The High Risk Merchants Guide to Credit Card Processing and E-commerce

High-Risk Business Categories

It is important to remember that processors are not making a moral judgment on your business by labeling it high-risk. High-risk businesses are not necessarily bad businesses. They are often quite profitable for everyone involved.

While processors can label a business as high-risk due to poor business practices, they often assign this categorization if your business one of the following four factors applies :

• Your industry. Risk assessors consider the processing history of other businesses in your vertical. They weigh how many refunds and chargebacks occur, how much fraud, and similar elements. If you are new to the industry, this can help them assess your baseline risk. Assessment by vertical is known as a merchant category and it is identified by your merchant category codes (MCCs)
• Your financials. The risk assessor will look at your financials to see how you have operated in your industry vertical or others. They will consider financial facets like your burn rate, debt to equity, and overall profitability. Considerations are similar to opening a business credit line; both you and your business are assessed.
• Your billing model. Risk assessors want to understand the types of transactions you are likely to be processing. Low-risk transactions are card-present transactions, while card-not-present (CNP) transactions carry a higher risk. Recurring billings, like subscriptions, are some of the highest-risk transactions. Annual recurring billings are of particular interest to risk assessors, as they could be held liable if you go out of business less than 12 months after selling an annual package.

Your processing volume. Risk assessors want to know how much processing your business will do. Processors may place your business on a sliding risk scale based on your number of annual transactions. A greater amount of transactions equates to a higher risk for the processor.

There are certain business industries or categories that are considered high-risk. These high-risk business and product categories include: 

What’s the Difference Between High-Risk Accounts and Regular Accounts?

The difference between regular accounts and high-risk accounts lies in risk identification. If the processor determines that your online business is at a high risk of receiving chargebacks or fraud accusations, your account will be classified as high-risk.

Many factors that make a risk assessor label your business as high-risk cannot be changed. You will be assessed higher processing fees, but high-risk accounts often come with more freedom and flexibility with your online sales.

While your industry is one factor in determining whether you are classified as high-risk or low-risk, other factors to consider which may put your online business into the high-risk category can include:

• If your average credit card transaction is over $500
• If your average monthly sales exceed $20,000
• If you accept multiple currencies
• If your sales are seasonal or recurring

Can I Use Stripe, Paypal, Square, or Shopify with a High-Risk Business?

Many of today’s popular third-party processors aren’t well-suited to high-risk e-commerce businesses. Here is a rundown of these four processors. Please note that experiences may vary and the contents within this paragraph are not to be taken as legal advice.

If you are experiencing issues related to electronic payments law, Global Legal Law Firm can help explain your rights and legal options, regardless of your jurisdiction.

Explaining Reserve Funds

Because your merchant account presents a high risk to your processor, you may be required to obtain a reserve fund to offset your risk. The processor will determine the share of your funds that must be deposited into your reserve fund. The processor can use the reserve fund to protect against unforeseen losses. It acts as insulation against your business failing or suddenly receiving excessive chargebacks or fraud claims.

If your risk level is too great, the processor may simply refuse to offer you a merchant account. However, if they merely label you as high-risk, they are willing to work with you but need some guarantee that your risk will not prove too great for them to bear. In these situations, they may require you to hold reserve funds. 

Reserve funds are similar to a loan’s escrow account, providing some assurance of reduced risk.  It must be noted that reserve funds held by the processor can often cause significant difficulty and complications for merchants. 

How To Protect Your Merchant Account From Suspension Or Termination

One of the big worries common among merchant account holders is the dread of having your account suspended or even terminated. Many merchants use Shopify or Paypal to accept payment processing for their goods or services. However, both are known for dropping or locking accounts without warning. Often, the merchants are left clueless about what infraction occurred, as customer service can be lacking for some payment processors. Once this happens, vendors may be left with customers who want to make a purchase but are unable. Vendors can lose out on more than daily sales; they may lose previously-loyal customers to their competitors.

What To Do if You Need a High-Risk Merchant Account Provider

If you need a high-risk merchant account provider, you first need to find a bank that will agree to underwrite your business. To increase your chance of acceptance, you may also consider working with a payment service provider.  Global Legal can provide advisement on seeking high-risk processing solutions.

Focus on banks and payment service providers that not only cater to high-risk merchants but also cater to your chosen industry. Some of these providers may exclude certain industries, so it is best to narrow your list down to your best options straight away.

Once you have narrowed down your list to your potential providers, do some research on each. Consider their Better Business Bureau report and read the good and bad reviews. Another great idea is to read through their contracts to ensure you would be willing to agree to their requirements. This should help you narrow down your list even further. Some trends you’ll want to look for in a good provider include:

• Flexibility and customization
• Responsive support
• Up-to-date technology supporting their services
• Transparent pricing

Once you have determined your top choices of high-risk merchant account providers, you’ll want to fill out their online application. If accepted, the payment service provider will often help you find a bank that matches your industry and business needs.