High Risk Merchant Accounts For Small Business
As a business owner, you strive to ensure your customers are as satisfied as possible. In today’s ultra-competitive business world, part of that means making sure they are able to access a range of payment options when purchasing a product or service. But, while ‘ordinary’ businesses may find it easy to access cashless payment solutions, it is hardly the case for high risk merchants.
Being deemed high risk comes along with loads of concerns especially when you are forced to apply for a high risk merchant account. Still, the situation isn’t hopeless. Knowing what to expect as a high risk business owner may help you secure a great deal and avoid unpleasant surprises.
Understanding High Risk Merchant Accounts
In the past, many business owners were denied a merchant account as they were considered “high risk”, usually because the business type typically struggles with chargebacks, fraud, or sales of questionable products and services. It could also be because the business owner has a poor personal credit. Banks and merchant account processors are often cautious when dealing with high risk businesses as they pose risks to their reputation.
Merchants with poor person credit histories often wonder why their credit matters during the account application process. But the truth is that merchant accounts are also a form of credit since the bank pays the merchant before money is collected from the customer. What this means is that banks consider credit card payments made to a merchant as loan for a short period of time. Merchant account processors are also prone to risks due to possible fraudulent activities by merchants, so the credit history is a great way to insure themselves against fraud to a reasonable extent.
If you have a poor credit history, do well to contact a merchant account processor that specializes in providing high risk merchant accounts for high risk merchants or poor credit merchants . These processors offer tailor-made services to high risk businesses, but the rates are usually higher than traditional merchant accounts.
Is the “high risk” designation really doom and gloom for a business? How does it impact your business?
Well, in some cases, being considered high risk means that your application for a merchant account will undergo extra scrutiny. The financial institutions involved may require that you have a certain amount of cash reserve or may even limit you to a specific number of monthly transactions. As noted earlier, a high risk designation also attracts higher processing fees. But there are benefits of having a high risk account too.
Two of its benefits include:
- Ability to Manage International Transactions
When it comes to managing international transactions, low-risk merchants have several limitations. On the other hand, the limitations are fewer for high risk merchants, which makes it possible for them to reach their global expansion goals.
- Flexible Payment Acceptance Options
Low risk merchants are limited to accepting certain types of credit card payments. The limitations are fewer for high risk merchants, meaning they can sell a wide range of products and services, offer recurring payments, and process larger sales volumes for special sales and launch events.
What Variables Classify a High Risk Merchant Account
Merchants are so often focused on addressing the many details of their business, that they fail to realize their business has been deemed high risk when they apply for payment processing solutions. Unsurprisingly, most merchants express surprise when they learn they are classified as high risk.
But what really defines a high risk business? Here are seven variables that define a high risk merchant account:
- High Chargeback Rate
If your business type has a history of a high rate of chargebacks, you will likely be labelled high risk. Acquiring banks and processors usually consider the behavior of your potential customers, not you personally, when making their decision here.
- Location of Business
If your business is primarily focused on selling to the U.S., but headquartered overseas, you might be considered high risk. Are you wondering why the location of your business may determine the fate of your merchant account? Well, truth is, certain regions and countries are known for high rate of fraudulent activities, especially in Asia, Africa, and Eastern Europe. Even if your business is headquartered in some states like Nevada, Georgia or Florida in the U.S., you may be subjected to higher merchant account fees as these states rank highest in reported fraudulent activities in the country.
- Credit Card Present or Not Present
Card not present (transactions with e-commerce merchants) is considered a higher risk than merchants in a brick-and-mortar store. When the card is not physically present at the point of sale in an e-commerce transaction, the risk of fraud is greater than card present at the time of payment.
- Questionable Products or Services
Acquiring banks and merchant account providers are usually cautious when dealing with businesses in certain industries such as online gambling, online wine delivery, adult content, and e-cigarettes. These products could get into the wrong hands – and cause harm to the individual.
- High Average Ticket Transactions
Your business could be deemed high risk if it usually accepts abnormally high-cost purchases through credit card. The timeshare and chartered air flight industries are an example. If, for instance, an executive pays $20,000 for a chartered flight, then cancels and initiates a chargeback via his credit card, the merchant is left empty-handed in a transaction that involves significant investment.
- High Monthly Volume
Companies in the nutraceuticals or multilevel marketing industries deal with high volume merchant accounts and are often considered high risk as a result of the risk of chargebacks. This is especially true for domestic merchants. For instance, if an acquiring bank does not identify a fraudulent domestic merchant until days or even weeks later, they will lose money as a result of chargebacks since this kind of merchants receive daily payouts.
- Bad Personal Credit
Though most criteria used to determine high risk status focuses on the business, this one focuses on you as the business owner. If your personal credit rating is low, you’d likely be deemed high risk by some processors, no matter the reason.
Types of High Risk Businesses Industries
Considering the variables above, which businesses are considered high risk? Which businesses need to settle for high risk merchant account services?
Here are some business types that need high risk merchant account services:
- Legal Services
Banks and merchant account processors exercise caution when dealing with businesses in this industry as these businesses usually experience rebuttals for refunds and chargebacks.
- Auto Dealership
The vehicle sale industry is another one that is considered high risk. This is largely due to its ticket size. Cars are expensive, and financial institutions prefer working with merchants that offer pocket-friendly products and services with lower ticket size.
- Auction Services
The risks associated with this business model is that fraudulent persons can take advantage of it since it is not possible to determine the price of the product. Another risk is that there is a potential for a different person to claim the product even after the auction.
- Construction Services
The construction industry has become high risk since the subprime mortgage crisis. Financial institutions are reluctant to offer merchant account services to construction companies since they reply on payments from builders. The real estate industry is unpredictable and volatile.
- Agricultural Companies
Climatic conditions heavily determine the success of farming and agricultural companies. A company in this industry may suffer losses as a result of drought, torrential rains, and low yield. A farmer who makes huge profits in a year may experience little to no profits the next year.
- Gaming Businesses
Companies in the gaming industry are deemed high risk due to a range of reasons. Processors consider their high-volume turnover a risk. Most gaming companies are also typically based offshore, in areas where gambling is allowed, and this could make them channels for money laundering.
The kind of products gaming companies offer is another reason they are considered high risk, as it usually leads to many refunds. High risk gaming businesses include mobile gaming sites, online gaming sites, poker sites, and online casinos.
- Medical Marijuana Companies
Though the medical marijuana business and its use has been legalized in some states, many others are yet to toe the same path. This, coupled with the fact that the use of cannabis is still considered illegal, has been a major setback for medical marijuana companies in their quest to get a cannabis merchant account.
Even in states where marijuana has been legalized, there are many processors and acquiring banks that still refrain from offering merchant services to medical marijuana companies. Medical marijuana businesses struggle with problems like legal protection, government concerns, legality issues, and other issues that increase the risk of doing business in the industry.
- Subscription Services
Subscription service is a business model which requires a customer to pay a certain recurring price at regular intervals to gain access to a product or service. Though this service is regular – and potentially attractive for processors – problems usually arise when customers initiate disputes for refunds. Request for refunds may happen on a regular basis in this industry, especially when a customer forgets they have an active subscription. These customers may initiate a chargeback to get their money back.
- Adult Entertainment Businesses
Acquiring banks and processors are wary of doing business in the adult entertainment industry due to the issue of its legality in some jurisdictions. For some, associating with businesses in the industry feels like a taboo. As such, this industry is considered high risk.
Typical High Risk Merchant Account Fees
As you know by now, the rates charged for high risk merchant accounts are typically higher than traditional accounts. Here are the rates you should expect to pay as a high risk business owner:
- Set-up Fee
The set-up fee is the first payment you will have to make once your application for a high risk merchant account has been approved. This fee varies from provider to provider, but it would be up to a few thousands on average. Some high risk merchant account services may offer to reduce or even waive off the set-up fee to attract new business owners, but we suggest that you properly read the contract to see if it includes a merchant accou8nt termination fee.
- Capture Fee
Your high risk merchant account processor will offer you a terminal through which you will be able to capture card information. Once again, this varies widely in cost, but you can expect to pay anywhere from $50 to hundreds on dollars. The cost will depend on your pre-empted volume. Your provider will give you a limited number of transactions you are expected to process. Once you exceed this limit, your provider will charge you an extra fee per transaction after the limit.
- Processing/Transactional Fees
Most providers charge a specific amount for processing every month, as well as a fixed percentage of the value of each transaction. As expected, high risk merchants pay more, so you can expect to pay processing fees up to as much as 10% of your sales.
- Schedule Fees
This is also another fixed fee you will be required to pay. It includes terminal fees, PCI fees, payment gateway fees and monthly annual fees.
You will have to pay terminal fees if you have a physical store and process every credit card payment via credit card terminal.
Payment Gateway Fees
Like a physical terminal, you will be charged a physical gateway fee for accepting credit card payments via the online terminal.
This fee is paid directly to the payment gateway industry.
Monthly Annual Fees
Your merchant account processor will charge this fee either on a monthly or annual basis. It includes the services the merchant processor provides, such as setting up the account, maintaining it, and providing customer service.
- Incidental Fees
While the schedule fee is always constant, incident fees are not regular. They are charged when you have a chargeback fee. So, you wouldn’t have to pay any incident fees if there is no chargeback fee.
Choosing the Best High Risk Merchant Account Provider
The ability to receive payments through credit cards is now one of the most important attributes of modern-day business. As a high risk business owner, you want to ensure you have the best merchant account processor to help you manage your business. Though there is a good number of high risk merchant account providers out there, choosing the best one for your business can be challenging.
To guide you through this important process, here a few factors you should always keep in mind:
It is important that you choose a high risk merchant account provider with great level of reputation and adequate market experience since the provider may also serve as your payment gateway. Before making a final decision, conduct market-oriented research, which includes reading customer reviews on each provider to know how fit they are for the job. Ensure you take note of any negative reviews as they reveal the weaknesses of a merchant service.
- Type of Services Offered
Finding a good high risk merchant account provider is one thing, finding one that offers the services you need is an entirely different prospect. Remember that it is the responsibility of the provider to offer services that make your transactions safe and secure. So do yourself a favor, to compare different providers by going through their websites. This will give you an insight into the kind of services you should expect from each provider.
Not only should your chosen high risk merchant account provider offer the services you are interested in, but they should be rendered at an affordable rate. However, it is important that you remember that your business type, registration process, and a few other factors could impact the fees you are required to pay for your high risk merchant account. For instance, if you have an MCC account that requires card registration and you’d like to create an account with both Visa and MasterCard, you will have to pay as much as $1,000 yearly.
- Communication Level
The best high risk merchant account provider should have a friendly and professional customer support service which you can easily access via different platforms. The customer care service will come in handy when you need help concerning your card processing or payment gateway. The provider should be able to interact with you in the clearest possible terms and help when you need it. They should also be able to provide support during the application process to ensure it is as smooth as possible.
A “high risk” designation is no doom and gloom for your business. Although it can be expensive, it wouldn’t plead your business dry so long as you make the right decisions. Conduct your own research based on the factors listed above and identify the right provider for your needs and budget. The best high risk merchant account providers focus on ensuring you get a great deal on for your account.
If your business is currently challenged with being considered high risk or your account has been closed for chargeback issues, finding a specialist in high risk merchant processing is your best course of action. Seek-out a firm that specializes in high risk merchant accounts for advice and possible game plan moving forward. Good luck.