What is a high-risk merchant account?

A high-risk merchant account might sound like trouble, but that is not true. Knowing how to treat a high-risk merchant account, which businesses get labeled as high-risk, and why is it actually so is a must for a proficient merchant. Today we will explain what a high-risk merchant account is and what we recommend to the owner.

What is a high-risk merchant account?

A high-risk merchant account is an account that is issued for a merchant whose business is considered high-risk. A high-risk account can be issued by high-risk merchant account providers or by acquiring banks. Let’s go deeper into what is a merchant account itself, and why some businesses are called high-risk. 

A merchant account is basically a bank account, which exists only for collecting electronic payments from credit and debit cards, local payments, and alternative electronic payment methods. Getting a merchant account is a must for any business that aims to operate with electronic transactions. 

A merchant account does not substitute a business account, nor a personal one. It is quite the opposite, a personal account and especially a business account are needed for the establishment and proper functioning of a merchant account. Do not mix a merchant account with the merchant ID, for more clarification, check out the article: “What are MIDs in payments?”

The trick about these accounts is that transaction incomes are sent to a merchant account, but they can not be spent or sent to any other space except a business account that belongs to the exact same merchant. If this seems a bit confusing we have an article “Why do you need a merchant account and what you need to know” that will definitely clarify the situation.

A high-risk business does not mean illegal business. It also does not mean a business that deals only with adult products or gambling. There are a lot of factors that can put any business into the high-risk category. 

For example, a certain business location, and multi-currency operations can label a merchant account as high-risk in the same way as bad credit history. To be short, a high-risk business is a business that is unstable for some reason in the eyes of acquiring banks that issue merchant accounts. 

Is it bad to have a high-risk merchant account? Absolutely not, if you know how to deal with it. High-risk payment processing requires more attention, potential multiple merchant accounts, and higher fees to pay off the lack of trust among acquiring banks. Later on, we will describe what brings a merchant account to the high-risk category.

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

A high-risk merchant service for an account would not differ in the variations or functionality. The main distinction is in the service itself and payment processing of the high-risk merchant account.

Differences between low-risk and high-risk merchant accounts:

• The merchant account opening. The first step can be the most challenging. Acquiring banks have not much trust in high-risk payment processing, so not all of them are going to allow these kinds of merchants to start an account.
• Charges and fees. The unavoidable fact of having a high-risk business is paying higher fees for all the features: for setting up a merchant account, for its maintenance, for payment processing, and payment gateway.
• The life cycle of a merchant account. In some high-risk industries, merchant accounts can have a life cycle of 6-12 months. Which is very little for business development. Mostly, this is due to the accumulated chargebacks, if the chargeback ratio breaks the limit, an acquiring bank can terminate a high-risk merchant account.

Why do acquiring banks treat high-risk businesses so poorly?

A financial institution naturally has more trust in businesses that are stable and bring no or minimum chargebacks. And high-risk payment processing is well known for crossing this line. So a chargeback is basically a demand for the transaction reversal initiated by a customer for the product or service in that case when the customer is not satisfied in some way and he or she can prove it. 

This dissatisfaction can come from a damaged product, poor service quality, lost goods, and other delivery troubles. You can read about it here in more detail: “What is a chargeback?”.

Any customer has a right to demand a chargeback. The thing is that when a chargeback is issued and confirmed by the bank, the funds to the customer’s account are taken from the special reserve of an acquiring bank, and only later the same amount plus extra charges are demanded from a merchant. 

The trouble starts if this reserve for chargebacks is overwhelmed. Then a merchant is facing huge charges and regulations. And also, the reputation of a merchant gets damaged: with a lot of chargebacks points to potentially a bunch of dissatisfied customers (which is very often not true). 

This is actually a reason why a refund is better for the business than a chargeback. By the way, we have an article on avoiding massive chargebacks “Prevent chargebacks and fraud with Maxpay’s merchant account services”.

Who needs a high-risk merchant account?

Here is the list of the factors that turn a business into the high-risk one:

• The business with a bad credit history.
• The business, which has a background as a terminated merchant, meaning it has lost the past merchant account due to the high chargeback amount.
• The business within an industry with a potentially high chargeback amount.
• Any business that sells subscription-based products or services.
• The multi-currency businesses.
• The business that offers products or services that result in high dollar transactions.
• The international business or location of the business within a country with a high risk of chargeback accumulation.
• Most of the businesses which work externally – out of Canada, the US, Australia, the European Union, Japan, South Korea, or Singapore.
• The business is new, with very little or no credit card processing records.

As you can see from this list it is not necessary to deal with gambling to get the high-risk label. All subscription-based products or services are considered high-risk, which means that well-known video on demand platforms belong to the high-risk payment processing. Besides that, there are a lot of industries such as airlines, life coaching, and social networks that automatically get the high-risk label.

High-risk merchant account fees

Fees are definitely higher for the merchant accounts for high-risk businesses. But at least there are options. Surely acquiring banks require massive charges at every step of banking services. While paying for every service is totally normal, some high-risk merchants can pay twice as much as low-risk businesses. 

Here we recommend looking for a payment service provider. Instead of an acquiring bank, a PSP demands fewer charges, less documentation as well, and generally it works with high-risk merchants not differentiating them much from low-risk merchants.

Recommendations for high-risk merchants

For opening a high-risk merchant account. In this case, there is an alternative option to partner with payment service providers instead of acquiring banks. PSPs also can issue merchant accounts on behalf of acquiring banks requiring less documentation, lower fees, and providing more customer help. 

For extending the life cycle of a high-risk merchant account. In this case, we advise you to think of multiple merchant accounts especially for industries with a fast life cycle. Multiple merchant accounts protect a high-risk business from being completely shut down by an acquiring bank. While one merchant account can be terminated because of the chargeback accumulation, the parallel merchant account would be functioning as the backup just alright.

Maxpay is a payment gateway service provider that helps companies with multiple merchant accounts opening and provides other services businesses require. Visit our website for more information.