What is a High-Risk Merchant Account

What is a High-Risk Merchant Account

Accepting payments online is a must for any business wanting to compete in the e-commerce market.
Most companies apply for a merchant account by contacting a financial institution. Processors of financial transactions will evaluate your company and assign it to a “high risk” or “low risk” category based on their findings.

High-risk merchant accounts allow businesses at risk of chargebacks to accept customer payments.

Understanding High-Risk Merchant Accounts

A payment processor may classify a company as a “high-risk merchant” if they deem it particularly risky. A company may be assigned a high-risk merchant account if it is considered to have a high probability of fraud and chargebacks. Because of this safeguard, payment processors can assume some risk without running the risk of going bankrupt.

On the other hand, low-risk merchant accounts are available to businesses that are not as likely to experience high fraud rates, chargebacks, or returns.

Justifications for Labeling a Merchant as High-Risk

While some of the reasons a payment processing platform may label you as high-risk may be obvious, others may be more subtle. High-risk merchant accounts meet specific general criteria but are defined differently by each provider.

1. Massive Numbers of Purchases

When a merchant processes a lot of transactions or has a high rate of transactions per customer, they may be labeled as high risk. If a merchant processes more than $20,000 in monthly payments or their average transaction amount is $500 or more, they may be considered high risk.

2. Taking Payments from Around the World.

A business may be classified as high-risk if it caters to customers in countries with a high fraud rate.

3. Fresh Businessman

A merchant may be labeled as high risk simply because they have no track record of successfully processing payments or only a limited history of successfully processing transactions.

4. Occupations with a High Potential for Harm.

Even if a merchant has never had a problem with fraud, returns, or chargebacks, their industry may be considered high risk. Subscription businesses, for instance, are considered risky because many customers begin free trials but fail to cancel their recurring payments. Customers frequently dispute payments after discovering previously overlooked charges on their monthly statements.

5. Poor Financial Standing

If the merchant’s credit score is low, doing business with them may be risky.

High-Risk Industries and Businesses

Knowing whether or not your industry is high-risk can help you prepare for it. Companies in this sector include:

  • the adult entertainment sectors
  • the travel sector (airlines, cruise lines, and vacation planners)
  • the furniture and electronics industry
  • the gambling sectors
  • the multi-level marketing sectors
  • the e-cigarette, CBD, and vape retail sector
  • the subscription services sector
  • the debt collection sector.

Rewards of a High-Risk Merchant Account

It might seem like most of the articles cast a negative light on high-risk merchant accounts. Of course, that’s not the case. The cloud doesn’t lack a silver lining. Once again, we see that the primary criterion for categorization is the economic sector they serve. And it’s clear from the list that many of them have practical applications. Possessing a high-risk merchant account can help you in three key ways.

1. One benefit is access to markets all over the world.

The advent of ubiquitous high-speed internet, digital tools, and the meteoric rise of social media and e-commerce have created a growth opportunity that a small domestic player could never hope to exploit.

2. You’ll need a high-risk merchant account to sell in more precarious markets.

Those who prefer to err on caution and use low-risk merchant accounts don’t have access to this resource. The high-risk merchant account holder will gain the wisdom to successfully navigate the market and maximize sales and profits after making a few risky transactions.

3. Third, there is one more benefit, this one less obvious.

Markets with a low-risk profile are not immune to payment failures, refunds, and cancellations. In the event of multiple unsuccessful transactions, a merchant’s “low-risk account” with a payment gateway may be closed. The sudden shutdown of the business will be very upsetting for the shop owner. What could be worse for a businessman than a clogged pipeline? It rarely occurs with high-risk merchants. Due to the higher fees associated with high-risk payment gateways, they are more lenient in their account termination policies than their low-risk counterparts.