When opening a merchant account, a business owner must understand whether this account will become a high-risk one. Today we will explain what is a high-risk merchant, which industries automatically drive any business into the high-risk category, and how to get a bank loan with this type of merchant account.
What is a high-risk merchant?
A high-risk merchant is a merchant with a high-risk merchant account whose business is considered to be high-risk by payment service providers, payment gateways, and especially acquiring banks.
A high-risk business is a business that fits into one of the categories of being money-wise risky for banks. Mainly these categories are divided by two directions: a business that works within a high-risk industry, or a business that experiences a significant amount of chargebacks.
How business owners can be seen as high-risk merchants?
Several possible factors can drive a business into the high-risk category:
- The business operates internationally or in countries with a high chargeback volume risk;
- Most of the businesses operating outside of Canada, the US, Australia, European Union, Japan, South Korea, or Singapore;
- The business from an industry with a high chargeback volume;
- The business that offers subscription-based products or services;
- A new business with very little or lack of credit card processing records;
- If a business is multi-currency one;
- The business sells products or services that result in high-dollar transactions;
- The business is labeled as a terminated merchant which has lost the previous merchant account because of the high chargeback volume;
- The business has a bad credit history;
Any merchant can become a high-risk one. It is enough just to jump over the established chargeback ratio or offer the service with a subscription payment model. By the way, we recommend this article to understand what the chargeback is and why it is so dangerous for any business “What is a Chargeback?”.
Why do banks label a business as high-risk?
Banks are responsible for issuing merchant accounts, setting up electronic payment methods, and enabling businesses to collect these payments. Working with the low-risk business is more secure, as the low-risk merchant account is safer in terms of chargebacks, potential fraud events, business credit history, and so on.
Merchant accounts for high-risk businesses are more dangerous for banking systems to operate with. They may have a less stable financial environment by generating a high volume of chargebacks or being a threat to the bank with its bad credit history. If you want to go deeper into what the merchant account is and how to set it up the best, follow this link “Why do you need a merchant account and what you need to know”.
Is it bad for the business to be considered high-risk?
The short answer is not necessary. The business can simply fit into the high-risk category just because of the industry it operates within or because of its short credit history. The multi-currency approach and international markets are also not well-trusted by the acquiring banks.
The actual negative thing about the high-risk label is that high-risk merchant account services cost more than the same services for low-risk merchants. Transaction fees, monthly charges, and all the other service payments are usually higher. The reason is again the lack of trust in the high-risk merchant accounts.
Usually acquiring banks charge the most, demand long-term agreements, and request a lot of paperwork. For the high-risk merchant account owner, a better option may be a payment service provider. Here we have an article that explains the difference between an acquiring bank, payment service provider, and payment gateway services for the low and high-risk business: “Are you using the right merchant services provider?”.
Payment service providers offer various merchant services for high-risk businesses, including merchant accounts, payment processors, and payment gateways for lower fees and without heavy obligations. Payment gateway services set up only the web-based tool for collecting payments online, but it can be perfectly enough for the high-risk business that already is using other complimentary services.
Which industries do banks consider high-risk?
A high-risk merchant account refers not only to those industries that deal with adult content, gambling, and casinos. A high-risk merchant account can belong to those merchants who offer travel services, to airline companies, movie streaming platforms, social networks, and life coaching businesses.
Here are some of the more common industries that are considered high-risk. You can always consult with the bank or a payment service provider on whether your company falls under this classification.
- Adult entertainment;
- Subscription-based businesses;
- Gambling and betting;
- Multi-Level Marketing;
- Travel agencies;
- Online casinos;
- Dating sites;
- CBD products;
Tips to qualify for a business loan in a high-risk industry
It can be complicated to gain the trust of financial institutions for high-risk merchant account owners. But here are some tips on how to be qualified for a business loan.
- Eligibility. Different financial institutions work with different business industries. Before applying for the loan, we advise verifying the business type eligibility for it.
- Business plan. We recommend having a precise plan of the development, a strict schedule, along with a professional strategy. These simple steps can help the financial workers to see how their investment would be applied.
- Debts pay off. It is important to take care of the credit history even if it is quite short. High-risk merchant account owners should pay off all the possible debts before applying for the new loan.
- Collateral. Another tip to get the loan is to secure it with collateral. By doing so a high-risk merchant account owner shows to the financial institution his or her reliability.