Published December 08th, 2015
For credit card processing companies, merchants that have a higher level of risk will need to be set up with service that is capable of meeting the needs of their specific business model. If you’re classified as a high risk business, you’ll want to find a company that doesn’t charge you excessive costs—or stick you with slower transaction rates.
How does a business get classified as a high risk merchant account?
A high risk merchant account will typically be classified as such because the particular industry has a greater risk of fraud and chargebacks compared to a more traditional retail merchant. If you’re in an industry that deals with international merchants or your business deals in legal or morally ambiguous trades, you may be categorized as high risk as well.
While certainly not an exhaustive list, here are several examples of high risk merchants:
- Automotive Brokers
- Amazon / Yahoo / Google Stores
- Adult Industries
- Chat Sites
- Casino and Gaming
- Payday Loans and Cash Advance
- Fantasy Sports Websites
- Financial Consulting
- Federal Firearms Licenses Dealers
- Investment Firms
- Life Coaching
- Web Hosting
- International Business
- Extended Warranty
You may have found trouble initially finding approval for credit card processing
, but there are many companies that specialize in the unique needs of your business. The good news is that you can find affordable and secure service despite being classified as a high risk merchant.
Additionally, if you’ve been categorized as high risk primarily due to chargebacks, we have some tips below that can help.
How Chargebacks Affect High Risk Credit Card Processing
Of course, every business brings some uncertainly and unpredictability, but you can avoid certain risks while making informed decisions if you understand the basics of high risk processing.
Prior to being able to accept payments via credit cards, your business will get approved for a merchant account with the acquiring financial institution. It seems overly simplified, but there are only two merchant categories: high risk and low risk. If you’re perceived as risky, you’ll get placed in the high risk category, and unfortunately, many credit card processing companies
avoid taking the risk, so you’ll have to find a company that specialized in high risk business.
So how is my risk determined?
Financial institutions look at different factors to conclude if your business has an increased risk of chargebacks including the following:
What are the specific disadvantages of the high risk label?
- The financial institution will look at the mode of processing. Are you in a storefront and only accept physical cards, or is your business set up to take payment with no cards present, such as an ecommerce site? These variables play a huge role in determining how to classify your business.
- What are the types of services and products offered—see the above list to get an idea of what we mean here. Basically, non-traditional business models that bring a higher financial risk that will automatically put you in the high risk category.
- The institution will look at the average dollar amount for all monthly sales and transactions and this figure will go in the overall formula of risk.
- They will also look at what countries you do business with to determine any risks here as well. Not all countries outside of the US are risky, but who you do business with is taken into account here as well.
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– Many processors will impose increased fees before you’ve even started doing business because they are allowing for the risk of those predicted chargebacks. You might see a very large setup fee, for instance, as well as higher monthly fees. As a high risk merchant, you can also expect to see higher processing fees between 3.5-5.0% whereas a low risk business is between 1.5-2.0%.
Higher chargeback fees
– While every merchant is expected to incur some chargeback fees, the high risk merchant can expect to pay a higher chargeback rate. Additionally, if your chargebacks are excessive, you could pay even more. Read on below for tips on how to lower your chargeback rate.
Required merchant account reserves
– A merchant reserve is a non-interest bearing account that is held by the acquiring bank in the case of emergency situations in order to protect the financial institution’s financial interest. You can expect to have what is called a “rolling reserve” and what that means is that a portion of all of your monthly sales will be held in said reserve and then will slowly be released after a preset amount of time has expired.
For example, your financial institution can withhold 5 – 10% of your sales. Typically the funds are kept for 180 days, and then your funds are gradually released. Of course, these funds are yours technically, but you just can’t access them until the full time has been allotted.
You can imagine that this withholding could cause some cash flow challenges if not planned for accordingly—so be aware of this and ask your financial institution what their policies are in this regard.
When being high risk is a good thing….
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While all of these fees may seem discouraging, keep in mind that as business owner, you are also gaining freedom to do more types of business in more places. Risks can reap huge rewards. Low risk merchants are just that—low risk—but that’s because they don’t typically take advantage of many of the things that can also open up opportunities for business growth, either.
Here’s what we mean:
- Low risk merchants typically don’t accept transactions unless the card is present, therefore, they miss out on sales opportunities.
- They don’t process a large range of currencies.
- Low risk businesses don’t sell to countries outside of the US, Japan, Australia, Canada, or Western and Northern Europe.
Many companies actually view becoming a high risk company as a good thing. For them, the rewards offer greater payoff than the risk negates. For example, there’s simply more opportunity for revenue when you sell to anyone, anywhere in the world. Additionally, high risk merchants have more opportunity for commerce—think of the opportunities e-commerce brings.
How you can improve your risk profile and lower your chargeback risk
Unfortunately, many businesses get thrown into a high risk category because of chargebacks—not because of their industry, necessarily. In these cases, the focus truly needs to be in lowering chargebacks in the first place. Some business will reap the benefits of being labeled high risk because it allows them to significantly increase their earning opportunities—such as in certain e-commerce sites as discussed above. However, if that’s not you, being high risk is risky for your bottom line.
There are some things you can do as a business owner to ensure your chargeback rate is kept low, thereby lowering your risk profile.
- Improve customer support and follow-up
- Improve sales scripts to make sure your customers aren’t signing up due to high-pressure or misleading sales tactics
- Ask your institution about adding security measures through the payment process
- Use multiple merchant accounts to allocate business sales in those separate accounts to cut monthly volume
Because chargebacks are largely preventable, your business shouldn’t be assigned into this category simply on this one fact alone. Once you determine what can be improved, have your entire team of employees help to get back on track to focus on improvement.
How can I protect my company when doing business with a high risk processing company?
Make sure that you understand the details of your contract by reviewing it thoroughly in entirety. It is important that you deal with reputable companies that have a solid history of ethical dealings. Of course, there will be predatory organizations, so doing a little background work and checking their ratings will prevent your business from getting taken advantage of simply for having a high risk type of business model.
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As discussed above, ensure that you check the fine print for setup fees along with the monthly processing charges and the required amount that must sit in a reserve account until it is released. Another thing that anyone who is choosing a credit card processing company needs to do is make sure that they understand what termination fees will apply.
Even though you may be feeling a bit overwhelmed at the prospect of the high risk rating—there’s no need to be.
Take your time and make sure you ask the right questions, review documents, and even shop around before you decide on a merchant company to assist you with your specific needs.