When a business is at a higher risk of fraud or chargebacks as compared to those average merchant account, then it is most likely that your payment processor will classify you as a high-risk merchant account. High-risk merchant accounts are subject to higher processing costs as a way of compensating the payment processor for the risk it is taking on, which is why selecting experts like TailoredPay and undertaking a TailoredPay High-Risk Merchant Account can be a good idea.
How is an Account Classified as High-Risk?
Whenever your account has been determined by the payment processor that it has an increased risk for chargebacks, fraud, or a high amount of returns, then your account will be categorized as high-risk. A variety of factors could contribute to this, including the fact that you are a start-up merchant that has never accepted payments before, or just because your sector is deemed high risk and also has a high probability of fraud (for example, controversial products). Merchant accounts with a high level of risk are subject to increased processing costs in order to compensate for this risk.
High-Risks Merchant Accounts Entails Higher Costs
Even though every credit card processing is distinct from each other, for accounts that are classified as high-risk, these shall be subjected to additional costs across the board. In general, processing fees for all activities will be higher, often more than twice as much as those for low-risk merchant accounts, as a result of the increased risk. Despite the fact that low-risk merchants are also subject to chargeback costs (a price you pay when a client disputes a charge straight with their credit card), high-risk merchants are subject to significantly greater chargeback fees on average.
When you are a high-risk merchant, you may be required to lock into contract terms that are longer, be required to pay an early termination fee, or be required to pay a monthly or annual cost by reason of the risk. Payment processors that deal with high-risk merchant accounts may also impose a rolling reserve, in which case they hold back a specific percentage of your revenue until they can confirm that your transactions were neither fraudulent nor in danger of chargeback.
Factors That May Cause a Merchant to be deemed as High-Risk
It is possible to be classified as high-risk by a payment processing platform for a variety of reasons. Some of these reasons are clear, while others are more complicated because the parameters for high-risk merchant accounts vary from provider to provider, but in general, the following are the characteristics of accounts that may be classified as high-risk:
- A large number of transactions. Merchants who conduct a large number of transactions or who have a high average transaction rate may be deemed high-risk by financial institutions. If a merchant handles more than $20,000 in transactions per month, or if the average transaction value is $500 or more, they may be considered high-risk by the financial institution.
- Accepting payments from overseas customers. When a merchant sells to customers internationally in countries with a high risk of fraud, they may be classified as high-risk (these are any country aside from the U.S., Canada, Japan, Australia, or the countries in Europe).
- New merchant. If a merchant has never accepted payments before or has only a limited history of transaction processing, they may be labeled high-risk merely because they do not have a track record of successful transactions to draw upon.
- The industry alone is high-risk. Despite the fact that a merchant may have a clean track record, they may be classified as high-risk because the industry in which they operate is regarded to be more susceptible to fraud, refunds, and chargebacks. For example, subscription-based businesses are classified as high risk since many customers join up for a trial and then forget to discontinue their payments after they have finished. When they review their statements and discover the unpaid charges, they frequently charge the payment back to the credit card company.
- A poor credit rating. It is possible that the merchant will be considered high-risk if they have a low credit score.
High-Risk Business Types
It’s vital to know in advance whether your industry is classified as high risk so that you can plan appropriately. Several enterprises fall within this category, including the following:
- Adult industry
- Travel-related services, such as airlines, cruise companies, and vacation planners.
- Electronic and furniture retailers
- Gambling
- Dating over the internet
- E-commerce
- Pyramid Schemes (MLM)
- Retail establishments that sell e-cigarettes, CBD, and vape juice
- Subscription services and businesses that charge on a recurrent basis
- Debt collection
How Does a High-Risk Merchant Account and a Low-Risk Merchant Account Differ?
There are a few common indicators that indicate to a payment processor that a merchant is a low risk. Merchants that are considered low-risk often possess the following characteristics:
- Low monthly number of transactions (less than $20,000)
- Transactions worth less than $500 on average
- Low-risk business operations in a single nation such as the United States, Canada, Japan, Australia, and the European countries.
- A single unit of account
- Very few chargebacks or none at all, and a low return percentage
- Labelled as low-risk industries
Obtaining Approval for High-Risk Merchant Accounts
By emphasizing their business’s finest characteristics, high-risk merchants can enhance their acceptance rates. A cover letter should provide relevant data, such as the industry expertise of the project’s participants. Additionally, merchants should explain anything that distinguishes their firm, such as proactive fraud monitoring.
In a cover letter, address the issue of excessive trade volumes. Trading volumes have an effect on the processing company’s risk. Demonstrating a solid processing history and a high volume of money going through the organization can significantly boost the likelihood of acceptance.
Lastly, high-risk merchants must have a strategy in place to deal with lengthy fulfillment times. The term “fulfillment duration” refers to the time period between money collection and product delivery. The greater the delay of fulfillment, the greater the chance of chargebacks, and hence the riskier the firm. Finally, bespoke accounts mitigate the risk associated with chargebacks. If you are forced to extend the time of your fulfillment due to circumstances beyond your control, you risk receiving consumer complaints and chargebacks. Not to fear; high-risk merchant accounts provide enhanced provisions for these unforeseen circumstances.