What is a High-Risk Merchant Account?

Whether you’re starting up your first online shop, or growing a well-established ecommerce business, sooner or later you might come across an intimidating term: high-risk merchant account. 

This is what banks, payment processors, and card networks call businesses they’re a little worried about serving. 

“The term high-risk is a frustrating misnomer in the payments sector since it is used to describe businesses that aren’t genuinely dangerous but just so happen to sell goods that underwriting banks have moral opinions about. Which, in my opinion, is a strange thing for banks to do,” said Jack Kanefield, CEO and founder of the Onno T-Shirt Company.

But fear not: high-risk doesn’t have to mean low sales or low profit. You can still grow your business and delight your customers. 

This article will attempt to answer as many of your questions as possible:

• What is a high-risk merchant account?
• Do we qualify as a high-risk merchant account?
• What happens after retailers are deemed “high-risk”?
• How can high-risk merchant accounts find payment processors?
• What should high-risk merchant accounts expect from payment processing?
• How can my business earn low-risk account status?

What is a high-risk merchant account? 

A high-risk merchant account means payment processors and card networks view the company as being more likely to default on its payments, suffer high levels of chargebacks, or even commit fraud.

• High-risk businesses are typically those that are new, have a history of credit problems, or operate in an industry that is considered controversial or unpredictable. 
• Even ecommerce businesses often naturally fall into the high-risk category, because they accept something known as card-not-present transactions—card payments where the merchant doesn’t physically “see” the customer’s card. 
• Fair or not, high-risk status can result in higher card payment fees, higher payment processing rates, and stricter terms and conditions around compliance and reporting. 

If your chargeback rate begins to exceed a certain threshold, you’re in danger of being considered a high-risk merchant. If your chargeback rate is not brought back under the threshold, card networks may cease to do business with you, making it impossible to accept card transactions.

Do we qualify as a high-risk merchant account?

Many providers will have a list of activities or business types that they deem to be high-risk, so it’s important to find out if your company falls into one of these categories. “The first step is to contact your chosen merchant account provider and ask them if they have any restrictions in place for high-risk businesses,” said Ann Colvin, a brand analyst at ConsumerGravity. 

Companies that rely mostly on card-not-present transactions are more susceptible to fraud and chargebacks, said Robyn Newmark, founder and CEO of Newmark Beauty. “This includes internet companies, home-based businesses, online dating services, online auctions, and a range of other web-based enterprises.” 

Other reasons your business may be considered high risk include your industry and transaction sizes. In fact, merchants may not even realize their business is considered high risk until they attempt to obtain a merchant account from a traditional bank.

Even firms that sell tangible goods handle the payment processing for those goods online. “If you’ve had a large number of chargebacks in the past—whether due to payment processing errors, a defective batch of items, or any number of other reasons—you may have been labeled as a high-risk merchant account,” said Newmark.

What happens after retailers are deemed ‘high-risk’?

Tia Jones, the owner-operator of Flower Power Packages, can answer this question. She has a business that is considered a high-risk merchant because it sells cannabis packaging to cultivators and dispensaries.

“When we’re deemed a high-risk merchant by a payment processing company, it means it’s been determined we’re more likely to experience chargebacks or fraud. As a result, the processor can charge us higher fees, impose stricter limits on transactions, or even refuse to provide service,” she said.  

Ryan Stewart, founder of Webris, a Miami-based digital marketing agency, said high-risk retailers can be charged higher processing fees at about 1.5% plus the interchange rate. “They undergo a longer application process and are subject to a rolling reserve where the payment processor holds a certain percentage of a merchant’s income,” he said.

How can high-risk merchant accounts find payment processors?

It takes a little bit of extra effort for businesses to secure a payment processing partner when they are considered high risk, but the task is far from impossible.  

“It’s important to emphasize that businesses under a high-risk category still have the same quality of products or services as low-risk ones,” said Lilia Tovbin, CEO & Founder of BigMailer.io, a digital marketing agency based in New York. “There is no way that a high-risk merchant’s reputation is stained just because they are identified differently by their processors.”

1. Know your own risk factors

The first step is to identify the high-risk factors associated with your business, according to Jones. “When you’re looking for a payment processor, you should ask them how much experience they have with high-risk merchants like yourself. You should also ask about their chargeback policies and fees,” she said. 

2. Gather your financial statements

Potential payment providers will assess your business and tax documents to determine whether you’re a high-risk merchant, said Nunzio Ross, CEO and Founder of Majesty Coffee. “Ensure your provider is specialized in managing high-risk clients … and read your processor’s contract carefully to know their criteria and terms in labeling merchants as high-risk,” he said.

3. Be transparent from the start

It’s crucial to be completely open and honest with your merchant service provider, according to Kanefield. “Being truthful in your application is recommended because lying or misrepresenting information about your company will almost always result in the deletion of your account, the suspension of your merchant account, or both,” he said. 

4. Check fees and security standards

Sarah Jameson, marketing director at Green Building Elements, said business owners should also review all the terms and conditions of merchant account providers to understand any per transaction or percentage-based fees they will be charged. 

“Ensure your merchant account provider is also compliant with the Payment Card Industry Data Security Standard (PCI DSS) and check whether they have the right tools and systems in place for fraud-and-chargeback prevention,” she said.

5. Ask about customer support capabilities 

“Lastly, high-risk businesses should also learn about the [customer] support they should get from the account providers in case something goes wrong. This means knowing that your account could be reclassified in the future because they also aim to reduce your fees and make your business look more appealing with a good record,” said Kanefield.

“[Any] partner we collaborate with must have a solid track record and wealth of industry knowledge, both of which can ultimately encourage the application and approval processes.”

What can high-risk merchant accounts expect from payment processing?

Working with a reliable high-risk merchant account service provider with expertise in high-risk payment processing will help high-risk merchants get accepted more easily. But their experience will be different from accounts that are considered lower risk. Expect:

• Higher payment processing fees of up to 1.5%
• Additional interchange rates
• Higher chargeback fees

How can my business earn low-risk account status?

While there is no surefire way to guarantee that your business will be classified as low-risk, there are a few things you can do to improve your chances, believes Colvin.  

She suggests retailers and other merchants make sure they have a strong credit history, limit returns and chargeback rates, and give processors financial statements to prove the business is stable and profitable. To keep chargeback under control, merchants can:

• Verify identities: Confirm a customer’s identity when they pick up their layaway, special order, or shipment. Then you’ll have evidence to prove the sale is legitimate. 
• Give clear billing descriptions. This is information that appears next to a charge from your shop on your customer’s bank statement. 
• Provide a clear sales receipt: List your store, location, phone number, and what items were purchased. This will help customers match details with their bank statement information. 
• Handle authorization requests well: Do not repeat the authorization request, If you receive a payment decline. Unauthorized transactions can easily return as a chargeback.
• State your terms and conditions: Ensure that your sale/return policies are readily available and easy to follow and cooperate with. 

Jones said it’s important for retailers worried about this situation to know that high-risk merchant account status is not permanent. “Simply work with your processor and take whatever steps are needed to reduce chargebacks and fraud. Eventually, you’ll regain low-risk status and enjoy lower fees and fewer restrictions.”

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