With the steady rise in digital payments, an ever-increasing number of businesses are looking for cost-effective payment processing solutions. In fact, only 19% of consumers still prefer using cash to make payments.
Although most payment services providers serve diverse verticals, there are always certain businesses that they are slightly more circumspect about. These often belong to high-risk industries that inherently carry greater risks of fraud or chargebacks.
If your business falls into the “high-risk” category, you may struggle to find the right payment processor. But who determines if a business is high-risk? And what factors determine the risk? In this article, we’ll help you understand all this and more, so you can be better prepared to find the right payment processing partner for your business needs.
What Is a High-risk Merchant Account?
Businesses that are characterized as “high-risk” will need a high-risk merchant account to accept debit and credit card payments. A high-risk business is one that has a greater likelihood of chargebacks or fraud (and certain other characteristics as well).
However, there is no central authority or framework in the payments industry that determines the risk factors associated with a business. Instead, every bank and every payment processor has its own set of standards.
Some payment solution providers may state upfront that they don’t serve certain industries. Others will typically seek detailed information about a business to ascertain risk—depending on which their application may be accepted or rejected. Ultimately, it all boils down to a payment processor’s internal criteria and outlook towards risk management.
What Factors Determine If a Merchant Is High-risk?
Businesses from certain industries that innately carry higher risks may be automatically flagged as high-risk businesses. Here are a few examples of high-risk industries:
- CBD (Cannabidiol), e-cigarettes, and vape
- Stun guns and tasers
- Credit repair
- Multilevel Marketing (MLM)
- Adult products/services
- Supplements and nutraceuticals
- Tech support
- Search Engine Optimization (SEO) services
Besides this, there are many other factors that could result in labeling a business as “high-risk”:
- Some processors could label you as “high-risk” if you are a new entrant and have never processed payments before.
- Poor credit records or low credit scores for defaulting on loans, etc., are other significant factors. If a processor has previously put you on the MATCH list, that could increase your risk perception as well.
- The same goes for businesses that have controversial product lines or operate on a slippery legal slope.
- Businesses that are overly dependent on international sales may also have high-risk scores. This is because of the relatively unpredictable economic dynamics abroad.
- Industries that are highly regulated by legislation or governments are also labeled “high-risk.”
How Do High-risk Accounts Differ from Regular Accounts for Payment Processors?
Being labeled as a high-risk business can seem to be quite daunting. A processor may simply decline your application. Alternatively, however, a payment processor might choose to offset your inherent business risk by enforcing some measures.
There are several ways in which a payment processing company may mitigate its risk. These are also the prime differentiators between high-risk and regular merchant accounts.
Longer application process
If you’re applying for a high-risk merchant account, a merchant services provider may ask for very detailed information to analyze your risk profile or study past patterns of your finances. Typically payment processing companies will check your business’ processing history, partnerships, and even your personal credit history (to watch out for bad credit, etc.).
Higher payment processing fees
For standard small businesses, payment processing fees may be 0.3% above the rate of interchange. However, for a high-risk merchant account, this could go up to 1.5% plus the interchange rate. While interchange fees may vary from company to company, in general, higher risk will incur higher fees.
Cash reserve requirements
Some payment solution providers might even hedge a certain amount of cash for a business. They may maintain the thresholds of this reserve in a number of ways:
- Rolling reserve. A high-risk payment processor sets aside a proportion of every transaction that you process (which you’ll receive later). This could be as high as 10%. For instance, if you have a six-month rolling agreement, you receive the balance from January in July.
- Capped reserve. The processor holds a certain proportion of each transaction until the cash reserve reaches a predetermined level. At this point, the per-transaction contributions will stop but the reserve will remain.
- Upfront reserve. A high-risk payment processor receives a set amount from the merchant upfront. Sometimes, the processor may even withhold all transactions until the merchant pays the said amount.
Higher chargeback fees
When businesses need to process refunds, they must also pay chargeback fees to their payment processor. For businesses that have a high chargeback ratio, these charges may be higher to offset risks of excessive chargebacks. These rates may vary anywhere between $20 to $100 each. Businesses with high chargeback ratios such as clothing brands could therefore feel the heat.
Volume caps in credit card processing
Some credit card processors may simply bar you from processing any more transactions if your sales volume exceeds a certain limit. Processors presume that risks may be compounded when dealing with high volumes.
Depending upon the type of business, some processors may have other requirements when providing services to high-risk merchants. If you sell age-restricted goods, the processor may ask you to use tools that ensure you aren’t selling to underage customers. They may not approve your processing account till you fulfill all the criteria.
What to Do If You’re a High-risk Business and Need a Payment Processor
If you are a high-risk merchant, what’s the best way to go about your search for a payment processor? Here are a few simple things you should keep in mind:
- Maintain healthy cash levels. Most processors would like to see a healthy cash level in your business bank account. This conveys a picture of financial stability thus lowering the risk perception.
- Try to reduce chargebacks. There could be a number of factors behind the soaring numbers of chargebacks in your business. In industries such as eCommerce, this could stem from a mismatch between a product description and the actual product. Or, it could also be due to prolonged delivery times. Whatever the reasons may be, you can always analyze them and try to reduce your chargebacks.
- Be transparent. Disclose all materials and relevant information during the application process. Not doing so could be detrimental to your cause and will only affect your credibility. Unlike low-risk merchants, processors may ask you for very detailed information about your business and finances. Be open, honest, and transparent.
- Keep your documents ready. This could mean having six months of bank statements and a few years of tax returns. That said, each processor has its own set of requirements so make sure to check them.
- Follow the guidelines of your payment processor. When you apply for a high-risk credit card processing solution, besides your business needs, the risk-taking ability of the processor also matters. So, be flexible and see if there are things you can do to reduce your risk by discussing with them and following their recommendations.
How to Find a High-risk Merchant Services Provider
As a high-risk business owner, you may not be able to find standard pricing info for high-risk merchant accounts on a provider’s website or other public platforms. Instead, you might need to arrange meetings or private consultations with their representatives to put forth your case.
Start off by listing down a few payment processors that are likely to cater to your industry. Some popular ones that specialize in high-risk merchant accounts include Durango Merchant Services, Payment Cloud, Payline Data, Host Merchant Services, Soar Payments, etc.
Once you have a few options at hand, you must look at what each one brings to the table. Seek clarifications on the following:
- What kind of experience do they have working with businesses in your industry?
- How long does it take them to deposit payments?
- Do they have a reserve requirement?
- Besides credit and debit cards, do they support eChecks and ACH payments?
- Will they charge an early termination fee in case you switch to another provider in the future?
- What kind of equipment (POS machines, virtual terminals, etc.) will they provide?
- How robust and accessible is their customer support?
Does Stax Cater to High-risk Businesses?
High-risk merchants are going to have a limited number of providers they can work with and Stax may not be one of them. If you’re a CBD merchant, for instance, Stax won’t be able to cater to your business. That said, we see several high-risk businesses come to us to see if we can serve them.
The biggest advantage of signing up with Stax is that a merchant will go through an underwriting process upfront—before they get their merchant account. This process flags risk factors early on and saves you precious time (and costs). We’ll let you know upfront in case we can’t serve you and perhaps even recommend a processor that can serve you better.
However, it’s important to note that there are other providers whose process for flagging risks early on, isn’t as effective. Square, for example, lets merchants process payments right away — in minutes or days. That’s because they don’t go through an underwriting process like that of Stax.
So they may approve a merchant initially, but suddenly flag them as high-risk and close their account or hold their funds. Merchants that might not be aware of this policy could be in for a surprise. Square can cut you off at their discretion at any time.
As is clear from the above discussion, some businesses carry inherent risk factors. The definition of “high risk” varies from one merchant and one processor to the next. More importantly, there are several payment processors whose entry point is easy but merchants run the risk of being cut off at any time.
By choosing a processor like Stax, you can rest assured that there won’t be any unfavorable surprises later on.
FAQs about High-Risk Merchant Account
Q: What is a high-risk merchant account?
A high-risk merchant account is designed for businesses deemed as “high-risk.” These types of businesses have a greater likelihood of chargebacks, fraud, or other financial risk factors. High-risk businesses require such accounts to be able to accept credit and debit card payments.
Q: Which industries are generally considered high-risk?
Various industries are considered high-risk because of their inherent attributes. Some examples include CBD (Cannabidiol) products, e-cigarettes, vape products, stun guns, credit repair services, multi-level marketing, adult products/services, pawnshops, dietary supplements, SEO services, and tech support.
Q: Who determines the categorization of a high-risk business?
The categorization of a business as being high-risk isn’t determined by any central authority. Every payment processor or bank sets its own standards, often based on their internal risk management criteria. Providers assess businesses based on several detailed information bits to ascertain risk levels.
Q: What factors make a merchant account high-risk?
Factors contributing to a business deemed as high-risk include being a new business, having poor credit records or low credit scores, operating in controversial or highly regulated industries, relying heavily on international sales, and previous placements on the MATCH list by payment processors.
Q: How are high-risk merchant accounts different from regular ones?
High-risk merchant accounts differ from regular accounts in several ways such as having a longer application process, higher payment processing fees, cash reserve requirements, volume caps in credit card processing, higher chargeback fees, and additional requirements based on the business type.
Q: What steps can businesses take if categorized as high-risk?
A high-risk business should ensure it maintains healthy cash levels, tries to reduce chargebacks, discloses all relevant information during the application process, keeps its financial documents ready, and adheres to the guidelines set by its payment processor.
Q: How can a high-risk business find a suitable merchant services provider?
A high-risk business can find a suitable merchant services provider by researching and listing down payment processors that cater to their industry. Businesses should consider factors like the processors’ experience in their industry, processing fees, equipment provided, customer support, experience with businesses in the same industry, and support for diverse payment methods.
Q: Can Stax cater to high-risk businesses?
Stax may not cater to all high-risk businesses (e.g. CBD merchants). It offers an upfront underwriting process that identifies risk factors early, saving the merchant time and potential costs. However, if Stax cannot service a particular business, they may recommend a processor better suited to your needs.
Q: What are some payment processors that cater to high-risk merchant accounts?
Some payment processors that specialize in high-risk merchant accounts include Durango Merchant Services, Payment Cloud, Payline Data, Host Merchant Services, and Soar Payments.