk merchant account.
What is a rolling reserve?
A rolling reserve is a portion of a merchant’s transaction funds that is withheld by a payment processor to protect against potential losses from chargebacks, refunds, or fraud. Rolling reserves are typically released after a set period of time.
Are there alternatives to high-risk merchant accounts?
Yes, high-risk merchant accounts are not the only way to accept payments if your business is high risk. Other options include bank-based alternatives like GoCardless or ACH processors, account-to-account transfers, and crypto payment rails.
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