Starting a new business can mean many things to different people, but one thing is true across the board, the mode in which you accept payments must be solid. Accepting debit and credit payments is just the tip of the iceberg. Understanding whether or not your business is categorized as high-risk or low-risk, and which type of merchant account is best suited for you, must be factored into your plans. You may be wondering how high-risk and low-risk merchant accounts differ from one another.
When a merchant account is classified as high-risk, the credit card processors that provide high-risk merchant services are also known as merchant service providers or payment service providers. There is a higher probability that you will experience many chargebacks and refund requests on your credit card transactions.
Therefore, having a low-risk merchant account means the risk is lower to experiencing chargebacks.
A merchant account is a particular bank account that permits businesses to accept payments through several channels, most frequently credit cards and debit cards. When an acquirer and a merchant acquiring bank enter into a contract, a merchant account can be created to process and settle payment card transactions. In some cases, the merchant agreement may also name other parties, like a payment processor.
Once a payment processor has created a merchant account for your company, you can start accepting credit and debit cards from customers as payment for goods and services.
Several factors contribute to the classification of merchant accounts as high-risk. One consideration is the age of the company.
That designation can change over time, but only if you don't meet the other criteria listed below.
The fact that chargebacks have historically been common in the merchant account industry is another factor contributing to their high-risk status. For instance, chargebacks are a problem for subscription services because customers sign up for the free trial and then have to pay for it with their credit card. The day before the first payment is due, they fully intend to cancel the trial but fail to do so. They ask the merchant to issue a chargeback to their bank to have the money credited to their account once they realize they have been charged, rather than cancel the subscription and bear the cost of their error.
Other retailers are classified as high-risk due to their high sales volume or their sale of pricey goods like luxury goods, high-end electronics, and even automobiles.
Additionally, as was already mentioned, some retailers engage in industries like adult entertainment, CBD, and gambling that banks fear will damage their reputation.
What businesses are included in a Low-Risk merchant account?
Among the traditionally low-risk industries are:
An account with a low statistical likelihood of costing the bank money or luring widespread fraud is considered a low-risk merchant account. As a result, the payment processor views it as a wise financial decision, or at the very least, a safe one.
A business that banks and card processors believe is likely to go bankrupt is considered high-risk. If a company operates in a financially dangerous sector with a high rate of chargebacks, credit card processors and financial institutions classify it as high-risk.
Here are some examples of high-risk retailers:
A high-risk merchant account is a special account that imposes more conditions, and limitations on the retailer and usually carries higher fees. Merchants in high-risk industries or with a high rate of fraud or chargebacks use these accounts.
If they switch accounts, other merchants might discover that their regular payment processor offers high-risk accounts and be willing to keep doing business with them.
Due to the importance of having a merchant account for accepting payments, it is crucial for businesses to be aware of their chargeback ratios from month to month, and to maintain open lines of communication with their payment processors about the state of their accounts.
Companies that can't get a merchant account from a traditional bank must work with processors that offer high-risk merchant processing. We help our clients access the resources they require by making finding a high-risk credit card processor easier.
Merchants labeled as low-risk tend to not encounter as many chargebacks, more face-to-face transactions, and have smaller transaction amounts. However, the merchant might be relabeled by their payment service provider and dropped if they accumulated an unusually high number of chargebacks, for instance, or if they started keeping track of many more transactions each month. The merchant must then look for a new payment service provider to partner with.
The benefits of a low-risk merchant account are as follows:
A typical example of a low-risk merchant would be a physical cafe, bookstore, or eatery.
There may be a number of requirements you must meet in order to be considered a low-risk merchant, but the three that stand out as being the most crucial are low revenue, few transactions, and few chargebacks and returns. These are some additional characteristics that a low-risk merchant should have:
Examples of low-risk locations where business transactions take place include the United States, Europe.
You might be put in the high-risk category based on your processing history, specifically the number of chargebacks you have gotten. If your company possesses any of the following characteristics, it will be viewed as high-risk. These are the most typical ones, though other merchant account providers may add their own to this list.
Giving as much information as possible about your industry when applying for high-risk credit card processing and merchant accounts is crucial. The price estimate you receive may need to be more accurate if you attempt to hide the realities of how your business operates.
Expect to pay slightly higher fees if you are approved for a high-risk merchant account. This is because the bank expends more resources and runs a higher risk when bringing the special business on board.
The lowest rates and best terms for a high-risk merchant account, and credit card processing are available to high-risk retailers when they work with a knowledgeable and reputable payment processor like Merchantech.
Merchantech speaks with every business owner to better understand how to meet their unique needs. Even if your risk is high, there are steps you can take to lower it.
Merchantech provides high-risk merchant accounts, and ensures secure credit card processing for online and brick-and-mortar businesses worldwide. If traditional processors and banks categorize your company as requiring a high-risk merchant account, turn to Merchantech for efficient and secure credit card processing.
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