High-Risk v/s Low-Risk Merchant Account: Pricing Difference

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.

What is a merchant account?

What is a merchant account?

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.

High-risk and Low-risk Merchant Accounts?

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:

  • Automobiles and auto parts
  • Food services
  • Health and beauty
  • Hospitality
  • Household goods
  • Office Supplies
  • Online clothing stores
  • Pet supplies
  • Services provided by professionals (doctors, lawyers, architects, etc.)

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.

How is a Business Categorized as High Risk?

How is a business categorized as high risk?

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:

  • Adult products and entertainment
  • CBD
  • Kratom
  • Trading in cryptocurrencies, FOREX, and currencies
  • Collection of debts
  • Ecommerce and other cross-border transactions (especially for high-dollar products like electronics)
  • Sports Fantasy
  • Gaming and gambling
  • Lodging and hotels
  • High-priced/high-dollar situations
  • Medical Procedures
  • Network marketing and MLM
  • Nutraceuticals
  • Pharmaceuticals

What is a High-Risk Merchant Account?

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.

What is a Low-Risk Merchant Account?

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:

  • Low- to mid-priced purchase
  • In a sector where chargebacks have historically been minimal
  • In a lightly regulated, politically uncontroversial sector of the economy.

A typical example of a low-risk merchant would be a physical cafe, bookstore, or eatery.

Pricing Of Low-Risk Merchant Account

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:

  • Every credit card transaction is for less than $500.
  • Less than $20,000 worth of transactions is made each month.
  • The industry, which includes necessities like clothing, household goods like furniture, and baby products, is viewed as low risk.
  • Less than 0.9% of transactions were chargebacks as a percentage of all transactions.

Examples of low-risk locations where business transactions take place include the United States, Europe.

Pricing Difference Of High-Risk Merchant Account

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.

  • A minimum monthly income of $20,000 is required.
  • Credit card transactions with an average value of $500 or more
  • Collaborating with countries known for their high fraud rates
  • A track record of credit issues
  • Multiple refunds and chargebacks

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.

Open a High-Risk Merchant Account with Merchantech

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.

  • Utilize effective fraud prevention strategies to lower your risk of chargebacks.
  • Concentrate on generating reliable income streams and Prevent sporadic large income streams
  • Show that you can keep up with high trading volume by doing so.

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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