The global economy is growing because all industries work to achieve a common goal: the highest number of transactions that will bring the highest revenue possible (which is directly proportional to the number of sales).
However, the equation is not that simple. Customers, companies and bank institutions can’t work together if they aren’t getting the value that they are paying for.
The customer wants to get the exact product he ordered, with the precise quality and delivery as promised by the seller. The merchant wants to generate a sale, and gain revenue from the customer as fast as possible. The financial institution, on the other hand, wants that buyers and sellers keep the value of their agreement, without ever disputing the transaction or misusing the payment processing structure – because in the end, it is precisely the high risk merchant account provider that covers the maximum risk of payment processing.
Because financial institutions assume the risk associated with online payment processing, and it costs them money, they want to make sure that it is kept as low as possible. For this reason, they define businesses in 3 categories: Low, Mid, and High Risk. High risk businesses are the least likely to get a high risk processing solution with the majority of acquirers because they involve massive risk for all three parties.
Why is your business considered risky?
Being a high risk merchant is not easy in the fast-paced digital payment world. If establishing a profitable company online wasn’t already hard enough, some merchants may also get labelled as “high risk” by payment processors, ending up in a difficult situation for accepting payments online.
A high risk merchant processing solution/account is an agreement between a high-risk merchant and a high risk payment processor. A high-risk merchant owns a business that falls into a high-risk category.
Long story short, if you are a high-risk business owner, you need a high-risk merchant processing solution.
Here are some reasons why a new business may have been classified as high risk:
- 1. Your credit score is low.
- 2. Since your business is brand new, you don’t have a history of credit card processing.
- 3. Your business is in a new, emerging, unproven, or disreputable industry.
- 4. Your business only sells to customers in another country.
Some examples of high-risk businesses.
The most common high-risk businesses include (but are not limited to):
- Online Gambling, Online Gaming, and Casinos
- Sports Booking
- Travel and Advanced Booking
- Subscription-based services
- Telemarketing services
- Bitcoin Mining or Forex Trading
- Cannabis Products / Head Shops
- Online Dating and Adult services
- E-cigarettes and tobacco
How is the risk of a business determined by banks or a high risk payment processor?
There are many factors that might get your business labeled as high risk. They can be sorted into two categories: red zone (you operate in an industry that is considered high risk independently from your individual business history), or grey zone (businesses that are high risk due to their own processing history or performance).
These factors include (but are not limited to):
- Your sector is listed on a High Risk Industries List
- You are not compliant with the security regulations of your industry
- You are in a sector with high chargeback ratios
- You are in a sector with a high employee turnover rate
- You do business in countries with high chargeback risk (such as Brazil, Mexico, Russia, etc.)
- You’ve been previously labeled as a Terminated Merchant (TMF), which means that you’ve already lost a merchant processor due to an excessive number of chargebacks.
- Your business is relatively new, and with little to no credit card processing history.
- You have a bad credit card history (such as not paying bills on time, or not providing collateral for loans as high risk).
- You are experiencing a high number of chargebacks (above 1%)
- You are an international merchant with a multi-currency business
- You experience a high volume of refunds and returns
Problems faced by High-Risk Businesses in getting approved for a payment processing solution.
If your company falls into the grey zone, your business history is going to play a huge role in the type of credit card processing that will be available to you. New businesses without processing history are usually at a disadvantage, especially in the case of card-not-present payments where fraud risk is higher.
Generally speaking, businesses in the grey area with good processing and stable financial history can usually find a provider to help them enable online payments. However, it will be more challenging for young companies or companies with a poor history.
If your company falls into the red zone because you are operating in a high risk industry, you can still find a provider to help you accept payments online. High Risk Payment Gateway providers such iPayTotal are specialized in certain high risk industries and can help you partner with an acquirer to obtain a Virtual Terminal.
Reasons why payment providers label you as a high-risk business.
High Risk payment processors or banks, depending on who you are applying to, assume risk to provide you with merchant processing capabilities, so there is an approval process involved. The application process evaluates you and your business information in order to evaluate and hopefully minimize their risk.
Most merchant processors maintain a list of industries that they generally will not service due to their traditionally high-risk nature. It is the bank’s method of protecting its interests. Don’t take it personally if you are declined for being a prohibited business type, but do be aware that high-risk business types typically result in higher processing fees charged to the merchant to help cover the risk that is being assumed by the processor.
Some industries present more risk than others. The industry risk profiles are well grounded in decades of processing history by millions of merchants. For example, restaurants, one of the lowest risk merchant categories, may have an industry average loss ratio of less than 1 basis point (100 basis points is equal to 1%). That means for a group of restaurants processing $1,000,000, the merchant account provider can expect losses of less than $100. Conversely, for the travel industry, the average loss ratio may be 10x higher.
(Note: payments are taken on a website, over the phone, or through the mail or fax present much higher risk than in-person payments where the person is present and the card is swiped. Accepting tuition in person, then, is considered medium risk; if a merchant accepts tuition online, the risk is higher.)
If you fall into the “high-risk” category and are having trouble getting approved, explore other options by doing an internet search for “high-risk credit card processor.”
The TMF Match List is like the “blacklist” of merchant processors. Being on this register indicates that another bank has terminated a merchant account with you and has raised a red flag to the banking system that you are a credit risk.
To avoid this complication, make sure that any previous merchant accounts under your name were left in good standing. If you have any outstanding bills or fees owed to a previous provider, ensure that those are paid before expecting to get approved for another account.
Underwriters will consider how long a merchant has been in business, their financial wherewithal, and profitability. Here are a few variables that elevate risk: being new, expecting large volumes with minimal financial resources (e.g. requesting to process $1,000,000 in credit card volume with $10,000 in the bank), being unprofitable, having a high debt to equity ratio, a high burn rate and a high percentage of deferred revenue. None of these variables prohibit a business from getting a high risk payment processing solution/account, they just elevate risk.
Another factor underwriters look at in conjunction with the company information is the business principals’ creditworthiness. Because of the similarity in risk to a line of credit, providers will generally request a personal guaranty (especially if the business is less than 2 years old) from the business owner to try and prevent bad behavior. This can be waived if financials are provided and determined adequate to mitigate the risk.
Risk Associated with Billing Methods
How a merchant accepts payment can increase or decrease the risk of their business. Accepting payments in advance increases risk; the farther in advance payment is accepted, the higher the risk. If a merchant sells annual subscriptions, for example, and then goes out of business during month 5, there are 7 months of financial liability for the merchant account provider. The same applies to merchants who sell a product that is guaranteed for a year, or a service that is available for a year. Therefore, merchant account providers will want to ensure the merchant’s financial strength and previous processing history in order to approve this billing method.
On the other hand, accepting payments after the service has been provided can greatly reduce the risk on an account. A good example of this is a merchant that bills for their monthly service at month’s end.
Some merchants, such as advertisers, accept payment on retainer. This allows customers to put money into an account with the merchant, who gradually deducts their fees from that account as their services are provided. Since there is no expiration date on when that money may be used, the risk is similar to annual billing.
Costs for High Risk Merchant Accounts
High risk merchant accounts come with higher fees than traditional merchant accounts. Your specific business type, registration with card brands (if applicable), and other factors all affect your final costs.
If you choose to take both Visa and Mastercard and have an MCC that requires card brand registration, you’ll pay $1,000 per year for registration with the two companies. That registration fee is not in your processor’s control and is in addition to the per-transaction rates and fees.
Processors will set pricing and terms on a case-by-case business, reviewing the details of your individual needs. It’s a good idea to get quotes from multiple processing companies to compare costs before making a decision.
Why do high risk merchant accounts have higher rates?
High Risk 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 High Risk processor has to get courts involved.
Another reason is that High Risk 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 High Risk 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.
Merchant Account Provider’s Risk
Working with the new PSPs requires banks to adjust their level of vigilance to ensure the beneficial owner of the relationship is legitimate and is not conducting any activities that would violate AML, ATF or sanctions rules. Processing payments for third-party payments providers is relatively high risk for banks because the PSPs are themselves processing payments for someone else.
Regulations to govern these types of PSPs will be developed but in the meantime, banks cannot rely on any external measures that will provide comfort in developing relationships with such providers. In the absence of a regulatory framework, the onus is on banks to ensure they have strong KYC processes to implement when establishing relationships with these providers. The approval program is a key part of this process. This requires a high level of vigilance to ensure that any distributor that sells a bank’s products will adhere to certain rules and that the contract shows all the protecting clauses.
Banks must implement detailed policies that will govern the approval of these new PSPs. They need to understand what types of services these payment providers will offer and to what types of customers. Policies and procedures must be put in place to govern the relationship and ensure compliance with AML, ATF and KYC requirements. Knowing who the ultimate customer is has become very important in all areas of correspondent banking. Knowing the customer of your customers is also becoming paramount. This is difficult when the PSP is operating in a relatively anonymous fashion.
Once approval of a relationship has been established, the account needs to be regularly monitored for suspicious or illicit activity. Banks must make sure that the flows into and out of the account are in line with what the PSP has stated they would be. As this is a high risk area, these relationships also must be regularly reviewed. Documentation should be updated and policies and procedures also renewed. Technology plays an important role and account monitoring tools enable banks to identify suspicious transactions.
The compliance programs of banks exist to prevent accounts or products being used for illicit transactions. It is our duty to make sure these accounts are not used illegally. The general principle of the regulations that govern banks is that we must apply a risk-based approach to our customers and implement the necessary policies and procedures.
Thus, if you’re deemed as a high-risk business, your High Risk 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 to account freezes. During this freeze, you cannot continue to process credit or debit cards until the hold is lifted.
If there’s a suspicious activity with your merchant account, a high risk 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.
What can you do to save your high risk merchant account?
If you are an owner of the business that is marked as high risk, it’s better to find a reputable High Risk payment service provider that works with your type of business and trust this PSP the taking care of your payment transactions.
Such High Risk payment provider will consult you on what documents should be gathered, will help you to open a High Risk Payment processing solution and also will provide you with the best solutions for business.
While choosing the payment provider pay attention to these tips:
- Choose the PSP that works with merchants from your type of high-risk industry
- Never settle for the first offer. Choose a flexible merchant account provider to save money and hassle
- Make sure that you clarify a fee structure with your payment provider
- Manually review transactions where the customer’s authentication request was declined. Consider calling the buyer.
• Create and disclose all return, privacy, refund, return and cancellation policies.
• Review and batch transactions on a daily basis.
• Insist on proof of identification upon delivery for high priced items.
• Cancel orders immediately upon client request.
• Consumers change credit cards frequently. Work with your merchant account provider to set up automatic credit card updates.
In the era of digital marketing when businesses have to provide all kinds of value before winning a sale, businesses must go the extra mile to forge lasting relationships with each and every customer. Merchant service providers appreciate signals that business works to benefit its clients. Express client services take the form of emails to customers to report when an order is shipped that also provides the tracking code. Emails that explain an order is on backorder also indicates to merchant service providers that the high-risk business operates for the benefit of their customer base. Finally, satisfying customers demanding refunds may feel like short-term pain, but long-term reliability and respectability. Even if a business wins a chargeback dispute, that chargeback still remains on their record.
How can iPayTotal help you?
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.
To apply for a High-risk merchant account solution just fill out our online application form and we’ll get back to you and help you save time and save money. IPAYTOTAL is here not only to provide you with a High Risk credit card processing account but also to assist you and help you anytime (24/7). Whether you are planning to start a new business or need help to expand an existing business, we can help you. Our highly experienced and well-educated team, with more than a decade of experience in the industry, are always ready to help in giving you payment solutions to start your new business with safe and secure policies and also to expand your existing business.