Businesses must set up a merchant account to process credit cards and certain other types of digital transactions. It is a type of bank account into which money is deposited by banks after the company accepts credit card orders. Since the bank is fronting the money to the merchant (cardholders typically pay their credit card bills every 30 days), if a transaction falls through, the bank is liable for the full amount if the merchant cannot cover it. Thus, if a merchant has financial issues or is in a business where a greater-than-average number of transactions fall through, a bank may offer a merchant account, but it will be a high risk account.
A high risk account and a standard account have two main differences. First, the high risk account carries higher transaction fees, and probably some will have several additional fees imposed as well. Additional fees, terms and conditions may include early termination fees, increased chargeback fees, longer contract periods, and transaction or volume caps. Second, the high risk account likely requires the merchant to maintain a reserve fund to cover chargebacks as they occur. Reserve funds reduce cashflow and may affect a merchant’s ability to maintain smooth operations.
Both the fees and reserve funds are methods used by a bank to compensate for the higher financial risk of handling the merchant’s credit card orders. Transaction fees for high risk accounts vary widely, depending on the nature and magnitude of each merchant’s level of risk. On the low end, we see fees just under 3%, but they can run higher than 7% for very high risk situations. Reserve funds generally amount to about 5% to 10% of a merchant’s credit card sales over a 180-day period. Funds are set up to be either rolling reserves or a fixed amount.
Merchants are deemed high risk for a variety of reasons. If you are in a regulated industry or an industry that experiences a higher-than-average number of chargebacks, or if your business is highly susceptible to fraud and/or if your business is not on firm financial footing, banks will place you in the high risk category.
High risk businesses may be more common than you would at first imagine. For instance, some online businesses are high risk because they exclusively process CNP (card not present) transactions. CNP transactions are inherently more vulnerable to fraud because no one is physically present during the sale to observe potentially fraudulent behavior or other warning signs. Another large category of high risk is businesses using the recurring billing model. Subscription services have many advantages, but recurring bills increase the likelihood of chargebacks, Customers forget they subscribed, they become disenchanted with the product/service, their cards expire, etc.
If you are in a high risk category and want to set up a merchant account or look for one with better terms, contact us now. Our company specializes in high risk accounts and we will help you find a payment processing solution that works the way you need it to work.