High-risk credit card processing can be tricky, but it’s not a death sentence for your business. Running any business these days more or less requires that you give your customers the option of paying with credit or debit cards. If you’re an eCommerce entrepreneur, credit/debit cards are just about your only option for getting paid. If, for whatever reason, your business is determined to be a high-risk one, the consequences can be severe. Many processors will simply refuse to approve you for a merchant account, while others will charge you significantly higher rates and fees than you would otherwise have to pay.
High-Risk Business Categories
Believe it or not, there’s no single definition of high risk businesses in credit card processing. Visa, Mastercard, American Express, and Discover all have their own lists. Processors use those lists as a base and add additional industries according to their own risk requirements. That means that while all processors will include the card brands’ listed industries, any additional high-risk classifications beyond that are at the processor’s discretion and will vary from one processor to another.
Because of that, narrowing down exactly what business types processors consider high risk is a difficult task. A business that Visa may not consider high risk can still be classed as high risk by a processor. However, while there is variation, there are several industries that most processors will consider high risk. Those industries include:
- Travel services
- Adult entertainment
- Dating websites
- Tobacco and vape shops
- Debt collection and credit repair
- Bitcoin and digital currency exchanges
- Loan services
This is not a complete list of high-risk industries, and it does not mean that a traditional processor won’t be able to support your business.
However, if you’re operating in one of the industries above, you’ll save yourself some time and aggravation by looking for a processor that can explicitly support your business type. Keep in mind that processors can choose to support or not support particular businesses at their discretion.
The first thing to understand about high-risk businesses is that your processor will determine whether you fall into one of their high-risk categories when you apply for a merchant account. Either you’re high-risk, or you’re not – there is no middle ground. Beyond that, it gets complicated as every processor has their own unique guidelines for determining whether you’re in the high-risk category. While some business types, such as pornography or drug paraphernalia will almost always be placed in the high-risk group, others may or may not be, depending on your processor. Some merchant services providers have very strict guidelines for determining high-risk status, while others use more relaxed criteria. If you’re considering a particular provider, check their website or contact them directly to see if they find your business to be high-risk. This can save you a lot of time and effort in wasted applications to providers who aren’t going to approve you.
How a merchant services provider treats a high-risk business can also vary widely. Many providers, particularly those that try to offer merchant services at the lowest possible prices, simply do not accept any high-risk businesses at all. This helps to reduce their exposure to fraud and keeps costs low for their existing clients. Other providers will allow certain high-risk companies, but will charge you significantly higher rates and fees for your merchant account due to the elevated risk they’re accepting by giving you a merchant account. There’s also a third category of providers who specialize in placing high-risk businesses. While their rates and fees aren’t a good deal for non-high-risk merchants, they can often provide a merchant account for high-risk businesses that have been turned down by other providers.
If your business falls into one of the high-risk categories we mentioned above, don’t worry, not all is lost. You’ll likely still be able to obtain a merchant account. However, your rates and terms of your contract may be less desirable in comparison to your low-risk counterparts.
The good news is, there are a lot of merchant service providers that specialize in high-risk merchant accounts. And as online gambling and the cannabis industry make a push towards national legalization, we wouldn’t be surprised if more high-risk account providers pop up in the future, or if these types of businesses lose the high-risk tag altogether.
While many MSPs openly advertise their standard, low-risk merchant rates, high-risk account fees are usually less transparent because there are more variables to take into consideration. However, generally speaking, high-risk merchants can expect to pay anywhere from one to two percent more per transaction.
Additionally, if you’re deemed as a high-risk business, your account provider will likely require you to keep a reserve. There are three types of reserve accounts you can expect from MSPs, and they are:
Rolling Reserve. A rolling reserve is a risk management strategy the acquiring bank uses to protect themselves from potential fraud, chargebacks, or other incidents where the acquirer may lose money. Think of it as a buffer or an insurance policy on the high-risk nature of your business. Based on the terms of your merchant agreement, the payment provider will withhold a percentage of your daily revenue for a specified term, and then gradually release the funds.
Up-Front Reserve. If you’re a new business or have other less than ideal qualifying factors, some MSPs will require starting with an up-front reserve. Based on expected transaction volume, an up-front reserve is the amount of money that must be placed in escrow at the start of the merchant agreement — or allow the MSP to withhold 100 percent of credit card funds until the reserve balance is met.
Capped or Fixed Reserve. A fixed reserve is when the acquirer withholds a percentage of every transaction until the reserve reaches the cap agreed upon in the merchant agreement. Unlike a rolling reserve where the acquirer takes a portion of every sale indefinitely, in this model, once the cap is reached the acquirer will not take any additional funds. However, if the MSP needs to withdraw from the reserve for any reason, the withholding percentage will kick in again until the cap balance is replenished.
One last thing to note because of the high-risk nature of your business, you may also be susceptible account freezes. During this freeze, you cannot continue to process credit or debit cards until the hold is lifted.
If there’s suspicious activity with your merchant account, a payment processor may temporarily freeze your account to analyze your processing habits and decide whether or not you’re operating within the terms of your agreement or are in breach of contract.
If it’s the latter and you’re fulfilling your side of the agreement, expect the MSP to do one of the following:
Rewrite the merchant agreement based on the assessment findings.
The temporary freeze will lead to a permanent termination.
The worst case scenario when a high-risk merchant account provider freezes your account and intentional fraud is found, the merchant can face fines or have criminal charges brought against them.
While account freezes may be unavoidable from time-to-time, the best way to avoid termination is to be honest on your merchant application. Be upfront about the types of products and services you offer and your expectations for credit card volume.
The Low Down
Whether your company is considered high risk because of the nature of the business or if your account qualifications are less than stellar, don’t lose faith. In the end, if your business is flagged as a high-risk merchant account, it may be more challenging and require stronger cash flow to obtain a processing account, but it’s not impossible.
Why do high risk merchant accounts have higher rates?
Processors that support high risk businesses charge higher rates for several reasons. A big one is that there’s a greater chance they’ll lose money. Even if a business is held liable for chargebacks, it can cost a processor time and money to pursue that business for the costs associated with chargebacks, especially if the processor has to get courts involved.
Another reason is that processors are required to do more administrative work for high-risk businesses, and that takes staff time. For example, Visa’s rules regarding high-risk require that a US-based acquirer must generate “unusual activity reports” every day and report any unusual activity to Visa within 2 business days. A processor will need to run reports to determine if a business needs to be referred to Visa for review.
Visa’s criteria for reporting states that if a business must be reported to Visa if it has weekly gross sales volume of $5,000 or more and any of the following criteria exceed 150% of the usual daily activity:
- Number of daily transaction receipt deposits
- Gross amount of daily deposits
- Average transaction amount
- Number of daily disputes
Visa must also be informed if the average time between the date of the transaction and the processing date of the transaction is more than 15 calendar days.
Acquirers must collect and retain data for the first month of processing in order to establish a normal daily value for each criterion, and then begin daily monitoring. At least once a month, the acquirer must update the normal daily value using the previous month’s data.
As you can see, there are a lot of requirements behind the scenes for your processor, and that’s just for one card brand. It takes employee time to comply with the requirements.
How to Get a High-Risk Merchant Account
Securing a processor for a high-risk business may take a little longer. The companies that offer immediate set up, like Square and PayPal, explicitly prohibit most types of high risk businesses. So while you may initially succeed at signing up, they will likely catch on down the road and terminate your account due to the violation of terms, leaving you in a bind.
Dedicated high risk merchant account from the Best High Risk Merchant Account with instant approval aren’t readily available due to the extra steps involved in the underwriting process. As noted above, in some cases, your processor will need to register you with the credit card brands before you can accept those cards. Even though it seems like a pain, it’s better to take a little extra time to find a processor who can work with you than to sign up quickly and one day find yourself with no way to process sales.
When looking to secure a merchant account:
It may be tempting to fudge the details a bit so that you appear to be a different type of business. However, it’s never a good idea to do that, as processors often catch on and will terminate your account. Don’t misrepresent your business. If you’re a firearms dealer, don’t claim to be a general retail store. Remember, as long as your business is legal, there’s athe Best High Risk Merchant Account out there who can support it.
That said, just because there are processors for all legal business types doesn’t mean that you won’t be subject to restrictions. It’s common for high-risk processors to impose what’s called a rolling reserve. With a rolling reserve, the processor will hold a percentage of your sales. The processor will disclose the percentage and the length of the hold to you prior to the account set up.
Did You Actually Read the T&C of the Merchant Agreement?
While researching to find your credit card processor you will speak to many different sales people and receive numerous quotes. However, you can’t simply make your decision and start processing immediately. In order to get a merchant account you must apply and be approved to use the service.
Part of the application paperwork will include the terms and conditions of the merchant agreement. The T&C will govern the usage of the service and the relationship between your business and the processor. It is a very important document.
It should be obvious that you should read the T&C of the merchant agreement of the Best High Risk Merchant Account before signing the contract and submitting your application. Why would anyone sign a contract without reading it? The reason is actually quite simple, and anyone who has seen a merchant agreement will know the answer: they are long legal documents filled with complicated legalese and confusing language.
Upon glancing at the paperwork, many people don’t bother reading. We’ve all been on websites or installed software that included long terms of usage that must be agreed to before proceeding. Few people (if any) actually read these documents. Your merchant account agreement should not fall under this category. It will have a major impact on your business and requires proper attention. Despite the fact that it may not be a thrilling read, as a business owner you must take the time to at the very least do a solid skim through the contract. The purpose of this is not to examine the language or try to review it like a lawyer would. What you are looking for is red flags. If anything comes up that causes questions or concerns you must raise them with your potential processor before proceeding. If you don’t do this you could be setting yourself up for frustration down the road.
The single most common frustration that merchants experience after signing the merchant agreement is that they do not end up receiving the pricing that they were promised by the sales person. This happens for two reasons:
- The merchant does not have an adequate understanding of merchant industry pricing.
- More importantly, the sales person may have been deceptive. The business owner accepted a verbal or email based quotation but did not read the contract to make sure they would receive what was promised.
The merchant industry is rife with confusing terms. In fact, merchant industry pricing is a topic worthy of an entire article on it’s own but here we will discuss it only enough to understand the basics of the issue. The most important thing to understand is that the rate that you pay fluctuates depending on the type of card used. This is because the “interchange” cost (the cost from Visa or MasterCard) varies depending on the type of card used. Cards that carry a benefit to the cardholder (like an airmiles card) and corporate cards are slightly more expensive to process. Some processors may offer flat pricing where the type of card does not influence the rate being charged, but in 2011 this is very uncommon. Fluctuating pricing is far more common because Visa and MasterCard have built interchange to vary depending on the type of card used.
With the understanding that the cost to the processor fluctuates depending on the card type, we can now understand why the cost to the merchant often fluctuates. Armed with this knowledge we can now discuss the worst pricing trick in the industry. The worst trick occurs when a sales person quotes an extremely low rate (often below interchange cost to the processor), but does not explain to the merchant that the pricing can fluctuate.
Are You Making Volume Commitments?
Some processing agreements have volume commitments that a merchant must satisfy. In other words, a merchant must process X amount of dollars per month. If the merchant doesn’t satisfy this volume commitment then the discount rate can be increased or other financial penalties can be applied. This practice is almost non-existent in Canada and Europe. It’s far more prevalent with US based credit card processors. A clause like this is unfair for most small and mid-sized businesses, and is absolutely outrageous for a startup. Be aware and make sure that there are no volume commitments in your processing agreement. the Best High Risk Merchant Account
As a side note to the volume commitments discussion, in some cases it is a fair fee. For example, an established business that processes 10 million dollars in sales per month would be able to negotiate a very low rate. The processor may roll out the red carpet and give them a fantastic deal. But if the merchant doesn’t end up driving that high transaction volume the processor could end up taking a loss (or at least make no revenue) in which case there was no sense in boarding the account. Again, this is something that doesn’t apply to small and mid-sized businesses. The reason I’m mentioning it is because many of the “pricing tricks” that exist in the industry originated for very meaningful reasons. It’s when and how a rule is applied that matters. What you don’t want to happen is to find yourself in a situation where you signed into a merchant agreement with some type of clause that you weren’t aware of that will have an adverse impact on your business.
Also note that the volume commitments discussed in this section are not to be confused with a monthly minimum fee, which is a standard fee to help a processor cover costs on dormant or inactive accounts. A monthly minimum is standard and fair, so long as it’s reasonable and clearly disclosed.