2021 Ultimate Guide to High Risk Merchant Accounts

Over the past few decades, one of the most notable changes in consumer behavior is the switch from cash and check to credit or debit cards. The world is quickly becoming a cashless society in which more payments are made using a card to electronically transfer funds. This means for business owners who sell products or services to consumers, you will need a merchant account.

A merchant account is necessary for your business to process payments from credit or debit cards. It is an arrangement between the business owner or merchant and the bank and processing company for the transfer of funds or settlement of payments made on cards. The merchant account is a third party that holds the funds until they are transferred to your bank account.

Every business owner must follow a set of steps before they can be approved for a high risk merchant account. You will need to do the following.

  • Detailed Financial & Business Background Information
  • Business Type, History, and Personal Credit
  • Application Approval of Provider’s Underwriting Department

High-Risk Merchant Accounts are needed because credit card payments are more than a simple transfer of funds. You are really collecting the payment in advance which is before the product is delivered or knowing whether the customer is satisfied with the product itself. If the customer returns the product or claims the warranty, then your merchant account will face a chargeback.

This is the risk associated with merchant accounts. As with a line of credit, if you as the business owner cannot provide the money for the chargeback, then it falls to the account provider. Therefore, the provider of the merchant account is taking a risk.

Depending on the type of business you run, you may be charged a different rate for your merchant account. In fact, if your business is considered high-risk, you may have to apply for a high-risk account or not be able to enjoy the services you need to help run your business.

Understanding A High Risk Merchant Account

There are many elements of risk that are associated with opening a high risk merchant account. One of the most important is the type of business that you operate. There are some businesses that run a greater risk of chargebacks than others. These are considered high risk and therefore you may be charged higher fees as a result.

For example, the travel industry is considered a high-risk business not only because people often change their minds about traveling. There are also factors such as weather cancellations that affect the chargeback rate. In some cases, you may be denied a merchant account based on the type of business that you run.

What is true is that all forms of monetary transaction, including cash paid in-person, involves some form of risk. For example, credit or debit card payment is a higher form of risk compared to cash because of the greater likelihood of fraud. This is especially true for credit card payments made by phone, fax, or over the internet as opposed to directly to the merchant in the store.

The risk is calculated by the provider of the merchant account and used in totality with the other risk factors such as your personal credit history and so forth. But the risk assessment does not stop at that point. If your business suffers a pre-determined number of disputes, refunds, or chargebacks, then your business might be reclassified as high risk.

If your merchant account is terminated due to an excessive number of chargebacks, refunds, or disputes, then your business is added to the Terminated Merchant File. This means that if you apply to another provider to receive a merchant account, your business will be on that list. While it does not mean your business will be automatically rejected, it does mean if you are accepted that you may fall into the high-risk category. This also applies to individuals starting another business when their previous company had their merchant account terminated.

Keep in mind that the merchant may not always be the source of the chargeback. There are certain reasons that will cause the processor of the payment or the credit card company itself to be the source. In addition, there are times in which the credit card company may hit the payment processor with a penalty for having too many merchant accounts that have a higher than normal average of chargebacks.

And while this may sound surprising, there are benefits for business owners to have a high-risk merchant account under certain circumstances. This is because such accounts come with features that are not present under normal accounts.

  • Processing of Different Types of Currency
  • Processing of Higher Sales Volume
  • Billing that Reoccurs

This is because a high-risk merchant account involves a considerable number of factors that need to be assessed before the decision is made by the provider. Another advantage is that high-risk merchant accounts have a higher threshold for cancellation based on chargebacks compared to standard merchant accounts. And, if you lower your chargebacks, you may improve the standing of your business.

What Constitutes a High-Risk Classification?

Despite the many common factors, each provider has their own criteria for assessing the risk associated with each business. There are some providers with strict guidelines while others may offer exceptions. To understand if your business may be considered high risk, then these are the most associated factors.

  • Industry has High Number of Chargebacks, Returns, or Refunds
  • High Number of Sales: $20,000+ every month
  • High Sale Price: What you sell averages $500 or more each
  • Financial Documents are Inadequate for Expected Sales Volume
  • Accept Payment in Different Currencies
  • You Deal in Future Deliveries of Products: For example, concert tickets or hotel reservations
  • Long Chargeback Liability Period: For example, 18 months since date of sale
  • Terminated Merchant File: Your name is present
  • Insufficient Credit Card Processing History, Low Credit Score, and You Process Automated Recurring Payments

In addition, there are certain products or services that may be considered high risk as well. For example, services are considered a higher risk compared to physical products. But digital products are considered a higher risk compared to services. In addition, payments made in-person are considered lower risk compared to payments made over the internet, phone, or fax.

What Businesses are Considered High-Risk?

There are a surprisingly wide range of businesses that are considered high-risk in the eyes of merchant account providers. Such businesses include but are not limited to the following.

  • Debt Collection, Repair, and Consolidation
  • Businesses with Annual or Online Memberships
  • Credit Protection & Counselling Services
  • Bail Bonds, Check Cashing, and Financial Planning & Consultation
  • Gift Cards, Coupons, and Reward Point Services
  • Online Electronic Sales
  • Hypnosis, Horoscope, Psychic, Astrology, or Fortune Telling
  • Multi-Level Marketing (MLM), Mail Order and Telephone Order (MOTO), and Online Auctions
  • All Downloading Digital Products such as Movies, Music, or Software
  • Amazon, eBay, and Yahoo Online Stores
  • Travel Services (including Clubs & Agencies), Tour Operators, and Flight Charters
  • Telemarketers, Timeshare Advertisers, and Holiday Rentals
  • Antiques, Automotive Brokers, and Furniture Retailers
  • Voice Over Internet Protocol (VoIP) and Prepaid Calling Cards
  • Bankruptcy Attorneys and Attorney Referral Services
  • Discount Medical Services or Life or Personality Development Coaching
  • Modeling or Talent Agencies, Pawn Shops, and Real Estate Brokers
  • Home-Based Businesses, Check Cashing, & More

As you can see, this covers a wide range of businesses. With these industries being a necessary part of the world economy, it means that to thrive they will need merchant accounts. But that does not mean the avoidance of consequences.

High-Risk Merchant Account Concerns To Watchout For:

It’s little wonder that payment processors and providers prefer low-risk industries over high-risk ones. Which is why it is more difficult to find a specialized processor where your application will be accepted, but many are with higher fees attached. Keep in mind that not all processors are alike as some cater to high-risk industries. This means that approval is easier even if you pay a higher rate.

However, the issues associated with a high-risk business include but are not limited to the following.

A Rolling Reserve: It is required by providers that the merchant using a high-risk account have a rolling reserve available. This is normally a savings account that does not accrue interest. This means if a chargeback should occur, the reserve will be able to absorb it. This provides an extra layer of security for the high-risk merchant.

Chargeback Fees: For every chargeback that happens to your account, you will be charged a fee that is higher compared to normal accounts. The higher fees are usually encouragement for businesses to focus on reducing the number of chargebacks whenever possible.

Contracts: For businesses that are not in the high-risk category, the standard contract is for three years and automatic annual renewals after that. But it gets even better as once the standard contract ends, the shift is really towards monthly agreements. This means that a business owner can leave at the end of the month and switch to another company.

The same cannot be said for high-risk businesses as they are often for five years and with automatic annual renewals. Depending on the reasons why you received a high-risk merchant account, this can be troubling if you find a better deal somewhere else but are still locked into your current contract. This means early termination fees which may be considerable.

Higher Rates & Fees: This is the most common associated risk and an understandable one. Even if you have good credit, the nature of the business itself means a higher chargeback, return, and refund rate. The fees are most often associated with the setup process. This means that unless you have a good profit margin, you may suffer because of the higher processing rates.

It also does not help if you have personal credit issues or a history of chargebacks that can affect your profit margins.

How to Choose the Right High-Risk Merchant Account Provider?

If you are going to pursue a high-risk merchant account provider, it is important that you be aware of the dangers involved. While most providers are reputable, there are some that have predatory practices. This means that they charge fees which are unreasonable. Unless you do your research, it can be quite difficult to distinguish between the reputable providers and those that will bleed your company dry with high fees.

What follows are some tips that will help guide you in finding the right provider of a high-risk merchant account.

Check Out Their Website: While the old saying is that you should never judge a book by its cover. You should look at the website of the high-risk merchant account provider to see if it is up-to-date and professional. It does not have to be fancy, but a basic or outdated-looking website is an indication that the company is not keeping up with the times. While not a deal-breaker, it should be a big warning sign that something may not be right.

Customer Reviews: A great place to start is Google Reviews and even more importantly, the Better Business Bureau (BBB). Keep in mind that even the best companies will have a few negative reviews. What you should be looking for is a pattern, such as high fees, hidden information in the contracts, and the like. The overall quality of service is another indicator that something may not be right.

Sample Contract: There should be a sample contract or online application form. Look it over and check out the details carefully. The small print is the place to look for any additional cost or fees that might be associated with signing up with the company.

Keeping Your High Risk Merchant Account in Good Standing in 2021

Keeping your credit in good standing is very important as it indicates that you are abiding by the terms and conditions of your credit card agreement. However, this is not what having ‘good standing’ is all about. There are a number of other factors involved and they vary from one credit card issuer to another. One thing is for certain, it clearly refers to the fact that you make at least the minimum payment by the due date every month. According to most credit card issuers, good standing means staying below your credit limit and keeping your account active. Your other accounts, e.g. loan account, checking account, etc. can affect your overall credit card standing.

Considering all these factors, it is crucial that you maintain a good standing with all your accounts.

What Are the Consequences of Losing Good Standing?

There are a number of key benefits of keeping your credit in good standing. These include the ability to make purchases up to your credit limit, redeeming certain exclusive credit card rewards, and more. However, once you lose your good standing, the consequences can be severe:

  • Added Fees to Your Bill: The most common penalty for making a late credit card payment is the added fees to your bill. It can occur even if you are just one day late.
  • Lowered Credit Limit: If you have high balances on your other credit cards or you make late payments, you can expect your credit limit to be lowered by the credit card issuer. Keep in mind that having a lowered credit limit doesn’t always mean that you are not in good standing. Credit card issuers sometimes do this for business reasons.
  • Increased Interest Rate: If you are late on your credit card payments for more than 60 days, the consequences are severe. This could lead to increased interest rate for all the new purchases you make on your account indefinitely.
  • Rewards Are Forfeited: If you miss a certain number of payments, you risk becoming ineligible for credit card reward programs. The criteria for this varies from one credit card issuer to another. Some reward programs restore your rewards once you have fixed your account, while others forfeit them indefinitely.
  • Suspended Charging Privileges: When you lose good standing of your account, you risk getting your charging privileges suspended for a set period of time. These privileges are restored once you fix your account.
  • Your Account May Be Closed: This is no doubt the most severe consequence of losing your good standing. This happens when you let your credit card remain dormant for several months or you continue to be late on payments delinquently. Once your account is closed, you will most likely need to apply for a new one. Keep in mind that even after your account is closed, you are still required to make monthly payments.

What Action Should Be Taken:

If you are seeing any problems with your credit card account, such as rewards unavailability, credit card purchases being declined, increased interest rate on credit card purchases, etc. then it is recommended that you contact your credit card issuer. If your account hasn’t become too delinquent, then it is likely that you will be able to correct the negative actions and hence restore the privileges for your account.

From the above-listed consequences, it is clear how important it is to keep your credit in good standing. And your relationship with your credit card issuer is only one factor that can lead to this problem. There are many other certain actions that can put your credit profile at risk. These include being late on your credit card payment for more than a month, making a negative entry on your credit report, becoming 90 days past due, etc. All these actions can negatively affect your credit score.

In conclusion, keeping your credit card in good standing is the key to maintaining a good credit score. Make sure your account history is good even if your current standing is positive. This is because even a slight problem, e.g. late payment, can lead to a notice remaining on your credit report. In some severe cases, certain notices stay with your account for seven years from the date of delinquency even if you have fixed your account. Your credit card issuer can decline interest rate decrease or credit limit increase if your credit report shows ignorance or mistakes in properly handling your account.

Chargeback Alerts: Can Save Your High Risk Merchant Account

No merchant wants to be on the receiving end of a chargeback. This is because the entire experience can be quite frustrating as the merchants generally have no power to prevent, stop, or reduce chargebacks – simply because they are not involved in the process until the very last stage.

Generally, there is a 90-day period in which consumers can open dispute to an unrecognized or suspicious transaction on their card. After that, issuers can take up to six weeks to review the dispute (Visa does it in 20 days) before notifying the acquiring bank. Only then, all the involved parties, including the merchant, are made aware of the dispute.

There is one significant problem with this system: the merchant is notified way too late. By the time the notification arrives, it’s far too late for them to take any meaningful action to resolve the dispute. The chargeback process is already initiated which means the dispute has been accepted by the issuer and the notification to the acquiring bank has been sent.

However, all is not lost, there are ways to prevent this outcome from happening. One of the best options in this regard are the chargeback alerts. A chargeback alerts has been designed to meet the growing demand from merchants so that they are able to effectively respond and resolve any dispute before the actual chargeback process is initiated.

What Are Chargeback Alerts?

Now, you may be wondering, what exactly is a chargeback alert? In layman terms, it is a notification system developed for merchants where, any time a consumer contacts their issuer to initiate a chargeback dispute, the merchant is notified. Thanks to the timely information, merchants have a valuable window of time to respond before the chargeback process is initiated.

Overall, the chargeback alert notification system is highly beneficial for merchants as it empowers them to quickly respond to a dispute, make a decision, and have the sufficient time to resolve the issue or initiate a refund directly with the consumer – privileges that they never had before. If the dispute is resolved before the chargeback is initiated, it is closed before it reaches the acquiring bank. This essentially saves the merchant from the irreversible and time-consuming chargeback process that could take up at least six weeks.

How Do Chargeback Alerts Works?

The state-of-the-art chargeback alert systems and fraud prevention tools, e.g., HRMA-LLC Chargeback Alert Service, work alongside an extensive network of merchants, banks, and issuers to prevent chargebacks and fraud by sharing critical information. When a consumer contacts their issuing bank to initiate a dispute regarding a transaction, the issuer’s system sends a notification to the merchant, this happens in real-time so there’s no delay. This is a very important notification as it gives the merchant the power to take action whether it be a decision to let the chargeback initiate, a move to stop the order from being processed, or offer a refund.

Generally, chargeback alert systems offer multiple points of access. Merchants receive alerts to resolve them quickly. The first is an online alert portal that is designed to help high risk merchants seamlessly view and manage their dedicated dashboard. Second is via an Application Programming Interface (API), which you can easily integrate into your current merchant system. The key benefit of this route is that you won’t need any additional sign-ins, and you can integrate with your existing order fulfillment and sales systems.

The initial setup of an API can be time-consuming but in the long run, it is worth it because it allows you to automate manual steps in the entire chargeback process. This greatly streamlines the workflow. Overall, this will save merchants both money and time, and allow them to recover goods/services while alleviating confusion and frustration that usually come with the dispute resolution process.

Overall, the chargeback system can be very frustrating for merchants, considering how time-consuming and irreversible it is. Not to mention the negative financial impacts. Since the process can hit merchants the hardest, it is unfair that they are the ones who are notified in the final stages. Fortunately, there are solutions that have been designed with merchants in mind. There are tools that offer reliable, responsive, fast, and actionable solutions for mitigating chargebacks and preventing fraud. The benefits of these systems are numerous, ranging from getting notified in real time when a consumer opens a dispute regarding a transaction, to helping you maintain the ideal fraud ratios. Chargeback alerts are an ideal solution that offers much-needed peace of mind to high risk merchants and helps them focus on what matters the most – offering a great overall experience for their consumers.

About The Author

Marks Sands co-founder of High Risk Merchant Account LLC, an authoritative expert in the high-risk merchant account space.
Mark has decades of experience in the payment industry & enjoys writing on entrepreneurial related topics.

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