When is a Merchant Account Considered as High-Risk?

Is it getting difficult for you while applying and getting approval for merchant services? Well, things can be confusing due to the complexity of concepts and other factors involved. But don’t worry because this article is right here to help you!

First of all, some people might be wondering why a merchant account in a high-risk business category is essential. The answer is simple because it allows a company to accept payment transactions through credit/debit cards. When it comes to a successful business, it is an important component in today’s digital and cashless world.

However, the application and approval process of merchant account is not easy, especially when it comes to businesses that are considered as high risk. It requires a company to fulfill several strict requirements for a merchant account.

This article is all about merchant services accounts for high-risk businesses. Keep reading till the end to find out what merchant accounts are, why do you need one, and what are its benefits? 

High-Risk Merchant Accounts: What are they?

Often merchant accounts are classified as high-risk. Typically, it means a merchant account of a high-risk business. Businesses that have these types of merchant accounts are required to pay higher merchant fees. The reason being the high risk of chargebacks in their category.

Before opening a high-risk payment processing account, banks look at the chargeback history of the business. If the amount of chargebacks is potentially higher, the bank puts a rolling reserve on the merchant account of the business. Rolling reserve is the money that covers the future possibility of frauds or chargebacks. 

What is the Difference between a High-Risk and Low-Risk Merchant Account? 

Every business owner should consider opening a merchant account for payment processing. However, before moving on to open it, it is required to know whether the business is high-risk or low-risk. The type of business will decide the type of account you need to open – a low-risk account or a high-risk account.

Merchant service providers have specific eligibility criteria that merchants must fulfill to open a high-risk account. Also, there are various things that characterize both types of merchant accounts. Read further to have a look at the differences between these accounts. 

When is a Merchant Account Considered as Low-Risk?

It is worth noting that all the payment processing companies have their own eligibility criteria. However, there are some characteristics of low-risk merchant accounts that are common in the merchant service industry.

Let’s have a look at these characteristics and find out the factors that indicate a low-risk payment processing account (merchant account). A merchant account low-risk:

  • When the monthly processing is less than $20,000
  • When the average transaction of credit card is less than $500
  • When the category of business is low-risk such as household goods, shoes and clothes, baby products
  • When the chargeback ratio is low
  • When there are minimized returns
  • When the business operates in a low-risk country. These include the USA, Australia, Canada, Japan, and EU countries. 

When is a Merchant Account Considered as High-Risk?

The major indicator of a high-risk business is the number of chargebacks. The higher they are, the higher is the risk. Therefore, the processing history and reputation of a business are some of the deciding factors. Also, businesses are required to keep the ratio of chargebacks lower than 0.9%.

Here are some of the factors that characterize a high-risk payment processing account (merchant account):

  • When the business has a monthly sale of more than $20,000
  • When the average transaction of credit card is higher than $500
  • When the business operates in a high-risk country
  • When the business has an excessive number of chargebacks and a bad credit score. 

Why is Merchant Account Essential if a Business is Under High-Risk Category?

Here’s why you require a merchant account:

  • Your previous merchant account was closed previously.
  • Your business has been turned down by financial institutions for a merchant account because of past bankruptcy or fraud.
  • Your business is undergoing frequent customer complaints, returns, and chargebacks.
  • Your business has a low credit score.

Here’s why industries require merchant accounts:

  • Their services or products are partially legal or fully illegal.
  • The services or products offered are related to the adult industry. Due to this reason, payment processors are not getting involved in the transactions.
  • The products offered come with a likelihood of consumer fraud or dissatisfaction. Common examples include collectibles, tickets, or gaming. 

Which Industries Have High Chargeback Risks?

Throughout history, some industries have repeatedly proven to be more prone to payment risks and chargebacks. That’s why they are universally considered high-risk. Some of them include:

  • Gaming or Casino Industry
  • Calling Cards and Telemarketing Industry
  • Pharmaceutical Industry
  • Dating Services and Adult Entertainment Industry
  • Accommodations and Travel Industry
  • Subscription Services
  • Credit Repair Services 

What are the Benefits of a Merchant Account under the High-Risk Business Category?

Merchant accounts have benefits of their own. Here are a few of them:

  • High-Security Standards: High-risk merchant accounts provide you with several detection strategies to catch deceptive credit card transactions. These strict security standards protect the business, account provider, and the card’s owner from any fraud.
  • More Market Opportunities: A high-risk merchant account allows you to create your businesses’ online sales website. Your website can serve as a digital catalog of your services or products and can help you win more potential customers. It will ultimately increase the growth and revenue of your business.
  • Minor Difficulties with Chargebacks: Having a low-risk merchant account may lead to an overload of chargebacks. It can result in the termination of the account. However, this does not happen in the case of a high-risk merchant account. The providing firm always monitors potential dangers and warns the owner of the account.

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