The Comprehensive Guide to High-Risk Merchant Accounts

Accepting credit cards today is imperative for most small businesses these days. Consumers are shifting their ordering to third-party apps for everything, taxis, renting a room, ordering take-out, buying groceries, ordering medicine, or paying for a subscription. Transactions that had been easy to pay for cash for years are now even easier to pay for with a smartphone wallet connected to your card. Today, there is no such thing as cash-only businesses anymore.

Businesses looking to continue serving their existing clients must adapt to a changing payment market. As these businesses start applying for merchant accounts, they learn that they are increasingly classified as high-risk merchants as many of them perform too many card not present (CNP) transactions. As the high-risk tag becomes a part of doing business, below, we highlighted what a high-risk business is, what impact such a classification has on businesses, and steps merchants can take to be accepted for a high-risk merchant account.

What is a High-risk merchant?

Being a high-risk merchant means that the merchant account provider considers your business riskier to do business with. It’s classified as riskier not because of the business you’re doing, i.e., security services or a bomb squad. Instead, the issuing bank may be seeing any of the following factors that increase your risk profile:

  • A business that can cause disrepute to the issuing bank of the industry, the nature of business, or legality of the business in some jurisdictions, i.e., CBD/hemp merchants, adult-oriented websites, or gambling sites.
  • You have poor past performance – you may be considered a high-risk merchant or were considered a problem merchant by other payment processors.
  • You have no past performance – if a business has just started, it’s tough to differentiate a legitimate one from one intending to process as many fraudulent transactions as possible to acquire credit and siphon that money illegally and then abandon the merchant account.
  • Card not Present (CNP) transactions are another risk factor. If your business is taking the credit card details via eCommerce or mail order telephone orders (MOTO), there is a considerable risk of error with keying in the card details. Or if the merchant can’t see the card, they don’t know if the consumer using the card is the rightful owner and the data hasn’t been illegally gained.
  • The merchant or the industry the merchant operates in has a history of chargebacks. Even low-risk businesses that suddenly start receiving chargebacks can be escalated into the high-risk category.
  • If a merchant is based in a country other than Australia, Canada, the European Union, Japan, the U.K., or the U.S., your business poses a higher risk.

The impact of being a high-risk merchant

Undoubtedly, merchants classified as high-risk will pay more payment processing. Issuing banks would require a higher return to compensate for the higher risk they are taking on.

High-risk merchants will also be subject to rolling reserves. These reserves can be as high as 50% of all monthly transactions. Furthermore, depending on the issuing bank and the merchant processor, funds can be held for up to 180 days after a merchant account is closed.

Another drawback for some high-risk merchants is chargebacks. Some consumers of subscriptions or free trials often resort to chargebacks as their form of canceling services after having missed important deadlines to cancel service. The merchant can defend themselves against such chargebacks. However, merchants are still stuck with the chargeback fees. Also, the more chargebacks such merchants have, the higher their risk profile, and subsequently, their processing rates.

High-risk merchants can also be subject to higher fees, such as PCI compliance fees, Non-compliance fees, or additional costs to comply with more stringent measures to reduce processing fees to a more manageable level.

Steps merchants can take to mitigate their riskiness

Merchants should focus on finding a payment processor that understands their business and industry niche. Such merchant processors have already implemented the appropriate compliance tools while staying abreast of the latest technology.

Some technologies merchants should (more often a must) incorporate include;

3-D Secure – is an online authentication protocol for card not present transactions in conjunction with that transaction’s financial authorization. This additional layer of security is offered by all payment networks and can be incorporated into merchants’ payment processing by default.

Tokenization – is a storage method of securing data that is being used to process a payment. It simply takes essential data needed for payment processing and replaces that with a string of numbers.

BIN checkers – merchants should ensure that the card details used in transactions are legitimate before processing payments. BIN (Bank Identification Number) is the first six digits in a credit or debit card number representing the issuing bank of the card. As a result of the BIN check, the credit card processor can quickly and securely establish the origin of consumer funds and process the transaction.

PCI Compliance functionality – this is a necessity for high-risk merchants to store cardholder data securely. Suppose a high-risk merchant offers eCommerce or subscription-based solutions. In that case, they should use a payment gateway that has PCI compliance capabilities built into their code where the consumer data is encrypted and securely stored. This capability can eliminate the need for consumers to re enter their payment info again if the payment gateway is equipped with this feature.

It is important to understand that high-risk classification isn’t necessarily a deal breaker to get a merchant account. Yes, it makes many merchant account providers more cautious, but it’s not the end of the world. Merchants should understand that high-risk is a specific risk category, and there are multiple reasons by issuing banks may classify merchants in that category. There are steps merchants can take to showcase how they mitigate the risk inherent for the type of niche industries they operate in. That can help in getting approved for a merchant account and minimize processing costs.

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