Merchant accounts allow businesses to process payments digitally, whether online or using point-of-sale technologies. High-risk merchant accounts are considered to be at much higher risks of fraud, chargebacks and as such usually pay higher fees and are subject to stricter policies, higher transaction fees and extended settlement periods for funds. You may struggle to find the right payment processor if your business is considered high-risk. In this article we'll help you to get a better understanding of high risk payment processing and guide you to selecting the best one for your business. We'll also get a better understanding of high-risk merchant accounts, their advantages and disadvantages and how payment processors and service providers determine if a merchant or industry is high-risk.
Understanding High-Risk Merchant Accounts
A merchant account serves as the cornerstone of digital payment processing, acting as a specialized bank account that enables businesses to accept electronic payments. This tool bridges the gap between customer payments and a business's operational account, facilitating everything from credit card transactions to digital transfers.
High-risk merchant accounts are specialized payment processing solutions designed for businesses that financial institutions consider to carry elevated risks. These accounts come with distinct characteristics and requirements, reflecting the increased risk assumed by financial institutions. A business might receive this classification based on various factors, including its industry type, financial history, or operational model.
What Factors Make a Merchant High Risk?
Financial institutions evaluate multiple factors when determining a business's risk level. The most significant indicators include:
- Industry Type:
- Adult entertainment and services facing regulatory and compliance challenges
- Gaming and gambling operations
- Travel and tourism businesses
- Cryptocurrency servicese
- Pharmaceutical and nutraceuticals
- Legal services, particularly in specialized or contentious areas
- Financial services and credit repair operations
- Multi-level marketing businesses
- Technical support services
- Cannabis, cigarettes, e-cigarettes and other drugs
- Operational Characteristics:
- Businesses processing high-value transactions
- Companies with significant international sales
- New enterprises lacking processing history
- Organizations with poor credit records
- Businesses in highly regulated industries
- Companies with elevated chargeback histories
Advantages of High-Risk Merchant Accounts
Despite their challenges, high-risk merchant accounts offer several notable benefits:
- Enhanced Security Features:
High-risk payment processors typically implement robust security measures, including advanced fraud detection systems and sophisticated monitoring tools. These enhanced protections help safeguard both the business and its customers.
- Market Expansion Opportunities:
These accounts enable businesses to operate in specialized industries where standard payment processing might be unavailable, allowing them to serve their target markets effectively and expand their customer base globally.
Disadvantages of High-Risk Merchant Accounts
Operating with a high-risk merchant account comes with several challenges:
- Financial Implications:
- Higher processing fees per transaction - The cost of each transaction is typically higher for high-risk merchant accounts
- Higher account setup and maintenance costs
- Increased chargeback handling fees
- Extended settlement periods for funds - The period of time it takes for funds to be accessible will usually be higher for high-risk merchant accounts
- Longer application process - High-risk merchant accounts will usually have to wait a longer period of time to be approved
- Reputational risks - being classified as high-risk by your bank or payment services provider can negatively affect doing business with financial partners
- Operational Requirements:
- Longer and more detailed application processes
- Stricter contractual obligations
- Reserve requirements, including rolling or upfront reserves - A percent of every transaction may be set aside by the payment processor or merchant service provider in case of chargebacks
- Industry-specific compliance measures
Choosing the Right Payment Processor
Selecting an appropriate payment processor requires careful consideration of several key factors:
- Risk Management Capabilities:
The processor should offer comprehensive risk management tools and fraud prevention measures specifically designed for high-risk industries. This includes chargeback prevention systems, fraud detection algorithms, and transaction monitoring capabilities
- Industry Expertise:
Look for providers with deep experience in your specific industry. They should understand your unique challenges and regulatory requirements, offering tailored solutions that address your specific needs
- Support and Reliability:
Evaluate the provider's customer support infrastructure, technical assistance availability, and overall reliability. The ability to quickly resolve issues and access support when needed is crucial for high-risk merchants
- Processing Efficiency:
Consider factors such as settlement times, payment deposit schedules, and transaction processing speeds. These operational aspects can significantly impact your business's cash flow and day-to-day operations
By understanding these various aspects of high-risk merchant accounts, businesses can better navigate the complexities of payment processing and make informed decisions about their financial services partners. While the high-risk designation presents certain challenges, working with the right payment processor can help businesses thrive while effectively managing their unique risks and requirements.