What is a high risk merchant?

Often, a business discovers it is high risk only when it tries to get a merchant account for accepting credit card payments. What was thought to be a routine part of setting up shop, taking credit cards, suddenly becomes a real obstacle for being in business at all. Many issuing banks either decline high risk business applications altogether or accept them with higher-than-average fees and various restrictions that make operating a business quite challenging.

But all is not lost! Our company specializes in helping high risk businesses obtain merchant accounts for credit card processing with the most favorable terms available. Our experience over many years in the business has enabled us to build solid relationships with payment processors that actively seek out high risk merchants and are set up to support them well.

Companies are categorized as high risk by banks for a number of reasons. Here are the most common.

  • Being in a regulated industry. Tobacco, firearms, pharmaceuticals — many such businesses require extra steps and additional procedures to validate customer identity and process transactions. More complex and sensitive transactions put more risk on the issuing bank.
  • Being in an industry with a high rate of chargebacks. Chargebacks, whether initiated by a dissatisfied customer or by the processor or bank due to a procedural or clerical error, cost money and chew up an enormous amount of the bank’s time conducting investigations and arbitration. Some industries, such as hospitality, have a high chargeback rate by nature — people frequently change travel plans, are dissatisfied with accommodations, cancel trips, etc. If you’re in such an industry, you will be deemed high risk.
  • Being an online business. CNP (card not present) transactions are inherently riskier than POS (point of sale) transactions, since there’s no physical way for the seller to “size up” the legitimacy of a customer. Because online businesses are more susceptible to fraudulent transactions, they are usually put in the high risk category.
  • Having high average ticket sales. Big ticket items elevate risk of fraud and also increase the financial hit of a chargeback. Again, the bank has to cover the risk with the higher fees and tighter terms associated with a high risk merchant account.
  • Having bad personal credit. For entrepreneurial businesses in particular, the financial strength of the company depends on the financial strength of the business owner. If you have a bad credit history or unsettled credit account issues, you should clear them up as much as possible before applying for a merchant account.
  • Being a new business. If you have a new business with no credit history, banks will likely assume the worst and put you in a high risk category. In the right circumstances and with the proper documentation, this obstacle is sometimes overcome.
  • Your business is using the recurring billing model. Subscription businesses and other types of recurring billing models are quite popular, but carry a higher-than-average risk of chargebacks (see the second bullet point).
  • You’re doing a lot of international business. Dealing with multiple currencies and accepting orders from individuals or businesses halfway around the world increase transactional complexity and opportunity for fraud — as well as making challenging disputes and arbitrating chargebacks much more difficult.

In summary, if your business experiences a high level of chargebacks, has a higher-than-average vulnerability to fraud, or struggles financially, banks will underwrite your merchant account application with great care before accepting it, if they accept it at all.

If you are in the high risk category and need a more effective payment processing solution, contact us now. We will help you!

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