What Defines a High-Risk Merchant?

High-risk merchantLong gone are the days when cash was the preferred form of payment. Around 33% of consumers use their credit cards to make a purchase. 38% of people opt to use their debit cards.

If you’re running an e-commerce business and accept credit/debit cards, you might’ve come across the term “high-risk merchant.” It can be intimidating if you discover that your company has been labeled as one. There are many reasons why a business selling a certain type of product might be considered a high-risk merchant.

This guide will discuss everything you need to know about high-risk merchants. We’ll also talk about what high-risk merchant accounts are and if your business needs one.

What Is a High-Risk Merchant?

A high-risk merchant is a physical or online business that sells products that fall into specific categories. These types of companies have a higher likelihood of fraud or chargebacks. Online businesses can fall into this category because they can’t physically see their customer’s credit cards and verify their identity.

Some industries that fall into the high-risk category include:

  • Auto sales and warranties
  • Alcohol
  • Computer sales
  • Charities
  • Gambling
  • Furniture sales
  • Jewelry
  • Pawn shops
  • Subscription boxes

Many characteristics might label a business as high-risk. In addition to the qualities we mentioned above, some other features include:

  • Large transaction amounts
  • Recurring billing
  • International sales
  • Accepts foreign currencies
  • No or poor credit history
  • Non-existent or inadequate credit card processing history

There isn’t a universal standard or set of rules when it comes to determining if a company is high-risk. Each payment processor and bank abides by its own set of standards.

What Is a High-Risk Merchant Account?

High-risk merchant accounts are a type of bank account that’s set up by a payment processor. These accounts enable businesses to accept debit and credit cards even if they’re considered high-risk.

The money that gets collected during a transaction, minus processing fees, gets transferred to the business’s checking account. It typically takes 24 to 48 hours for the merchant to receive the funds.

High-risk merchant processing gives these companies the ability to accept debit and credit cards. If you fall into this category, you should explore payment processors that offer high-risk merchant services.

What’s Different About High-Risk Merchant Accounts?

High-risk businesses have a higher likelihood of their application getting denied by banks or payment processors. However, some organizations have more relaxed standards when it comes to accepting businesses. They might also be more willing to work with you by enforcing additional measures low-risk businesses don’t experience.

Payment processors and banks have many ways they can reduce their risk when working with these types of companies. There are also big differences between regular and high-risk merchant accounts.

High Processing Fees

Some payment processing companies might charge around 0.3% for a standard business. That fee could be as high as 1.5% for a high-risk merchant. It’s important to understand their fees before you partner with a payment processor.

Lengthy Application Process

A payment processor or bank might ask for additional information when you apply for an account. They’ll want to use this data to look at your past finances. The bank might be analyzing your risk profile.

Other details they might want to review include:

  • Partnerships
  • Personal credit history
  • Your business’s payment processing history

Be as transparent as possible with the company. Show how much money you have moving through your business. Good cash flow can improve your approval chances.

Cash Reserve Conditions

Another thing to consider is that the payment processor might keep a reserve of a certain amount of cash for your business. Examples of this include:

  • Capped Reserve: A certain amount of cash is set aside until the reserve reaches the pre-determined amount
  • Rolling Reserve: A percentage is set aside for every transaction and you’ll receive the reserve after a certain date
  • Upfront Reserve: The merchant pays a set amount to the processor up-front

You should get as many details about their cash reserve requirements before you sign a contract. You don’t want to have to provide a large amount of cash upfront if you’re not able to.

Volume Caps

Some credit card processing companies might cap how many transactions you have. This is because they believe that they might encounter more risk if you have a high volume of transactions.

Increased Chargeback Fees

High-risk merchants might also have to pay chargeback fees when they process a refund. These fees may be higher to offset the risks the processor encounters with excessive chargebacks. These fees can range from $20 to even $100 each.

What Can I Do as a High-Risk Merchant?

Don’t get discouraged if you’re considered a high-risk merchant. There are many things you can do to keep your business in good standing.

Lower Your Chargebacks

Many e-commerce businesses deal with a lot of chargebacks. This is especially true if you sell clothing or shoes.

Make sure your product description matches what you’re selling. Include a detailed size chart to ensure your customers purchase the right size. Reduce your chargebacks so you can lower the related fees.

Get Healthy Cash Reserves

Many banks and payment processors want to see that you have healthy cash levels. Having a high amount of cash on hand shows them that you’re financially stable. You’ll increase your chances of getting approved at a low fee rate.

Be Honest

As we mentioned earlier, being transparent is key. Give the payment processor all the documents and information they need during the application process. Doing so will show them that you’re a credible business that they’ll want to work with.

Partner With a Reliable Payment Processor

Being labeled as a high-risk merchant doesn’t have to be the kiss of death for your business. Being proactive and doing research will ensure you get approved by a reputable payment processing company. Look for payment processors that work with businesses like yours to ensure you receive tailored services.

First Financial works with high-risk merchants, providing them with financial and payment processing solutions. Should you need help applying for a loan or other banking matter, we’re here to assist. Contact us to learn more about our services.

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