What Is a Merchant Account?

A merchant account is a specialized bank account, offered by a PSP, payment processor, or acquirer, that allows businesses to accept payments from credit and debit cards. These accounts are established under “merchant agreements” that state terms of settlement between the business and acquiring bank, and require merchants to abide by card network rules. Merchant accounts are distinct from business accounts, which are required for the day-to-day handling of a company’s finances.

How Do Merchant Accounts Work?

Merchant accounts act as holding accounts between a cardholder’s payment and a business’s regular bank account. When a cardholder initiates a transaction, the electronic payment information travels rapidly between several parties to authorize the transaction and trigger the transfer of funds, before the funds are deposited in the merchant account. Here is a step-by-step breakdown of the process:

1. Authorization: After a customer swipes or enters card details, the electronic transaction details travel from the merchant’s system to their payment processor, to the card network, and then to the cardholder’s issuing bank. If the bank approves the transaction, the response travels back along the same path, greenlighting payment.
2. Batching: At day’s end, the merchant sends all approved transactions as a batch to their processor.
3. Clearing: The processor sends the batch through a card network to the cardholder’s issuing bank.
4. Funding: The cardholder’s issuing bank then transfers the funds to the merchant’s acquiring bank, which deposits these funds into the merchant account (minus interchange fees).
5. Settlement: Finally, the funds move from the merchant account to the business’s regular bank account – this typically takes 1-3 business days.

What Are High-Risk Merchant Accounts?

High-risk merchant accounts are designed for businesses that pose greater risk to payment processors due to increased likelihood of chargebacks, fraud, or regulatory issues. Unlike standard merchant accounts, these specialized accounts come with additional safeguards but enable businesses in challenging industries to accept credit and debit card payments.

Risk classification isn’t determined by a central authority—each payment processor sets its own criteria based on internal risk management policies. A business might be classified as high-risk by one processor while being accepted as standard-risk by another.

Why Businesses Get Classified as High-Risk

Several factors can lead to a high-risk classification, often regardless of the business owner’s intentions or practices:

Industry-Based Risk Factors:

• Operating in sectors with historically high chargeback rates
• Selling products subject to heavy regulation or legal scrutiny
• Offering subscription services or recurring billing models
• Processing large transaction volumes or high-ticket sales

Business-Specific Risk Factors:

• Chargeback rates exceeding 1% of transactions
• High rates of returns or refunds
• Poor personal or business credit history
• Previous merchant account terminations
• New businesses without established processing history

Common High-Risk Industries

While risk assessment varies by processor, certain industries consistently face high-risk classifications due to inherent business characteristics:

Gaming and entertainment businesses face elevated risk due to emotional purchasing decisions and high chargeback volumes. Gaming merchants often deal with buyer’s remorse, family fraud from unauthorized purchases by minors, and seasonal dispute surges around new game releases.

Subscription-based services including many SaaS companies, encounter frequent chargebacks from customers who forget about recurring charges or abuse free trial periods. The subscription billing model creates extended chargeback liability periods, making these businesses inherently riskier for processors.

Travel and hospitality merchants suffer from chargebacks related to service disruptions, cancellations, and customer dissatisfaction. The “future delivery” nature of travel bookings creates additional risk, as customers can dispute charges months after booking.

Online gambling and gaming face universal high-risk classification due to regulatory complexity and frequent chargebacks from customers claiming unauthorized transactions after losing bets.

Cryptocurrency and financial services businesses experience high rates of friendly fraud when customers face investment losses and attempt to recover funds through illegitimate chargeback claims.

High-risk ecommerce segments including electronics retailers, jewelry sellers, and other high-ticket online merchants face elevated fraud risk and frequent “item not received” disputes. However, it’s important to note that many ecommerce businesses qualify for standard merchant accounts—risk classification depends on specific products, transaction patterns, and chargeback history rather than simply selling online.

Nutraceuticals and supplements operate in a heavily regulated space with high return rates and aggressive marketing practices that can trigger consumer complaints and chargebacks.

Implications of Being Classified as High Risk

High-risk merchant accounts come with additional requirements and restrictions designed to protect payment processors:

• Higher processing fees: Interchange rates typically range from 3.5% to 6% or higher, compared to 1.5% to 3% for standard accounts.
• Rolling reserves: Processors may hold 5% to 25% of monthly transaction volume in reserve accounts for 90 to 180 days to cover potential chargebacks.
• Enhanced security requirements: Mandatory implementation of fraud prevention tools like 3D Secure, AVS, and CVV verification.
• Volume and transaction limits: Monthly processing caps and individual transaction limits to control exposure.
• Shorter contract terms: More frequent account reviews and shorter contract periods compared to standard accounts.
• Additional documentation: Enhanced underwriting requirements including business plans, financial statements, and processing history.

Comparison of High Risk vs Standard Merchant Accounts

Optimizing Your Merchant Account Status and Managing Risk

Many businesses operating in high-chargeback industries require specialized high-risk merchant accounts to access payment processing – these accounts are legitimate business solutions, not penalties. However, all merchants benefit from proactive chargeback management to maintain the most favorable processing terms available and avoid additional interchange penalties, fines, and sanctions from card schemes and acquirers. Even businesses with high-risk accounts can optimize their processing costs by demonstrating improved risk management through lower chargeback rates and higher win-rates.

Fortunately, there are several key strategies that can help to cut chargeback volumes and lower risk in the eyes of merchant account providers. Antifraud measures such as biometric authentication, AVS, CVV, and 3D Secure can both provide additional layers of protection against true fraud, and of compelling evidence to defend against illegitimate claims of unauthorized transactions. Meanwhile, transparent billing descriptors, return policies, and product descriptions help to prevent cardholder confusion and associated disputes.