Published December 18th, 2015
There are a few different ways that a business could be classified as high risk, but it doesn’t always have to be a bad thing. Today’s post will work through why your business may be labeled in the high-risk category, what you can do to prevent an unnecessary high risk rating, and best of all—how you can benefit from being a high-risk merchant. Believe it or not, there are some serious benefits that you gain when you do away with the restrictions a low-risk business operates under.
What does a high-risk business rating really mean?
As far as the credit card processing industry
is concerned, high-risk merchants have a higher level of managed risk, so they often need specialized attention to help set up their payment processing account as well as keep it running while taking into account the increased risk.
That being said, high-risk businesses still need to find a service that equips their non-traditional business model without adding excessive costs or slowing down service.
Risk of Fraud and Chargebacks Increase
In a nutshell, a high-risk merchant account has a higher potential for fraud or elevated level of chargeback risk than a traditional retail business. One of the ways your transaction rates will be determined is by taking into account the average amount of each sale you process.
While higher ticket items may mean more opportunity for profit, higher prices mean more risk in the event of a fraudulent card or a chargeback. A chargeback is defined as the “demand by a credit-card provider to make good on the loss for a fraudulent or disputed transaction”. A chargeback is never a good thing in business because it means the loss of the sale and extra fees.
In addition to the average ticket sale, financial institutions also look at what specific type of business you are. Certain industries, by default, will have higher incidences of chargebacks. International merchants, some e-commerce, and morally ambiguous companies may also be dinged as well.
If you’re a high-risk merchant, what you need to do is find a financial institution who specializes in your types of accounts and offers you services that enable you to establish your account in a timely, transparent, and correct way.
You may initially find that obtaining payment processing as a high-risk business poses a challenge, but there are actually many reputable institutions that are secure and affordable options. Of course, there will be predatory businesses. Therefore, it is beneficial to learn what you can and ask the right questions before deciding on a high risk merchant account.
Learn About High-Risk Credit Card Processing
Prior to accepting credit card payments from your customers, you’ll need to obtain a merchant account. You’ll be categorized as either high risk or low risk. As described earlier, the financial institution recognizes that the high-risk business poses more of a risk than the corner bakery, for example. Many credit card processing companies tend to avoid these “risky” merchants.
So what classifies as high risk? Here are a few factors that increase your chances of chargebacks, and thus, you’ll see a higher risk rating assigned to your business if you:
- Sell a certain type of product of service
- Have a riskier sales method
- Accept card-not-present transactions
- Sell internationally to certain countries
- Have a higher average dollar amount for individual transactions and / or your monthly sales
Of course, the increased risk of chargebacks increases your risk factor, but there are other factors that can be considered as well.
What are the cons regarding high-risk credit card processing?
Being labeled high risk has some disadvantages, but also some advantages that we’ll discuss shortly…
Con #1 – Rolling Reserves
A high-risk payment processor will most likely require a merchant account reserve. This is a non-interest bearing savings account that the bank requires to be funded in the event of emergency situations. This account increases protection over the bank’s assets. In the event a chargeback is filed against your business and you can’t reimburse the bank, the bank will use the reserve cash to cover the loss.
The majority of high-risk merchants need a rolling reserve. You may have a portion of monthly sales held in your reserve for gradual release after a specific time has passed. 5-10% of monthly sales are typically held for 180 days and then you’ll see those funds released. Of course, these are still your funds, but the restricted access to revenue could potentially cause a dent in cash flow.
Con #2 Increased Fees
You can expect some additional fees right off the bat, but here you can do some calling around to get various quotes. An example of an inflated fee for a high-risk merchant is for the setup fee. You may also see slightly elevated monthly fees, and higher processing fees as well. You may be surprised to find out that not all banks assess the same amount of situational risk, so it does pay to make a few calls.
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Money is flying in the air.[/caption]
Con #3 Higher Chargeback Fees
Both high-risk and low-risk merchants have to pay chargeback fees—that’s just a part of doing business and covering for your losses. However, you also have to pay for additional administrative tasks that are associated with a chargeback processing.
If you’re a high-risk merchant, you’ll pay more across the board. You’ll have higher fees for each individual occurrence filed, but if you have excessive chargebacks, you can expect to pay even higher fees. Preventing chargebacks will be an important goal for your business, and will be touched upon towards the end of the post.
It isn’t only doom and gloom associated with high risk merchant accounts, there are some pros to look forward to as well, and they may compensate for any issues you encounter.
Pro #1 - You’ll be Less Threatened by Chargebacks
While traditional merchants can enjoy lower chargeback and processing fees, they face a much higher risk from excessive chargebacks than a high-risk business will. This difference is because you’re already set up with the bank to compensate for these issues, while the low-risk bank is in danger of having their account terminated altogether. The longevity of your business is far less threatened because of these key factors.
Pro #2 – No Limits on Earning Potential
have many more limitations including:
- Inability to offer recurring payment options
- Process transactions more than $500 each
- Limits on types of products or services sold
- Monthly earning limitations
Let’s take a look at the first issue of recurring payments. With the ability to accept recurring payments, you can see the potential for long-term business growth, but the low-risk business won’t have that option. As a high-risk business, you also don’t have to worry about the revenue cap imposed on your monthly or individual earnings. Sell your big-ticket items and rely on fewer sales to get solid streams of revenue!
Examples of High-Risk Businesses:
How to Prevent a Chargeback and Make More Money
- Health and Weight Loss
- Telemarketing Merchants (outbound and inbound)
- Travel arrangement
- Debt Consolidation Companies
- Tobacco Shops
- Licensed Firearm Dealers
- Automotive Brokers
- Amazon Stores
- Life Coaching
- Cash Advance
- Fantasy Sports
- Cannabis Shops
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Group of entrepreneurs working using a laptop and holding a document[/caption]
Chargebacks will be the single most important risk factor for your business. If you’ve been labeled high-risk due to chargebacks, you can learn how to prevent them to begin with. Instead of paying hefty fines, learn how to deter this issue and keep more of your profits.
Here are some tips that can help:
Finding the Right High Risk Merchant Account Provider
- Allocate business sales in separate merchant accounts to cut monthly volume
- Add security measures if possible
- Add improvements to the scripts used by your sales team, and ensure they are building solid sales – not high-pressure sales
- Follow up with your recent accounts and increase customer support methods
When your business is high risk, you’ll need to ensure that you completely understand all of the little details in your contract by reviewing it thoroughly. Focus on searching out those reputable companies that have good ratings and understand the needs of your particular business.
Researching a little and doing some calling around will help you avoid getting taken advantage of because of your high risk rating.
Make sure that you understand what each fee will be and how your transaction rate and chargeback rates are figured. Additionally, you’ll also want to research how the merchant services company rates in overall customer service. If you need service after regular business hours, you’ll want access to service when you need it.
To assist you on your search, we’ve compiled a list of the top high risk merchant accounts for many different types of businesses as well as for those with a bad credit rating. Learn more about the top businesses we feel outshine the rest, and more about our credit card processor rating
When it comes to doing business as high risk merchant accounts, you do have plenty of options in companies to find the one that will provide the most beneficial services for you. And as covered earlier, many businesses welcome the freedoms that come with becoming a high-risk merchant.
While there are some cons such as an increased fee structure, you gain more flexibility in what you sell and the amount you sell. Regardless of high-risk or low-risk business ratings, you can still expect the same level of service and a minimal amount of hassle if you do your homework and find a good company.