What Are High-Risk Merchant Accounts and Do You Need One

If you run a high-risk business, you can reduce your chances of having your application rejected or your merchant account frozen if you apply for a high-risk merchant account.

Some providers cater specifically to businesses standard merchant account providers deem too risky, and you could fall into this category if you run a startup, or sell pharmaceuticals, or tobacco and alcohol, to name a few sectors.

A high-risk merchant account allows you to start accepting payments without worrying about holds and freezes, however, these accounts often come with higher fees because of the high risk level.

We’ll explain exactly what a high-risk merchant account is, what businesses should consider using one, and the pros and cons of using one. We’ll also point you in the direction of providers that offer high-risk merchant accounts.

What Is a High-Risk Merchant Account?

A high-risk merchant account is a payment processing service for businesses that standard providers consider too risky to work with. They allow these businesses to accept credit card payments, online transactions, and other types of electronic payments.

All providers have different policies for what they consider high-risk, but they will take into account the type of product or service the business sells, its credit history, the average transaction value, the transaction type (online, international, etc.), and the likelihood of chargebacks.

What Makes a Business High Risk?

There are no set guidelines for what makes a business risky. It all depends on the standards and comfortability of each provider. For example, some are comfortable working with a brand-new company in any industry, while others only work with established businesses in certain industries.

The following factors can lead a business to be considered high-risk:

Age of the company

If a business is brand new, it’s seen as riskier for merchant account providers. Many new businesses fail, and even if they don’t, it takes a while before companies become financially stable.

Also, these companies have no evidence of profitability and no business credit or financial history. Some providers are willing to take a shot on a new business, but many others prefer working with companies that have experience and a long track record of successful transactions.

Reputation of the industry

Some industries are considered high-risk by default. These industries are either heavily regulated, incredibly volatile, have controversial products, or are prone to fraud and other shady activities (more in this in our examples section). All of these factors increase the risk that providers take on. Even if your business has no issues, you’re often guilty by association.

Chargeback frequency

If your business often deals with chargebacks, merchant account providers see you as a greater risk than companies that have less. Industries that experience high rates of chargebacks include subscription-based products or services and travel.

Chargebacks are when customers dispute a purchase and get their funds back. They’re a hassle for businesses and merchant account providers alike.

Regular chargebacks are often a sign of fraud or subpar product/service, both of which are red flags for merchant account providers.

Financial stability

Companies with poor financial stability or bad credit history are often classified as high risk. If you’ve defaulted on loans or have infrequent sales, a low credit score, or costs almost as high (or higher) than your revenue, some providers won’t want to work with you. If you don’t have business credit, providers may consider your personal credit history.

Average transaction value

Another factor that goes into determining high-risk businesses is your average transaction value. The larger your average transaction, the riskier your business is in the eyes of a provider. This is mainly due to larger purchases having a higher chargeback risk. Also, if fraud occurs, it’s much less impactful if the amount is $10 or $20 than if it’s $500.

Examples of High-risk Sectors

Businesses in certain sectors are more likely to be deemed high-risk than others. Here are some examples of typical high-risk sectors:

• Adult entertainment
• Alcohol
• Charities
• Gambling
• Health and wellness
• Insurance
• Luxury goods (watches, jewellery, designer)
• Nightclubs and bars
• PayDay loans
• Pharmaceuticals (prescription drugs)
• Pyramid selling
• Software subscriptions
• Ticketing and events
• Tobacco
• Travel and tourism

If you operate in one of these sectors, that doesn’t mean that your business will automatically be considered high-risk by all merchant account providers. Each provider has different criteria for what they consider high-risk, so applying for a standard account can be worth a try.

The Challenges of Using a High-Risk Merchant Account

Here are a few of the most common challenges of using a high-risk merchant account compared to a traditional one.

Higher costs

First, the costs of high-risk merchant accounts are greater than those of traditional accounts because providers are taking on additional risk.

For example, credit card processing fees generally range from 1% to 4% for traditional merchant accounts. However, for high-risk accounts, processing fees can be anywhere from 4% or 5%, up to around 10% in some cases.

Other fees may also be more expensive. For example, while a chargeback fee from a traditional provider is normally between $10 and $50, high-risk providers may charge up to $100.

Stricter contractual conditions

High-risk merchants also need to deal with more conditions and stricter terms to protect the provider. This may include regular accounts reviews, large early termination fees, penalties, or longer contracts.

Some providers may even hold a certain percentage of each payment, such as 10%, to cover any chargebacks or disputes. Similarly, there may be a longer settlement period, so your funds might not be available as quickly as they would with a traditional merchant account.

While these challenges make life more difficult for your business, they’re generally a small price to pay to accept card payments and increase your customer base.

Longer settlement period

High-risk merchant accounts often have longer payout wait times than standard accounts to reduce the risk of chargebacks. With a high-risk account, you’ll typically have to wait at least a week to see your money, compared to the standard one to three business days.

Choosing the Right High-Risk Merchant Account

There are several things to consider while evaluating your options for a merchant account provider.

Experience in your industry

First, you should look for a provider with experience working with companies like yours. If the company has worked in your space before, it may have tailored solutions to fit your needs and be aware of the obstacles your company faces. The company also may have more knowledge about how to comply with regulations in your industry.

While there are no rules against working with providers who aren’t experienced in your space, you may end up stuck with a company that doesn’t understand your situation as well as you’d like.

Reputation

Next, look for a reputable provider with a positive track record. While many company websites have testimonials and other types of positive feedback present, take time to check out third-party resources, too.

Look closely at ratings and reviews, and read about the experiences that other companies had with the provider. Try to find one with consistently solid reviews and minimal negative feedback. Be sure to make note of any concerning trends, such as issues that many reviewers had with the same provider, as well.

While it might take a few hours, doing your homework on the various options ensures you’ll end up with a high-quality provider. Conversely, if you choose a company without consulting any testimonials or feedback from other businesses, you’re taking a major risk.

Security features

With high-risk merchant accounts and companies being more prone to fraud, you have to choose a provider who takes security seriously. Make sure to read about its payment security features and ensure it has strong measures in place to protect data from breaches and mitigate fraud.

This includes encryption, firewalls, multi-factor authentication, chargeback prevention, and fraud detection monitoring tools. Ensure the provider complies with all regulations in your area and keeps up to date on security-related best practices.

Customer support

If you’ve got an issue with your account, you’ll want a quick and helpful resolution. As a result, make sure you know the quality of support the provider offers. Look for 24/7 support and multiple ways to reach out for help.

Being unable to accept credit card or online payments for several hours or even days as you wait for assistance is incredibly frustrating and could cost you hundreds, if not thousands, of dollars. In addition to a monetary loss, your brand reputation may take a hit if customers complain about their inability to make purchases or spread the word about your issues.

To get a glimpse of the support the provider offers, don’t hesitate to call, email, or message them to see how quickly they respond and how helpful the response is.

Transparency

Make sure the provider you work with is transparent, both in its fees and its contract. It should disclose the entire list of potential fees, as well as any penalties or other hidden charges. The contract should clearly state all the terms and conditions, as well as how long the contract is for.

Many companies are upfront and honest about things, but others hide fees and certain terms deep within the fine print of your contract. Read the fine print and make sure you know everything from the costs to the conditions to the clauses for termination.

If you’re confused about anything in the contract or want a second opinion, don’t hesitate to reach out to a professional for help.

How each provider stacks up against the competition

While checking out reviews and ratings is great, you should do your own research and compare the fees from one provider to the next.

Transaction fees are the most common, but there are other fees you’re responsible for paying. This includes monthly, chargeback, setup, incidental, and termination fees.

It’s important to know how much you’ll pay for each of these fees with every potential provider, even if you never expect to get charged them. Also, you should compare services and features so you end up with a partner that matches your needs.

Compatibility

Lastly, you have to ensure the provider you work with is compatible with the tools and solutions you already use. This ensures the setup goes smoothly and there are no strange interactions or issues while accepting payments.

For example, if your front-end technology like your online platforms or payment gateways isn’t compatible with your merchant account/processor, it may experience problems or won’t work at all.

Most providers offer a list of what they’re compatible with, but if you’re curious, don’t hesitate to reach out and ensure a provider is compatible with your existing technology

Examples of High-Risk Merchant Account Providers

If you think your business needs a high-risk merchant account to process card transactions, here are a few providers you can work with:

• Worldpay: a leading provider in the industry, Worldpay caters to all types of businesses, large and small, low and high risk. It offers both pay-as-you-go processing services and contract-based services. You can read more in our Worldpay Review.
• PayPal: PayPal is a merchant account provider that caters to online businesses, although its Zettle by PayPal service can be used for in-person selling. It offers contract-free payment processing with transparent pricing.
• ccNetPay: with a focus on high-risk businesses that operate internationally, ccNetPay is a good choice for businesses that sell in the EU, since it partners with leading European banks.