As a new business owner, you might not have ever heard the term ‘high risk merchant account’ until your business is labeled as a high risk. It may feel like an unfair judgement against your business or the services you provide. However, from the perspective of credit card companies and merchant account providers, this classification is just an indication that your business may pose a greater risk for chargebacks. If you’re considered a high-risk merchant, obtaining a merchant account for credit card processing may not be as easy. Many payment processors will simply refuse to give a high risk business a merchant account altogether while others may charge you significantly higher rater of fees. In this article, we’ll discuss the factors that may cause your business to be labeled a high risk and how this will affect your ability to get a merchant account.
When a business owner applies for a merchant account, the payment processor will estimate the risk associated with adding your account to their portfolio. Each payment processor has their own unique guidelines for determining weather or not you’re placed within their high-risk category. Some merchant account providers have very strict guidelines while others do not so while some processors may consider your business ‘high risk’, not all payment processors will. However, the following factors are reasons you may be given a high risk merchant account:
History of High Chargebacks: If your business industry as a whole has shown a high rate of chargebacks, your business may be deemed a high risk too.
Products or Services: If the products or services you sell have questionable legality you often will be considered a high-risk business.
Offshore business operating in the United States: If your business is headquartered internationally but your primary target is to sell to customers in the United states, your business may also be flagged as a high risk. The banking regulations within your home country may be a determining factor here.
High Ticket Sales: If your business is processing a lot of transactions or has high dollar amount transactions, you could be considered high-risk due to the greater financial risk.
New Business: If you’re a new business, you often don’t have any previous credit card processing history for payment processors to review. Since this leaves your business as an uncertainty, you may be viewed as a high risk.
Bad Credit: If you as a business owner have a low personal credit rating, you’re more likely to be given a high-risk status.
MATCH Listing: If your business has been flagged as having a merchant account terminated in the past, you may also be viewed as a high risk for a payment processor to take on.
Below is a list of businesses that are generally considered “high risk” merchants. Remember, not every merchant account provider uses the same criteria for labeling an account high risk so while one payment processor may view your business as high risk, another may approve you for a non high risk account.
Check Cashing Services
Credit Card Rate Reduction Services
Mortgage Modification Services
Traveler Check Services
If your business is labeled as a high risk, don’t worry! You will still be able to obtain a merchant account and perform high risk credit card processing. However, your rates and fees will likely be more than your low-risk counterparts. Additionally, high risk merchants may have contract terms that are less than desirable. Here’s what you can expect to experience as a high risk merchant...
Longer contracts: Typically, the industry average for a high risk merchant account is a three year initial term. However, some payment processors may try to lock you in at higher rates for as many as five years due to the risk you pose. Unfortunately, as a high risk merchant, you typically don’t have very much bargaining power to negotiate the length of your term.
Automatic renewal clause: High risk merchant accounts also typically have contracts with clauses that allow the terms of a contract to extent automatically beyond their initial expiration date.
Tiered Pricing: Though most payment processors charge an interchange pricing plan, high risk business are far more likely to be offered a tiered pricing plan which may cost more per transaction.
Chargeback fees: This is a free put on your account by your payment processor in the event of a chargeback. High risk merchants typically have higher chargeback fees then low risk merchants.
Early termination fees: If you wish to close your account before the end of your contract term, your contract will likely include an early termination fee.
Liquidated damage clause: Additionally, some payment processors may also charge a liquidated damage fee which specifies an amount of money you must pay for failing to meet the contract terms.
Keeping a reserve: Some payment processors may keep an additional portion of your credit card processing sales to cover the expenses of any future chargebacks. While reserves may decrease over time, they can present short-term cashflow problems if not considered carefully. There are three types of reserves a payment processor may require: a capped or fixed reserve, an up-front reserve, or a rolling reserve.
Account freezes or terminations: If payment processors believe that your account has become riskier over time, you may experience account freezes or have your account terminated outright.
If you’ve been turned down for a merchant account due to being a high risk business and rely on credit card processing, it can be tempting to not honest about the nature of your business. You should absolutely not do this! When a merchant misrepresents their services and get caught by their processor, they can have their merchant account terminated and may even be placed upon the Terminated Merchant File (TMF) list or the MATCH list. This list can make it more difficult to get approved with any merchant account provider in the future. These lists store the names of businesses that have had previous credit card processing agreements terminated within the last five years. Many merchant account providers use the TMF or MATCH list to screen applicants during the merchant account approval process.
Some reasons for getting on the TMF or MATCH list include:
So, you think you’re a high risk merchant and you’re ready to get started with high risk credit card processing but you’re not sure where to start? No problem! Though it may be difficult to find a merchant account provider that’s a good fit for your business, we at Zeno Payments already done all the hard work for you! We’ve partnered with multiple different banks and processors to snag you the lowest rates, the shortest contracts, and the smallest fees we can find. Get in contact with us and let us see what we can do for your business.
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