A high-risk merchant account is a unique payment processing account intended for companies deemed to have a greater risk of chargebacks or fraud than regular merchants. Payment processors or banks typically decide this categorization based on factors like the type of industry, financial history of the business, and potential legal risks.
Some industries, such as online gambling, adult entertainment, pharmaceuticals, travel, and nutraceuticals, are frequently considered high risk because they have a track record of higher chargebacks and fraudulent transactions. Further factors that contribute include operating on a global scale, using subscription-based billing, or working in tightly regulated industries. Businesses that have a bad credit past or are newly established without a proven financial history may also be included in this group.
Operating as a high-risk business can be challenging because these accounts often come with higher fees and more stringent contract terms. Due to the nature of these businesses, traditional banks and payment processors may refuse to work with them, necessitating the use of high-risk merchant account providers. Partnering with the right provider is essential, as these accounts come with added features like advanced fraud protection and chargeback management tools, which can help reduce potential financial losses.
Choosing a reliable high-risk merchant account provider is essential for ensuring seamless payment processing and safeguarding against fraudulent activities. Selecting a provider with a background in high-risk industries, clear fee structures, and excellent customer support is recommended to address challenges that may occur when working in these intricate fields.
Factors That Determine High Risk Status
When applying for a high-risk merchant account, payment processors assess various factors to determine the risk level of a business. The primary considerations include industry type, chargeback ratio, credit history, and transaction volume.
1. Industry Type: Certain industries are naturally classified as high risk due to their history of chargebacks, fraud, or regulatory scrutiny. For instance, businesses in online gambling, adult entertainment, pharmaceuticals, travel, and nutraceuticals often find themselves labeled as high-risk. Additionally, industries with frequent legal changes or moral concerns, such as cannabis or firearms, can also fall into this category.
2. Chargeback Ratio: A high ratio of chargebacks is a crucial risk indicator for payment processors. Companies that have recurring billing methods, like subscriptions, can face increased chargeback rates when customers fail to cancel before getting charged. This can raise concerns for providers and result in increased charges or more stringent contract conditions.
3. Credit History and Financial Stability: Payment processors also evaluate the creditworthiness of business owners and the financial stability of the company. A poor personal or business credit history can lead to a high-risk classification. New businesses with no established financial record may also be deemed high risk since they lack a proven track record of stability.
4. Past Legal or Financial Issues: Businesses that have had financial troubles, legal troubles, or bankruptcy in the past are likely to be considered high-risk. This categorization guarantees payment processors are safeguarded from potential losses and allows for closer monitoring of these companies.
Documentation and Information Required During Application
When applying for a high-risk merchant account, businesses need to provide extensive documentation to demonstrate their legitimacy and financial stability. The required documentation typically includes basic business and personal information, along with additional documents that prove the business’s ability to manage the risks associated with high-risk industries.
Common Documentation Requirements:
Business License and Articles of Incorporation: These documents confirm that the business is legally registered and operating in compliance with local regulations.
Financial Statements: Recent financial statements, such as profit and loss statements and balance sheets, show the financial health of the business. Some processors may require up to two years of financial data.
Identification and Personal Financial History: Business owners might have to provide personal identification (such as a driver’s license or passport) and personal financial records, like credit scores, to confirm their creditworthiness and lower perceived risk.
Proof of Business Bank Account: A voided check or bank letter showing account details is often required to validate the business’s financial stability.
Chargeback History and Transaction Statements: For existing businesses, three to six months of credit card and ACH processing statements help payment processors assess the business’s risk level and transaction patterns.
Additional Requirements for High-Risk Accounts: High-risk merchants may also need to present a more thorough explanation of their business model, marketing materials, and proof of PCI compliance to verify transparency and adherence to security standards. This aids payment processors in reducing risks such as chargebacks and fraud.
Providing accurate and complete documentation is essential, as inconsistencies or missing information can delay the approval process or lead to rejection. Preparing these documents in advance can expedite the underwriting process and improve the chances of securing a high-risk merchant account.
Expected Fees and Terms for High Risk Merchant Accounts
When applying for a high-risk merchant account, businesses should expect higher fees and more stringent contract terms compared to standard accounts. This is because high-risk accounts present greater potential liabilities for payment processors due to higher incidences of chargebacks, fraud, and financial instability in certain industries.
Typical Fees for High-Risk Merchant Accounts:
Transaction Fees: These fees are charged per transaction and are typically higher for high-risk businesses. The rate can range from 3.49% to 3.95%, which is usually 0.5% to 1% higher than fees for standard merchant accounts.
Monthly Minimum Fees: Businesses are typically required to meet monthly minimums when obtaining high-risk merchant accounts. If the minimum requirement is not reached, a charge will be applied to make up for the shortfall.
Chargeback Fees: Because high-risk industries face more chargebacks, these accounts come with higher chargeback fees, which can range from $20 to $100 per chargeback.
Early Termination Fees: Many high-risk merchant accounts have long-term contracts with early termination fees. If a business ends its contract early, it could face penalties.
Rolling Reserves: Payment processors may hold a percentage of the business’s sales in a reserve account to cover potential chargebacks and financial losses. This reserve amount is released after a set period, typically six months.
Contract Terms: High-risk merchant accounts frequently come with more stringent contract conditions, such as extended agreements lasting from 1 to 3 years. It is important for businesses to carefully examine the terms before agreeing to these contracts, as they might involve fees for ending the agreement early as well as other sanctions.
Why Are Fees Higher? The elevated fees for high-risk accounts reflect the increased risk for payment processors. Industries such as online gambling, adult entertainment, and nutraceuticals face higher levels of fraud and chargebacks, necessitating additional security measures and reserves. Understanding these fees and terms can help businesses prepare financially and choose the right provider.
Challenges You Might Face During the Application Process
Applying for a high-risk merchant account can be a complex process, and businesses may encounter several challenges along the way. One of the most common issues is potential rejections. Payment processors may deny applications if the business falls into industries with a high risk of chargebacks or fraud, such as online gaming, adult entertainment, or CBD products. Other reasons for rejection include poor credit history, missing compliance documentation, or high chargeback ratios.
The approval process for a high-risk merchant account may take much longer compared to standard merchant accounts. This occurs because payment processors conduct thorough underwriting reviews and due diligence to evaluate the risk linked with the business. The length of the review process varies from a few days to a few weeks, depending on the complexity of the business and the necessary documents. Make sure that all necessary paperwork is both accurate and complete in order to expedite the procedure. Submitting a thorough business plan and showing financial stability can decrease the time needed for approval.
Even after approval, high-risk merchants may face issues like account holds or freezes during the initial months. Payment processors often monitor new accounts closely to evaluate their risk profile. If the business experiences a high number of chargebacks or suspicious activities, the processor may place a temporary hold on the account or freeze funds to protect against potential losses. To avoid this, it’s essential to implement strong chargeback management and fraud prevention measures from the start, ensuring smooth payment processing and minimizing disruptions to business operations.
How to Choose the Right High Risk Merchant Account Provider
Selecting the right high-risk merchant account provider is crucial for businesses operating in high-risk industries. Here are some key factors to consider when evaluating providers:
1. Reputation and Experience: Choose a provider with a strong track record in handling high-risk industries. Look for companies that specialize in high-risk accounts and have experience with businesses similar to yours. Providers like Durango Merchant Services, PaymentCloud, and Host Merchant Services are known for their reliability and tailored solutions for high-risk sectors such as CBD, firearms, and online gaming.
2. Support and Services: Quality customer service is essential for businesses with high risks. Make sure the provider gives timely and available support, preferably round-the-clock, to help with possible problems such as fraud prevention or chargeback management. Companies such as Soar Payments and Easy Pay Direct are highly regarded for their extensive assistance and fraud prevention resources.
3. Fees and Contract Terms: High-risk merchant accounts typically come with higher fees and stricter contract terms. Compare providers based on transaction fees, monthly minimums, and early termination fees. Some providers, such as Easy Pay Direct, offer flexibility by not charging early termination fees, which can be advantageous for businesses looking for less restrictive agreements.
Red Flags to Watch Out For: Steer clear of companies that hide fees, lock you into lengthy contracts with expensive termination fees, or lack transparency in their pricing. It is crucial to also watch for negative customer feedback and inadequate support, as they may signal possible upcoming problems.
Best Practices to Improve Your Chances of Approval
Securing a high-risk merchant account can be challenging due to stringent requirements and the need to demonstrate a stable financial history. To increase your chances of approval, it’s essential to implement best practices that reduce perceived risk and strengthen your application.
1. Maintain Clean Financial Records: Before applying, ensure that your business maintains clean financial records. Provide accurate financial statements, a strong credit history, and clear cash flow records to demonstrate financial stability. This is particularly important for businesses in high-risk industries such as CBD, adult entertainment, or online gaming, as payment processors often scrutinize these factors more closely.
2. Implement Risk Mitigation Measures: Minimizing the perceived level of risk is essential for obtaining approval. Utilize effective fraud prevention measures like AVS and 3D Secure authentication to minimize chargebacks and fraud risks. Moreover, clear refund policies and transparent terms displayed on your website can help reduce customer disputes and chargebacks.
3. Build a Comprehensive Business Plan: A well-structured business plan can significantly improve your credibility. Outline your business model, target market, and risk management strategies. Clearly demonstrate how you handle chargeback management and fraud prevention for high-risk businesses. Highlighting compliance with industry standards like PCI-DSS further strengthens your application.
4. Develop a Strong Relationship with Your Provider: After being approved, it is crucial to keep an open and proactive communication with your provider. Consistently update on modifications to your business model or transaction volume, and ask for advice on reducing possible risks. This assists in establishing trust and has the potential to result in improved conditions in the future.
Conclusion
Seeking a high-risk merchant account includes dealing with increased fees, extended approval processes, and more stringent criteria. Businesses can enhance their likelihood of success by familiarizing themselves with the application process, gathering the required documentation, and selecting a suitable provider. Conducting thorough research and meticulous planning are necessary to discover the most suitable option.
