Several business owners ask what is a merchant account and how does it work? In this blog we will answer that question for you. In addition to explaining the difference between a low risk merchant and a high risk merchant. More importantly how to setup a high risk merchant account for your business.
Simply put, merchant accounts are a type of a bank account for businesses to process debit and credit card transactions. Now you might ask, how do banks classify industries as high risk businesses? High-risk merchant accounts are payment processing accounts meant for businesses that are high-risk according to banks. The simple answer is this, businesses that have a high likelihood of chargebacks, are considered high risk merchants which makes it an added cost for merchant services.
Banks categorize businesses in two categories based on their potential risk. The first category is called low risk merchants, while the second classification is called high risk merchants. If you operate a high risk business, you will need to reach out to a high risk merchant provider, while low risk businesses can typically pay lower rates.
General indicators of low-risk merchants include those that have individual credit card transactions averaging less than $500 and process $20,000 or less monthly. While different payment processors have different guidelines, there are similarities shared across the industry. Low-risk merchants also have a very low or non-existent chargeback ratio. They also operate in low-risk industries (i.e., household goods, baby products, etc.) and low-risk countries (such as countries in the EU, Canada, USA, Japan, and Australia).
High-risk merchants have more chargebacks. Anything above 0.9% of a business’s total transactions is considered as a high chargeback ratio. Other notable characteristics of high-risk merchants include bad credit history, $20,000+ in monthly sales, over $500 in average credit card transactions, and a business that sells products/services in countries prone to fraud.
In most situations, businesses that are prone to chargebacks and refunds need to setup a high-risk merchant account. On the other hand, certain industries are also classified as high risk that are common businesses. A good example of such businesses includes those in the travel/transport industry. For example, airlines where flight cancellations are common, and customers frequently ask for refunds. Another example, is hair salons, barber shops, online gamings and so many more.
There are several businesses in different industries that are considered high risk by banks. They include but aren’t limited to:
These are a handful of companies that are considered high risk. Once you are considered a high risk, the next step is to find a bank that will work with your business.
If you are a high risk merchant looking to find a solution to avoid paying costly fees from banks, here are three solutions for high risk businesses that include:
High-risk merchants can consider using cashless ATM machines, which are simply payment terminals resembling POS (point-of-sale) devices for processing PIN-based transactions such as debit card payments.
When using a cashless ATMs, the customer swipes or insert their cards at the payment terminal before entering their PIN, choosing a transaction type (i.e. cash withdrawal), before inputting the dollar amount and finalizing payment. In turn, the ATM prints a voucher, which is given to a merchant as confirmation for the payment. Next the customer gets their service or goods, and the payment is deposited directly into the merchant’s bank account.
This is another great solution for high-risk merchants. High-risk credit card processing machines utilize fraud-proof solutions powered by machine learning filters. Plus, a high-risk credit card processing machine will reduce false declines (valid transactions that are incorrectly rejected), chargebacks, and fraud attempts using multi layered security approaches, AI-based security checks, and other high-tech approaches. Other notable advantages include dedicated support and effective, up-to-date security.
High risk merchants can choose to accept cash only payments and avoid the high fees associated with chargebacks. However, this solution comes with its disadvantages. Businesses stand to lose customers who don’t have cash at the time of purchase, as well as those who insist on paying with their card. Accepting cash-only payments is not a wise decision, the better choice is a cashless ATM machine. A cashless ATM is also a great way for high-risk merchants to avoid chargeback fees while still offering the benefits of debit and credit card payments.
Most high-risk payment providers charge setup, monthly and yearly fees. Some may also charge a Payment Card Industry (PCI) fee. So, it is important that you read your contract and ask questions. Early termination fees may also apply when businesses close accounts before the contract expires. Since high risk merchant processing has evolved over the last few years, it is possible to find a high-risk payment provider that is transparent and provides exceptional customer service. Nonetheless, there are other fees applicable to high-risk merchant accounts. They include rolling reserve and chargeback fees.
Now that you have background knowledge, there is some good news. Applying for high-risk merchant accounts is easy. The first step is finding a trusted high-risk payment processor. After you find a processor, you will have to fill out an application to get approved. Once all the paperwork is submitted, and processed, the company will let you know if you are approved.
The application process usually includes due diligence done by risk management professionals to access risk and determine high-risk merchant status. A business’s card processing history must be reviewed thoroughly for fraud cases, lost account/s linked to high chargebacks, etc. One must also note that, while the application process might be similar at different companies, seasoned payment platforms take a case-by-case approach.
There are several benefits of high-risk merchant accounts that include:
Having a high-risk merchant account gives a business access to global markets that would have otherwise been inaccessible. Whether you are a local business that sells online or a brick and mortar business that needs to process international card transactions.
Regular accounts have chargeback thresholds that must be met, or an account is terminated. On the other hand, high-risk merchant accounts stay active since chargebacks limits can exceed a traditional merchant accounts.
Access to global markets and reduced risk of fraud, chargebacks, and other related situations translates to increased profit. Furthermore, you can begin to sell services and products online as well.
Here is a list of the cons associated with high risk merchant accounts:
Once you are classified as a high risk business, you will need to find a company that works with your type of business. Not all banks will work with you, so it’s a matter of doing your research to find the right company that can help you.
High-risk merchant accounts are usually subjected to higher processing fees. Since, customer disputes that result in refunds attract administrative fees associated with processing the chargeback. Generally, high-risk merchant accounts attract fees that may be twice as much (even more) than those paid by low-risk merchants. Thus, the higher fees associated with opening a high risk business account. However if you want to avoid the high fees, the best solution is a cashless ATM machine.
Banks set aside some money (known as a rolling reserve) on businesses’ accounts with a higher probability of chargebacks, and a history of refunds. A rolling reserve is a protective amount that cushions banks against chargebacks, fraud, and other unexpected activities. Generally, banks will take 5 to 10% of the card processed volume and hold this amount for a specified period (usually 6 months), after which it is released. Find a bank that works with you an explains all your options before you make a final decision.
Since there are countless high-risk card processors available today, how do you choose the best payment processor? The most important considerations when selecting a high risk merchant account include:
The credit card payment partner you select should offer dedicated 24/7 support (online and offline) to handle any/all payment issues that take place in managing payments for high-risk businesses.
You want a high risk merchant provider that understands your business. The payment processor you choose should also have a transparent pricing structure easily found on their website. Don’t work with payment processors who aren’t upfront about their charges and potential added costs of using their high risk merchant services.
The last thing any business owner wants to deal with is fraud. Finding a payment processor that has the technology and expertise to offer secure payments is a must. It also helps to work with a provider who offers fast, and secure onboarding. In addition to releasing payments without any downtime.
Now that you understand how high risk merchant services work, it’s time to find a company you can trust. At My Payment Solutions USA we can help you set up your high risk merchant account in no time. All you need to do is call us at this toll free number 1-800-734-3424 or click here to schedule a call on our calendar.
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