As an online merchant, it’s essential that you’re able to process credit card transactions. But if your business is considered high-risk, you may find yourself ineligible for traditional acquiring bank agreements and at the mercy of the terms and fees of a high-risk payments processor.
Credit is king in the online marketplace, so we’ve provided some tips to help you establish — and keep — a low-risk status while still running a profitable e-commerce business.
What Is a High-Risk Merchant Account?
Merchant accounts, which are typically opened through a bank or another financial institution, allow businesses to process credit, debit card or ACH transactions for customers. Merchants, not banks, are responsible for the transactions they process, and they agree to specific fees and terms of service to open these accounts.
Some businesses are deemed to be “high-risk merchants” and are unable to open traditional merchant accounts; instead, they must secure high-risk merchant accounts that are subject to additional fees and conditions — potentially catastrophic to a small business.
What, exactly, causes a business to be considered high risk? Although different providers have different underwriting guidelines, the most common driver of a high-risk designation is the sale of high-risk products or being in an industry with elevated fraud levels and frequent chargebacks.
High-risk business categories typically include:
- Multilevel marketing
- Travel agencies and airlines
- Car and truck rentals
- Check-cashing services
- Used-car sales
- Magazine sales
- Social networking sites
Additionally, other considerations may factor. For instance, a business is likely to raise red flags if it:
- Has a low credit score
- Is new and hasn’t yet established a credit card processing history
- Operates in a country with high fraud levels
- Has an average order value over $500
- Accepts recurring payments
In the end, banks are concerned about their reputation and their bottom line, and they may be reluctant to provide credit card services to potentially risky prospects – even though the merchant may be successful, with a solid business model.
Is Being Classified as High Risk a Problem?
Some providers are less risk-averse than others, so do your research to find a credit card processor that specializes in high-risk merchants. But this choice often comes at a price. For example:
- You’ll likely pay higher processing rates and receive less desirable terms and conditions because the processor is assuming more risk with your business.
- You may be asked for a “rolling reserve,” which requires a merchant to hold a percentage of gross sales (often 5%-10%) in a non-interest-bearing account for a specified time frame. This reserve protects the provider of merchant services in the event of fraud or chargebacks or if your business folds.
If you do find yourself needing to work with a specialized provider, be sure to closely review your contract to ensure the provider isn’t taking advantage of you. With a little time and effort, most merchants can find a processor that’s interested in working with high-risk businesses and offers fair rates.
The Relationship Between Chargebacks and Merchant Risk Levels
Just because your business isn’t designated high risk doesn’t mean your business is safe. Even merchants in low-risk categories can find their merchant accounts terminated. How? Chargebacks.
Banks prefer to see chargeback rates that are less than 1% of total transactions. High chargeback levels alone may be enough for your low-risk business to be reclassified.
If your customers regularly cancel transactions and request refunds, acquiring banks will suspect fraud. To protect their reputation and bottom line, they may choose to deny or cancel their credit card processing services to you.
However, chargebacks are preventable, and your business doesn’t need to remain high risk solely because of high chargeback levels. As you build up a positive history — that is, a low number of chargebacks and refunds — your business may be reclassified as low-risk, which means you can reduce your losses and possibly regain your traditional merchant account.
Being classified as high risk can potentially make processing transactions more difficult and costly, but it doesn’t mean you can’t do business as usual. Whether you’re a merchant that’s experiencing excessive chargebacks and at risk of being classified a high-risk merchant, or you’re a high-risk merchant that’s watching profits dwindle due to fraudulent chargebacks, we can help.