High-Risk Merchant Account — What it is and How it Works
A high-risk merchant account is one that a payment processor assigns to a company with a higher risk of fraud and chargebacks. Payment processors make this decision based on the business's nature, financial history, and geography. If you have a high-risk merchant account, it will significantly impact how much it costs you to take credit and debit card payments. So let us move on and understand how it affects high-risk payment processing.
How does the merchant account work in terms of payments?
After payment has been completed, monies from your business's credit and debit card transactions are placed into a merchant account issued by your payment processor. The monies are then put into your company's bank account. Merchants profit since most payment processors put funds into their accounts within one to two days after the transaction while waiting for the actual monies from the issuing bank (which can take longer).
Customers must have merchant accounts for payment processors to take on the high risk payment processing. When payment is completed, several things might go wrong: the payment could be judged fraudulent, the consumer could request a chargeback, or the transaction could violate the processor's terms of service (among other issues). When this happens, the payment processor will demand that the merchant account holder deals with the problem — but there's always the risk that the account holder may refuse or simply vanish.
Interchange-plus and tiered pricing are the two types of merchant accounts available. A tiny proportion of a transaction (paid to the credit card network) plus a modest set charge is what interchange-plus pricing entails (paid to the payment processor). For example, if you use Shopify as your payment processor, each credit and debit card transaction will cost you 2.6 percent plus 30 cents. Low-risk merchants generally obtain better conditions when it comes to interchange-plus pricing.
What is the definition of a high-risk merchant account?
When you apply for a merchant account, you'll be required to supply company and tax information as well as, in many cases, a credit check. Suppose anything in your application suggests you might be a high-risk merchant. In that case, you'll either be denied a merchant account or given one with high rates and fees to compensate for the payment processor's belief that your account is more likely to experience fraudulent charges, chargebacks, and other problems.
If you're a high-risk merchant, your payment processor will most likely want to get you to sign a long-term contract so that it can lock you in at favorable rates, even if your risk level decreases over time. Although certain payment processors may give interchange-plus pricing to high-risk merchants, it is far more typical for them to get tiered pricing, which is often more expensive per transaction.
In the event of a chargeback, your payment processor will apply a fee to your account. Chargeback costs are often greater for high-risk businesses than for low-risk retailers.
Automatic renewal clause:
A clause in a high-risk merchant account contract that permits the terms of the contract to be extended beyond the initial expiration date is another frequent feature. If you don't want the automatic renewal provision to take effect, you'll need to go over your contract carefully to see when you need to provide notice.
Early termination charge:
If you wish to get out of your contract before it expires, you'll have to pay an early termination price. Your charge will be determined by the conditions you agree to with your processor.
What happens after you register for a merchant account?
When you register for a merchant account, the payment processors effectively goes through an underwriting procedure. Although various processors have different requirements, there are a few factors that might raise red lights and cause your company to be labeled as "high risk."
- Bad personal or business credit score: A low credit score indicates to the payment processor that you are not excellent with money and are more vulnerable to fraud.
- History of chargebacks or fraud with another merchant account provider: This will certainly affect your application if you have a history of chargebacks or fraud with another merchant account provider.
- Years in business: Merchant account providers are wary of customers with little or no experience processing payments.
- Where your company is based: If you sell to consumers in the United States, but your company is based in another nation, you are more vulnerable to fraud.
- Products or services that are questionable: Pornography and drug paraphernalia are obvious examples, although this varies by the payment processor.
What to Do If You're a High-Risk Person?
It might be difficult to obtain a reasonable price on processing if most payment processors label you as a high-risk merchant. Here are some recommended practices to keep in mind to assist you:
Do your homework:
Read any payment processor's website and customer evaluations before agreeing to deal with them. There are several shady payment processors on the market. A shady-looking website or negative customer reviews might alert you to a payment processor that treats you fairly.
Read your contract carefully:
For the reasons stated above, you must read your merchant account contract carefully so that you are aware of all the conditions that may wind up costing you money in the future.
Payment processing will be more expensive for you if you're labeled a high-risk merchant, as unfair as it may seem. That does not, however, imply that you should be taken advantage of. Although major payment processors may refuse to deal with you, there are legitimate firms out there that will. Before signing any contract, do your homework, weigh your choices, and carefully read the conditions.
As you can see, there are various reasons why your company might be labeled high risk. However, if you open a high-risk merchant account with a reputable payment provider, the process will be painless.
Certain firms have a larger risk of conflicts. Therefore it's understandable that they have tougher conditions. However, you may be certain that the danger of chargebacks and fraud will be decreased if you take payments through a reputable high-risk payment processor that prioritizes security.