How a High Risk Merchant Account Works

How a High Risk Merchant Account Works

When running a business, accepting payments is a must, but for some industries, it isn’t as simple as swiping a card. Some businesses are labeled as “high-risk” by payment processors and banks, which complicates things. 

In this article, we’ll break down what high-risk payment processing is, how it works, and how businesses in this category can manage it.

What Is High-Risk Payment Processing?

High-risk payment processing refers to the services provided to businesses that are considered higher risk for fraud, chargebacks, or other financial challenges. These businesses may have higher chances of disputes or be involved in industries that are more prone to financial risk. As a result, payment processors see these businesses as risky to work with.

A payment processor is a company that handles transactions between the customer’s bank and the merchant’s bank. These processors help businesses accept credit card payments online or in person. But when it comes to high-risk businesses, they typically charge higher fees, have stricter rules, and require extra measures to protect themselves from potential losses.

What Makes a Business High-Risk?

While many companies operate with low-risk transactions, others fall into the “high-risk” category. High-risk businesses represent a significant portion of the economy; for instance, the global online gambling market, a high-risk industry, was valued at over $66 billion in 2022, and it’s only growing. Meanwhile, industries like nutraceuticals and CBD, also classified as high-risk, have grown by nearly 7% annually, contributing to a diverse yet challenging market landscape for payment processors. Here are some common reasons a business may be classified as high-risk:

  1. Industry Type: Some industries are more prone to fraud or chargebacks, such as:
    • Gaming and online casinos
    • Travel agencies
    • Subscription services
    • CBD and cannabis products
    • Debt collection
    • Adult entertainment
    • Nutraceuticals (health supplements)
  2. Business History: If a company has a history of frequent chargebacks or refunds, it might be considered high-risk. Chargebacks happen when customers dispute a charge, and the bank has to refund them, which can become costly for payment processors.
  3. Location: Businesses operating in certain countries are considered more vulnerable to fraud and are classified as high-risk.
  4. Credit Score: Just like individuals, businesses also have credit scores. If a business has a low credit score, payment processors may see them as a potential financial risk.
  5. Transaction Volume: If a company processes a large number of transactions or has high-ticket sales (expensive individual sales), there’s a greater chance of fraud or chargebacks. Payment processors may see this as a higher risk.

How Does High-Risk Payment Processing Work?

High-risk businesses need a special type of merchant account called a high-risk merchant account to accept credit and debit card payments. A merchant account is a special kind of bank account that allows a business to accept payments. For high-risk businesses, the process of getting and maintaining this account works differently than for low-risk businesses.

  1. Approval Process: Applying for a high-risk merchant account takes longer because processors need to assess the level of risk involved. They might look at the company’s industry, financial history, and chargeback rate before approving.
  2. Higher Fees: Since there’s a greater risk of financial loss, processors charge higher fees. These fees can include:
    • Transaction fees: A percentage of each sale.
    • Chargeback fees: Fees charged when a customer disputes a payment.
    • Rolling reserve: Some processors hold a percentage of the business’s funds in a reserve for a certain period to cover potential losses. This is called a rolling reserve, and it is released after a period of time if no chargebacks or disputes occur.
  3. Stricter Terms: High-risk businesses may face stricter terms, such as monthly transaction limits, extended payout periods (e.g., payments every two weeks instead of daily), and mandatory fraud detection systems.
  4. Chargeback Management: High-risk payment processors put systems in place to manage chargebacks. Businesses often need to use tools that help reduce fraud and keep chargebacks under control. This could include verification systems, 3D secure authentication, and detailed tracking of customer activity.

Why High-Risk Businesses Needs Special Processing in Payments

Banks and standard payment processors (like those used by low-risk businesses) are cautious about high-risk industries because they don’t want to lose money. If a business has a lot of chargebacks, fraud, or disputes, it can cost banks and processors time and money. In some cases, they might even have to refund customers from their own pockets.

For example, in industries like online gaming or travel, there’s a high chance that customers might request refunds or dispute charges after receiving services, making the processor vulnerable to losses. To protect themselves, these processors either refuse to work with high-risk businesses or charge higher rates and impose additional rules.

How A High-Risk Businesses Reduce Their Risk

There are several ways that high-risk businesses can reduce their risk and improve their payment processing experience.

  1. Lower Chargebacks: Businesses can reduce chargebacks by improving customer service, providing clear return and refund policies, and using fraud detection systems.
  2. Work with Reputable Processors: Businesses should work with payment processors that specialize in high-risk industries. These processors understand the unique challenges and can provide tailored solutions to help manage risk.
  3. Use Fraud Protection Tools: Using tools like 3D Secure, Address Verification Services (AVS), and tokenization can help reduce fraud and protect customer data.
  4. Offer Multiple Payment Methods: By offering alternative payment methods like PayPal, cryptocurrencies, or digital wallets, businesses can give customers more ways to pay, reducing the reliance on traditional card payments, which are more prone to chargebacks.
  5. Monitor Transactions Regularly: Regular monitoring of transactions can help businesses spot suspicious activity early and prevent fraud. This can include flagging unusually large transactions, multiple orders from the same IP address, or orders from high-risk countries.

Choosing a High-Risk Payment Processor

Choosing the right payment processor is crucial for high-risk businesses. Here are a few things to consider when selecting one:
  1. Experience with Your Industry: Make sure the payment processor has experience working with businesses in your industry. They’ll be better equipped to understand your needs and manage your risk.
  2. Fair Fees: Look for transparent and fair pricing. While high-risk businesses can’t avoid paying higher fees, it’s important to compare different processors to find the best rates.
  3. Chargeback Protection: Choose a processor that offers chargeback protection and fraud prevention tools. Some processors offer systems to help businesses fight disputes or block fraudulent transactions before they happen.
  4. Customer Support: High-risk businesses often face more challenges, so having strong customer support from the processor is important. You’ll want to work with a processor that provides reliable, round-the-clock support.

Get a high risk merchant account

  • Wide range of supported industries
  • A full set of payment products to accept payment anytime, anywhere
  • World-class customer service
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