High-Risk Merchant Account — What it is and How it Works

If you run an online business with a higher risk of chargebacks and want to process credit card transactions, you need a high-risk merchant account. But what is a high-risk merchant account and how do you know you need one?

To open a high-risk merchant account, you need to find an acquiring bank that will underwrite your business. However, to increase your chances of getting an account it’s better to ask a reliable payment service provider for assistance.

What is a high-risk merchant account?

A high-risk merchant account is a payment processing account for businesses considered to be of high risk to the banks. As high-risk businesses are more prone to chargebacks, they come with the need for paying higher fees for merchant services. If a business comes with a high potential of chargebacks, or the history shows many chargebacks and refunds, the bank may put a rolling reserve on your account. It’s the amount of money that will cover the possibility of chargebacks or fraud.

What are the differences between low-risk and high-risk merchant accounts?

Before you apply for a merchant account, it’s good to know whether you’re a high-risk merchant or a low-risk one. Merchant account providers have their criteria for categorizing businesses in terms of their potential risk, but there are several things characteristics for both groups of merchants.

So, what are the differences between low-risk and high-risk merchant account?

What is a low-risk merchant?

Note that every payment processor has its own set of guidelines, but there are some characteristics common for all the players on the market.

General indicators for low-risk merchants are the following (but there are many other factors, and it’s based on compliance’s general evaluation):

  • Less than $20,000 processed monthly
  • Average credit card transaction is less than $500
  • The industry that a merchant operates in is considered low risk (these are, for instance, low risk-clothes and shoes, household goods, baby products)
  • Zero to low chargeback ratio
  • The country a business operates in is considered low risk (European Union countries, USA, Canada, Australia, Japan)
  • Minimized returns.

What is a high-risk merchant?

The more chargebacks a business comes with, the higher the risk. Hence, the main factors that matter are industry reputation and processing history (it’s recommended to keep your chargeback ratio lower than 0.9% of your total transactions).

Here are overall characteristics of a high-risk merchant, but note that it widely differs based on a certain payment processor’s guideline:

  • More than $20,000 monthly sales volume
  • Average credit card transaction higher than $500
  • A business sells products and services to countries known for high levels of fraud
  • Bad credit history and excessive chargebacks.

Who needs a high-risk merchant account?

An example of high-risk businesses is the travel industry, as there are various factors there that can cause cancellations. This usually ends up with a number of refunds and customers who file chargebacks. Some others are gambling, forex trading, and adult-themed websites, to name a few.

There are many other industries or business models that are prone to chargebacks, so here’s the list of the most common types of businesses that need high-risk merchant accounts.

So, if you run a business in the industries mentioned above and similar, you need a high-risk merchant account to accept credit card payments on your website. If you are a high-risk merchant, you need to deal with higher costs of merchant account than regular merchants.

High-risk merchant account fees

Speaking of fees, the harsh truth is that high-risk merchant accounts cost more than accounts for low-risk businesses. There are inevitable costs that you have to face, so you need to prepare to pay more in processing charges and account fees.

But you should be aware that high fees for high-risk merchant accounts were set as a standard many years ago and today you can find payment processors that offer competitive rates tailored to your business. 15% commission rate or even higher fees stick to the dated approach. You don’t have to be stuck in long contracts running three to five years. The same goes for extra costs.

Several high-risk payment providers still may charge you a setup fee, monthly and annual fee, or even a PCI fee, so read the contract properly. In addition, an early termination fee may apply when you want to close the account before the date on the contract. The details regarding the termination fee should be included in the contract, so be sure to read it carefully before you sign the agreement.

The payment processing industry is moving forward, so look for high-risk payment processors that charge you only for transactions that happen on your website or in the app.

A rolling reserve for high-risk merchants

Another expense characteristic for a high-risk merchant account is a rolling reserve. It is an additional layer of protection for the bank against chargebacks or unexpected activities (such as fraud cases) on your side. So, a certain part of the credit card processed volume is secured (usually 5-10%), and it depends on the business model and processed volume. It’s kept on hold for a defined period, usually up to 6 months, and after this time reserve is released.

The higher the risk that the business comes with, the higher the rolling reserve is calculated by the acquiring bank. After the given time, the money is released and automatically settled in one of your weekly statements.

Note that the rolling reserve can also be offered to low-risk merchants that are just starting and have no credit history.

Chargeback fees

Also, remember about chargeback fees that may apply when a cardholder files for a chargeback and asks the bank to dispute the charge. It’s the money that covers the administrative costs of processing the chargeback.

Overall, high-risk merchant account fees may cost you twice as much of the amount that applies to low-risk merchants. But, if you run a business that processes numerous daily transactions, you can negotiate rates with a payment processor.

How do I apply for a high-risk merchant account?

To get a high-risk merchant account, you need to fill out an application online. Of course, to accept card payments you also need to find a reliable high-risk payment processor.

The process of applying for a high-risk merchant account is short and simple. For instance, if you choose Dough as your payment partner, we will help you find a bank that matches your business needs. Once your business is approved by the acquiring bank, you can start processing payments online or mobile.

The pros and cons of a high-risk merchant account

One of the most common disadvantages of high-risk merchant accounts is that you need to pay higher fees and processing rates. Moreover, banks might request a reserve — it’s because of a higher risk.

It seems that running a high-risk business is hard and comes with many limitations. So, are there any benefits of having a high-risk merchant account?

Global coverage. As a high-risk merchant, you can grow your business performance by accepting transactions in multiple currencies and sell to clients outside countries considered low risk. This means you can access larger markets.

High chargeback protection. This means that you have bigger chances of keeping your merchant account in good shape. For instance, when a merchant with a regular account crosses the chargeback threshold, they even may end up with a terminated account. They need to look for a high-risk merchant account, which usually equals a pause in taking credit card payments.

On the other hand, it’s easier to keep a high-risk merchant account up and running condition, as a single chargeback exceeding doesn’t have to come with closing an account. But it also doesn’t mean that you can neglect chargeback management.

Expanding your business. With a high-risk merchant account, you can sell products or services that are not allowed when you have a low-risk merchant account, so it gives you more opportunities for long-term growth.

Increased profits. Wider possibilities of products you can sell grow your chances of earning more money.

What to consider when looking for a high-risk merchant account

There are many high-risk credit card processors on the market, so conduct thorough research before you choose your future payment partner. There are many things you should consider before making the final decision, and these could be the following:

Responsive support. Believe me that you need someone ready to help when anything bad happens to payments on your website or in-app. Make sure that a credit card payment provider gives your high-risk business a guarantee that every issue will be addressed.

Flexibility and customization. Look for a high-risk processor that lets you implement various payment scenarios that tailor all your business needs, especially when you run a complex business model. Make sure you can customize every element of the payment form and that you can discuss the rates, conditions, and features tailored to your business.

Transparent pricing. Pricing structure should also be easily found on a payment processor’s website. Search for precise information about the fees and potential added costs. Make sure that there are no hidden or extra fees.

Technology. What you might be interested in is whether your prospective payment gateway provides multiple accounts. Moreover, ask for the payment platform’s APIs so that you will have full control over the setup and payment process. What also matters is fast onboarding and payments designed for users, without downtimes and surprises. Avoid payment processors with legacy technology and lack of know-how.

Security indicators. As a high-risk merchant, you need a payment partner that follows strict security rules and provides a set of anti-fraud tools that will keep your business away from the fraudsters. Make sure they offer a decent chargeback prevention system and a multi-layered approach to security.

Expertise. Do research to find out how long a payment company has been on the market and what’s the background of its leaders. Their expertise and the knowledge of all ins and outs of niche industries position them as market leaders. It also ensures that the payment platform you want to work with is reliable, so your money is safe.

High-risk payment processor website. Visit the processor’s site to check their layout and whether they publish updated information. A dated or basic website that makes you feel like back in time can be a warning sign that something is wrong with the company you consider.

Accepted business models. Before you apply for a high-risk merchant account, make sure that a credit card processor works with industries your company operates in. The same goes for countries accepted. Note that reliable payment processors keep a list of supported business models and countries on their website.

Read their contract carefully. Usually, you don’t find a sample contract online, but when you obtain a copy of the payment company’s terms, read them thoroughly.

When you apply for a high-risk merchant account, remember that its terms might be stricter than those of a regular merchant account, so always read your contract thoroughly. Check for hidden or extra fees, rates, and how high is the rolling reserve.

As you can see, there are many reasons why your business can be considered high-risk. But if you set up a high-risk merchant account through a reliable payment platform, the process will be simplified without headaches.

There are businesses with a higher chance of disputes, so it’s obvious that they come with stricter terms. However, when you accept payments through a reliable high-risk payment processor that keeps security at the forefront, you can rest assured that the risk of chargebacks and fraud will be minimized.

Wondering whether your business needs a high-risk merchant account? Contact us for pre-approval.