Let’s say, you’re all set to launch your dream business. The business website is live, the products are ready to go, and customers are already lining up—virtually or in person. But then hard reality strikes: how will you accept payments? Nowadays, people don’t carry much cash anymore!
That’s where merchant accounts step in. They’re not just a nice-to-have; they’re the backbone of payment processing. Whether your business is considered low-risk or high-risk can shape how easily (or how expensively) you set one up.
For some, the process is simple. For others—like businesses in tricky industries—it’s a maze of higher fees and stricter rules. Before you dive in, let’s unravel the world of merchant accounts and why this distinction matters for your business.
Quick Insights on Low-Risk vs. High-Risk Merchant Accounts
- High-risk merchant accounts cater to businesses in volatile industries like gambling, CBD, or cryptocurrency, while low-risk accounts serve stable sectors like retail or consulting.
- High-risk businesses face higher fees, stricter rules, and more compliance requirements compared to low-risk businesses.
- Chargeback rates over 1% often classify a business as high-risk, while rates below 1% indicate low-risk status.
- Monthly sales exceeding $20,000 or large transaction sizes push businesses into the high-risk category.
- Low-risk businesses typically enjoy simpler payment processing with fewer disputes and lower costs.
- High-risk businesses often deal with rolling reserves and limits on transaction volumes to manage risk.
- Businesses in high-risk zones or operating internationally face more scrutiny from payment processors.
- A clean credit and payment history improves your chances of qualifying for a low-risk account.
- High-risk accounts are essential for managing payments in industries prone to fraud or legal complexities.
- Understanding your business’s classification can help you choose the right merchant account provider and plan better.
What Are Merchant Accounts?
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A merchant account is a special type of business account that allows you to process credit and debit card payments. Whether your customers pay in person at a shop or online, you’ll need a merchant account to handle these transactions smoothly.
There are two main types of transactions supported by merchant accounts:
- Point-of-Sale (POS) Transactions: POS transactions occur when customers swipe or tap their card using a physical machine at a store, café, or restaurant.
- Card-Not-Present (CNP) Transactions: CNP transactions happen online or over the phone, where the card isn’t physically used.
You can set up a merchant account either through a bank or an independent Payment Service Provider (PSP). Banks tend to be more selective, especially with industries like gambling or CBD. On the other hand, independent PSPs are usually more flexible, making them a great option for businesses with unique needs. Always be sure to compare costs and hidden fees before choosing the right provider.
High-Risk Merchant Accounts
A high-risk merchant account is designed for businesses that payment processors see as riskier due to higher chances of chargebacks, fraud, or financial instability.
When you apply for a merchant account, the first thing providers do is assess your risk level. If your business falls into a high-risk category—often due to your industry (like adult entertainment, subscription services, or regulated products) or financial history—you’ll need a high-risk account.
These accounts come with higher setup fees, increased processing costs, and stricter rules, such as transaction limits or rolling reserves. They help banks and payment processors mitigate risks while enabling high-risk businesses to process payments.
What Is Chargeback?
A chargeback is when a customer asks their bank to reverse a payment they made. For instance, let’s say you run a subscription-based service with a free trial. Some customers might forget to cancel before the trial ends and get charged. Most will accept the mistake and cancel their subscription, but a few might dispute the charge and request their bank to refund the money.
When this happens, the bank refunds the customer and charges the business not only the payment but also extra fees. Too many chargebacks can make payment processors see your business as high-risk.
What Makes Businesses High-Risk
A business may be labeled high-risk due to several factors. Here are the signs payment processors look at to define your business as one:
- High Chargeback Rates: If your business has frequent chargebacks—over 1% of transactions—it raises red flags. This often happens when customers dispute charges due to dissatisfaction or confusion.
- Fraud-Prone Industries: Certain industries, like tech support or online gambling, are known for high levels of fraud. Even legitimate businesses in these sectors face added scrutiny.
- Legal Risks: Selling products with legal gray areas, like cannabis or counterfeit goods, creates liability for payment processors and often lands businesses in the high-risk zone.
- International Operations: If you deal with foreign currencies or operate from regions with weaker banking regulations, you’re more likely to be classified as high-risk.
- Unpredictable Revenue: Businesses with irregular income or high-value transactions often face concerns about stability.
- Low Credit Scores: If you or your business has a poor credit history, it can make you appear riskier to financial institutions.
- Unique or New Industries: Innovative or unconventional business models, such as multi-level marketing, can make payment processors cautious.
- Recurring Billing Models: Offering subscriptions or free trials might attract disputes if customers aren’t satisfied or forget they signed up.
- Large Transaction Volumes: Processing high monthly sales or expensive transactions increases perceived risk.
- Unreliable Customer Base: If your target market includes financially unstable customers—like in debt collection—it’s a red flag.
Eager for more? We have just the right blog for you: “10 clear signs your business might be high-risk.”
What Kinds of Companies Require High-Risk Merchant Accounts?
High-risk merchant accounts are often needed for businesses in industries that face unique challenges, such as constant disputes, stricter regulations, or higher risks of fraud. Here are the types of companies that usually fall into this category:
- Gambling and Gaming.
- Adult Entertainment.
- Nutraceuticals and Supplements.
- Travel and Tourism.
- Subscription Services.
- Cryptocurrency and Forex Trading.
- Telemarketing Services.
- E-commerce with Controversial Products.
- Charities and Nonprofits.
- High-Ticket Retailers.
These industries often face unique hurdles, making high-risk merchant accounts essential for managing payments smoothly and staying compliant.
Low-Risk Merchant Accounts
A low-risk merchant account is designed for businesses with stable operations and minimal financial risks. These accounts let businesses accept credit and debit card payments seamlessly, deducting small fees before transferring the remaining funds to the business bank account.
Low-risk businesses often operate in predictable industries, avoiding volatile markets. Examples include freelance consulting, pet sitting, and tutoring. These ventures require minimal capital, focus on providing steady services, and rely more on skills than large financial investments.
Because of their steady income and low exposure to chargebacks or fraud, low-risk businesses are seen as reliable by financial institutions, making payment processing simpler and more affordable.
What Makes Businesses Low-Risk
Low-risk businesses stand out for their stability and reliability. Let’s look below to learn the features that make businesses low-risk:
- Stable Revenue Streams: These businesses operate in industries with steady demand, making their income predictable and reducing financial ups and downs.
- Low Chargeback Rates: Fewer customer disputes mean less risk for payment processors and smoother operations.
- Minimal Regulatory Scrutiny: Unlike high-risk industries, they deal with fewer regulations, which makes compliance easier and lowers legal risks.
- Lower Startup Costs: Many low-risk businesses don’t require hefty investments, making it easier and safer to get started.
- Service-Based Models: Businesses like consulting or freelancing don’t need much inventory, keeping things simple and manageable.
- Established Practices: They follow tried-and-true methods that make them trustworthy to customers and financial institutions.
- Strong Customer Relationships: Great service builds loyalty, encouraging repeat business and reducing turnover.
- Diverse Revenue Sources: Offering a variety of products or services helps balance market changes.
- Low Liability: They avoid risky activities, keeping potential legal troubles to a minimum.
- Positive Reputation: Being in a respected industry earns trust from banks and payment processors.
How to Know if My Business Qualifies for Low or High-Risk Merchant Accounts
Figuring out if your business requires a low-risk or high-risk merchant account depends on several factors that payment processors evaluate. Here’s what they consider:
- Industry Type: Some industries, like gambling, adult entertainment, or cryptocurrency, are automatically labeled high-risk because of their nature. On the other hand, businesses in retail, education, or professional services are often seen as low-risk.
- Chargeback Rates: If your chargeback rate is below 1%, your business is likely low-risk. However, anything above puts you in the high-risk category.
- Monthly Sales Volume: Businesses processing under $20,000 per month are typically considered low-risk. If your monthly sales exceed that amount, you’re more likely to be classified as high-risk.
- Transaction Size: Smaller transactions, under $500 on average, are a sign of low-risk. Larger transactions tend to increase the risk profile.
- Business History: Established businesses with good credit and a solid financial track record often qualify as low-risk. Startups or businesses with poor credit, however, might be classified as high-risk.
- Processing History: A clean history with few disputes or chargebacks can work in your favor. Frequent disputes, however, could push you into the high-risk category.
- Location: If your business operates in areas prone to fraud or with loose regulations, it’s more likely to be seen as high-risk.
High-Risk Vs. Low-Risk Merchant Accounts: What Are the Differences?
When payment processors review your business, they classify you as either high-risk or low-risk. This label depends on several factors that impact how easily you can process payments. Let’s go ahead and learn all the differences between these two types of businesses:
Industry
- High-Risk: You’re in industries like gambling, CBD, or travel, which often face higher risks of chargebacks and fraud.
- Low-Risk: You operate in safer industries, like consulting or retail, with fewer financial disputes.
Revenue and Transactions
- High-Risk: You generate more than $20,000 monthly, and your transactions involve higher amounts.
- Low-Risk: Your business brings in less than $20,000 per month, with most transactions averaging under $500.
Chargebacks and Fraud
- High-Risk: Your business experiences frequent chargebacks or struggles with fraud.
- Low-Risk: You have minimal chargebacks and little to no fraud issues.
Business Age and Reputation
- High-Risk: Your business is new or has a weak reputation.
- Low-Risk: You’ve been in business longer and have built trust with your customers.
Financial Stability
- High-Risk: You’re dealing with financial instability or poor credit history.
- Low-Risk: You maintain stable finances and have good credit.
Products and Services
- High-Risk: Your offerings often involve pre-orders or delayed delivery, making them riskier.
- Low-Risk: You provide goods or services that are delivered immediately.
Comparison Table of Differences between High-Risk and Low-Risk Merchant Accounts
Aspect/Features | High-Risk Merchant Accounts | Low-Risk Merchant Accounts |
---|---|---|
Industry | Industries like gambling, CBD, or travel, often face higher risks of chargebacks and fraud. | safer industries, like consulting or retail, with fewer financial disputes. |
Revenue and Transactions | Generates more than $20,000 monthly, and transactions involve higher amounts. | less than $20,000 per month, with most transactions averaging under $500. |
Chargebacks and Fraud | Experience frequent chargebacks or struggles with fraud. | Minimal chargebacks and little to no fraud issues. |
Business Age and Reputation | Business is new or has a weak reputation. | The business is old and has built trust with its customers. |
Financial Stability | There will be financial instability or a poor credit history | Stable finances and good credit. |
Products and Services | involve pre-orders or delayed delivery, making them riskier. | Goods or services that are delivered immediately. |
How to Get a High-Risk Merchant Account
If you’ve discovered or been categorized as a high-risk business and need a high-risk merchant account, don’t worry—it’s a manageable process. Follow these steps to improve your chances of approval:
- Research Providers: Look into payment processors that specialize in high-risk accounts. Choose ones with experience in your industry.
- Evaluate Your Choices: Compare their services, fees, and customer reviews to find the best fit for your needs.
- Prepare Your Documents: Gather essential paperwork, including financial records, business licenses, and processing history. This shows stability and transparency.
- Check Your Online Reputation: Ensure your website and business have a positive and professional online presence to build trust with the processor.
- Apply with Care: Request the application, read the terms thoroughly, and provide accurate information to avoid unnecessary delays.
- Review the Agreement: Once approved, carefully read the merchant agreement to understand all terms, fees, and restrictions before signing.
For a deeper dive into everything high-risk merchant accounts, check out our comprehensive blog: “Everything about High-Risk Merchant Accounts.” It’s packed with valuable insights to guide you through the process!
FAQ
Q1: Is the Merchant a Buyer or Seller?
Answer: In any transaction, the merchant is the seller who provides goods or services to the buyer
Q2: What Makes a Merchant Different from a Vendor?
Answer: A vendor is a general term for anyone who sells goods or services, including wholesalers or suppliers. A merchant, however, refers specifically to a retail seller who sells directly to consumers and usually has a merchant account with an acquiring bank.
Q3: Is It Possible for My Business to Have and Maintain Both Low-Risk and High-Risk Accounts at the Same Time?
Answer: Absolutely, your business can have both low-risk and high-risk accounts at the same time.
For example, you could manage in-store transactions with a traditional merchant account while using a high-risk account for online sales.
This setup helps you tailor your payment processing to suit different needs. Since each processor evaluates risk differently, what seems risky to one may be perfectly acceptable to another.
Q4: What Is Classified As A High-Risk Merchant Account?
Answer: A high-risk merchant account is designed for businesses in industries considered high-risk, allowing them to process card payments. These accounts usually have stricter rules and higher costs compared to standard merchant accounts.
Q5: My Processor Is Asking for a Chargeback Reduction Plan. What Should I Do?
Answer: Well, take this request seriously—it’s a clear sign that your chargeback situation has raised concerns. Ignoring it could put your payment processing privileges at risk.
Q6: If I Do Not Reduce My Chargeback Ratio, I Will Lose My Merchant Account. What Tools Can Help Me Reduce Risk Quickly?
Answer: To effectively lower your chargeback ratio and protect your merchant account, consider using a combination of tools for comprehensive risk management. Here are some valuable options to include:
- Pre-Authorization fraud Detection: Identifies suspicious transactions before they’re approved.
- CVV Checks: Verifies the card’s security code for extra fraud prevention.
- Address Verification Service (AVS): Confirms the billing address matches the cardholders.
- 3D Secure 2.0: Adds an extra layer of authentication during online payments.
- Prevention Alerts: Warns you of potential disputes before they escalate into chargebacks.
- Order Validation: Confirms the accuracy of orders to prevent fraudulent activity.
- Rapid Dispute Resolution (RDR): Resolves disputes quickly, reducing the risk of chargebacks.
Q7: What Are Bank Accounts Specifically Designed for High-Risk Businesses?
Answer: A high-risk business bank account is tailored for companies involved in industries like gambling, cryptocurrency, or adult content, where there’s a higher chance of financial risks, fraud, or sensitive transactions.
Q8: Which is Better: High-Risk or Low-Risk Investments?
Answer: If you choose only low-risk investments, it may lead to losing purchasing power over time due to inflation. That’s why they’re often better for short-term goals or emergency funds. On the other hand, high-risk investments are typically more suitable for long-term financial goals.