High-Risk Merchant Account:
What Is It? And how does It Works?
A high-risk merchant account means your payment processor has determined that your business is more susceptible to fraud or chargebacks. High-risk merchant accounts pay higher processing costs to compensate for the risk that the payment processor is taking on. This article outlines why a merchant account could be considered high risk and what it means for your business.
What Does It Mean to Have a High-Risk Merchant Account?
Your business account will be labeled as high-risk if a payment processor believes it is at risk for chargebacks, fraud, or a large number of returns. This could be due to a number of factors, including the fact that you are a new merchant that has never processed payments before, or the fact that your industry is considered high-risk and has a high fraud risk (e.g., controversial products). To compensate for the risk, high-risk merchant accounts pay higher processing fees.
High-Risk Means Higher Fees
Although each credit card processing platform is different, high-risk merchant accounts will all have higher rates. In general, all transaction processing fees will be greater, often more than double those of low-risk merchant accounts. Although low-risk merchants pay a chargeback fee (a cost you pay when a customer challenges a charge directly with their credit card), chargeback fees for high-risk merchants are typically greater. A high-risk merchant may be required to sign a contract with lengthier terms, pay an early termination fee, or pay a monthly or annual fee. High-risk merchant accounts may also be subject to a rolling reserve, in which the payment processor retains a portion of your earnings until it can confirm that your transactions were not fraudulent or otherwise risky.
Reasons a Merchant May Be Considered High-Risk
- There are a variety of reasons why a payment processing platform can label you as high-risk, and while some are obvious, others are more subtle. Each provider has its own set of criteria for high-risk merchant accounts, but here’s what you should anticipate to be designated as such:
- • A high volume of transactions. Merchants may be considered high-risk if they have a high volume of transactions or have a high average transaction rate. A merchant may be labeled as high-risk if they process more than $20,000 in payments per month or have an average transaction of $500 or more.
- Accepting international payments. If a merchant sells to customers internationally in countries that are listed as high risk of fraud, they may be considered high-risk (any country except the U.S., Canada, Japan, Australia or the countries in Europe).
- New merchant. If a merchant has never processed payments before or only has a minimal history of processing transactions, they may be considered high-risk simply because they don’t have a track record.
- High-risk industry. While a merchant may have a spotless record, they may be labeled high-risk because the industry they are working in is considered to be at a higher risk of fraud, returns or chargebacks. For example, subscription-based companies are labeled high risk because many people sign up for a trial and forget to cancel their payments. When they look over their statements and see the forgotten charges, they often charge back the payment.
- Low credit score. If the merchant has a low credit score, they may be deemed high-risk.
Types of Businesses Considered High-Risk
- It’s crucial to know if your industry is considered high-risk ahead of time so you can plan accordingly. The following are some examples of enterprises that fall within this category:
- Travel, including airlines, cruises and vacation planners
- Furniture and electronic stores
- Adult industry
- Online dating
- Multilevel Marketing (MLM)
- CBD and vape shops
- Subscription services and companies with recurring payment plans
- Debt collection
- Adult industry
High-Risk Merchant Account vs. Low-Risk Merchant Account
There are a few general characteristics that make a merchant low risk to a payment processor. Low-risk merchants typically have:
- Low transaction volume (less than $20,000 per month)
- Average transactions under $500
- Business in one country that is labeled low risk (the U.S., Canada, Japan, Australia and the countries in Europe)
- One currency
- Very low or zero chargebacks and a low percentage of returns
- Industries labeled low-risk
Keep in mind that your risk status can change as your business develops. For example, if you go through a high period of growth, your provider may start considering your business high-risk. Or, if you expand to work in different countries, or shift industries, a payment processor may consider this a change in risk level. If this happens, your payment processor will either change your status or may drop you as a client if they do not support high-risk merchants, at which point you’ll need to find a new provider to process your payments.
How Do I Get a High-Risk Merchant Account?
When you apply for a merchant account, you’ll be required to provide business and tax documents. After your application has been processed, your payment provider will assess whether you are a high-risk or low-risk merchant, and adapt their plan accordingly.
Some payment processors are better suited for high-risk clients, so it’s a good idea to shop around and pick the one that best fits your company’s needs. For your convenience, Forbes Advisor has compiled a list of the finest high-risk merchant account providers.
You should study the contract carefully before picking a payment processor, as each bank and payment processing platform is distinct and has various rules for merchants they identify as high risk.