A Guide to High-risk Merchant Accounts

Operating in the eCommerce space requires a way to accept payments online. The usual process involves approaching a payment processor and applying for a merchant account. Payment processors will analyze your business model and categorize you as either high-risk or low-risk. High-risk merchant accounts allow businesses at significant risk of chargebacks to accept payments from customers; however, they do have a few drawbacks that need to be considered.

What is a high-risk merchant account?

A high-risk merchant account is a label assigned by payment processors to businesses with a higher likelihood of fraud and chargebacks. This designation provides a risk-mitigation mechanism that allows processors to facilitate payments while preventing financial loss. Conversely, low-risk accounts are reserved for businesses with stable, predictable transaction patterns.

What characteristics does a high-risk merchant account have?

A business is usually given a high-risk merchant account if they fall under one of the following characteristics:

• High transaction volumes – This pertains to businesses that receive payments of $20,000 or more per month. Individual sales of more than $500 in a single purchase will also fit in this category.
• Accepting international payments/currencies – If a business makes sales to countries where there is a high risk of fraud, this can also result in the requirement for a high-risk merchant account. 
• Type of industry – Industries such as gambling, the adult industry, and travel, amongst others, are characterized as high-risk due to the risk of chargebacks.
• Low credit score – if a business owner has a low credit score, a high-risk merchant account may be required to process payments.

If a business possesses one of the above characteristics, it should look to source a high-risk merchant account service provider that will be able to work with them. However, depending on the industry, some payment processors may be more suited than others. 

Some examples of payment service providers that offer high-risk merchant accounts services include Stax, CardX, and Chase for Business. The cost of these high-risk merchant account service providers can vary, and it is best to read the terms and conditions to avoid any issues at a later stage.

Problems faced by a high-risk merchant account

While high-risk merchant accounts allow a business to accept payment online, there are a few drawbacks. Some of the common caveats are:

Rolling reserve

High-risk merchant accounts have a rolling reserve put in place. This essentially is a form of risk mitigation put in place by the payment processor to protect against financial losses from chargebacks. A percentage of credit card sales, usually 10%, is held for six months by the payment processor. Therefore, a business would need to take this into account to forecast cash flow. 

Additional fees

Payment processors will usually state upfront the additional costs of payment processing. It will often be higher than low-risk merchant accounts. There will usually be a monthly fee required, along with either a certain percentage or a fixed amount per transaction. 

As a result of these additional costs, it can be worth shopping around to find high-risk merchant account service providers that offer the best deals for particular business types.

Chargebacks

High-risk merchant accounts, on average, pay more than double the fees for chargebacks compared to low-risk merchant accounts. This is just in administration fees to the payment processors and doesn’t take into account the other costs of chargebacks.

High-risk merchants cannot afford to be hit with too many chargebacks, not only due to the financial ramifications but there is a real risk of further action being taken. This is known as a chargeback monitoring program and usually falls under two providers, the Visa Dispute Monitoring Program (VDMP) and Mastercard’s Excessive Chargeback Program (ECP). The costs associated with this can quickly add up. If high-risk merchants are hit with too many chargebacks after entering a chargeback monitoring program, their account may be terminated. 

Bottom Line 

It is clear to see how chargebacks can pose a big threat to high-risk merchant accounts. Losing out against false chargeback claims can further cause strain in relationships with payment service providers. That is where Justt comes in. Using proprietary AI technology along with a pay-for-success payment model, Justt defends against chargebacks with no additional monthly costs. Having a high-risk merchant account shouldn’t mean that you can’t trade freely. With proper chargeback mitigation and prevention strategies in place, you can concentrate on what matters.