igh-risk credit card processing can be complex, but with reliable high risk merchant account provider things will be easier for high risk merchants.
Nowadays running any business requires that every merchant must give their customers the option of paying with credit or debit cards. In case you are in eCommerce business, credit/debit cards are just about your solitary option for getting paid. Albeit small merchants can get by with a payment service provider (PSP), for example, PayPal or Square, when your business achieves a certain size, you will need to move up to a full-service merchant account. While it would be decent if credit card processors treated all organizations equally, the truth of the matter is that they don’t. Larger, high-volume organizations get lower processing rates and regularly get more liberal contract terms.
Businesses are also treated differently depending on the level of financial risk they present to their processor. All processors will cautiously judge your business to decide if you fall into the “high-risk” category.
If for reasons unknown, your business is categorized under high-risk one, the results can be serious. Most of the processors will basically decline to approve you for a merchant account, while others will charge you undoubtedly higher rates and fees than you would some way or another need to pay.
Much like applying for a loan, when a business owner applies for a merchant account, there is an underwriting process the account provider (or loan provider) will go through to estimate the risk of adding your account to their portfolio.
Some of the points taken into consideration when applying for a merchant account are:
- Your personal credit history
- Company financials
- Number of years in business
- Merchant account history such as if you ever had a merchant account before. If so, do you have a history of chargebacks and have you been blacklisted on the MATCH list or Terminated Merchant File (TMF).
Are you in good standing?
Type of business or merchant category code
It’s the last one that’s the kicker. The type of business you operate will have a significant impact on the rates you pay per credit card transaction.
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.
What Happens If You Are Labeled a High-Risk Merchant?
High-risk merchants don’t qualify for traditional processing agreements. They’re stuck working with acquirers and processors who offer high risk merchant services and are willing to accept liability for the increased risk associated with these businesses (known as a high-risk payments processor). As you might imagine, “high risk” service comes with a higher price tag.
First and foremost, if you want to accept credit cards as a form of payment, there is going to be a cost associated with doing so. The major card networks (Visa, Mastercard, Discover, and American Express) charge interchange fees to use their network and the Merchant Service Providers (MSPs) charge processing fees to connect the card issuing bank to the acquiring bank via payment processors like First Data or TSYS.
Since the merchant account provider and the processor assume the majority of the risk during a transaction, they charge fees for their services on top of the interchange fees that the card networks charge. As any smart business that takes on risk would do, these companies try to their minimize risk by imposing higher premiums on merchant accounts that are deemed risky.
Typically, a high-risk merchant account is a business or an industry that is notorious for chargebacks and fraud, borders on the legality or is considered risky by association.