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High-Risk Merchant Account and Credit Card Processing: What You Need to Know

— September 14, 2021

When you apply for a merchant account, you are essentially submitting your business to the payment processor for underwriting.

A high-risk merchant account is one that a payment processor grants to a firm that the processor believes is at a higher risk of fraud and chargebacks. Payment processors make this assessment based on various factors, including the business’s nature, financial history, and geographic location. If you’re stuck with a high-risk merchant account, this categorization will significantly increase the cost of accepting high-risk credit card processing and debit card payments.

What Is a High-Risk Merchant Account?

To high-risk credit card processing and certain other types of digital transactions, businesses must have a merchant account. It is a bank account into which banks deposit funds following the acceptance of credit card orders by a company. Because the bank is financing the merchant (cardholders typically pay their credit card bills every 30 days), if a transaction fails, the bank is liable for the entire transaction amount if the merchant cannot cover it. Thus, if a merchant has financial difficulties or has a firm in which a significant proportion of transactions fail, a bank may offer a merchant account, but it will be a high-risk account. 

A high-risk account and a conventional account are fundamentally different in two ways. To begin, the increased risk account has a higher transaction cost and, in some instances, considerable additional expenses. Additional charges, terms, and conditions may include early termination costs, increased chargeback fees, extended contract terms, and transaction or volume limits. Second, the merchant is likely required to maintain a reserve fund to address chargebacks when they arise with the high-risk account. 

Banks classify businesses as high risk for a variety of reasons. The following are the most frequent. 

  1. As a member of a regulated industry:

Tobacco, weapons, and pharmaceuticals are just a few industries that require additional steps and procedures to verify consumer identity and conduct transactions. Complex and sensitive transactions expose the issuing bank to greater risk. 

  1. Being in a chargeback-prone industry:

Chargebacks, whether initiated by an unhappy client or by the processor or bank due to a procedural or clerical error, are costly and consume a significant amount of time for the bank to conduct investigations and arbitration. Specific industries, such as hospitality, naturally have a high chargeback rate – travelers frequently alter their plans, express dissatisfaction with accommodations, and cancel visits.

  1. A web-based business:

CNP (card not present) transactions are fundamentally riskier than POS (point of sale) transactions, as the merchant has no tangible means of determining a customer’s validity. Due to the increased vulnerability of online firms to fraudulent transactions, they are typically classified as high risk. 

  1. Having a high average revenue per ticket sold:

 Large ticket items raise the likelihood of fraud and the financial impact of a chargeback. Again, the bank must compensate for the risk by charging more fees and requiring stricter terms on high-risk accounts. 

  1. Possessing poor personal credit:

    Handmade brown leather wallet with credit cards sitting on brown wooden stool; image by Two Paddles Axe and Leatherwork, via
    Handmade brown leather wallet with credit cards sitting on brown wooden stool; image by Two Paddles Axe and Leatherwork, via

The financial strength of an entrepreneurial business, in particular, is contingent upon the financial stability of the business owner. Well, If you have an adverse credit history or unresolved credit account difficulties, you should address them as soon as possible before enrolling for a new account. Likewise, being a start-up business. If you are a new firm with no high-risk credit card processing history, banks will almost certainly assume the worst and classify you as high risk. This impediment can occasionally be overcome under the right circumstances and with the proper paperwork. 

  1. Your firm operates on a recurrent billing basis:

While subscription businesses and other recurring payment models are top-rated, they are associated with a higher-than-average risk of chargeback.

  1. International commerce: 

Dealing in numerous currencies and taking orders from individuals or firms located halfway around the world adds complexity to transactions and increases the risk of fraud and makes resolving disputes and arbitration chargebacks significantly more difficult.

  1. High-risk business types:

When you apply for a merchant account, you are essentially submitting your business to the payment processor for underwriting. Although each processor has its own set of rules, the following are some items that may raise red lights and result in your firm being classified as “high risk.” 

  1. Bad credit score for a company or personal use:

A low credit score indicates to the payment processors that you may be inept at handling your funds or are more prone to fraud. 

  1. Account history for merchants: 

If you have a history of chargebacks or fraud with another merchant account provider, your application will undoubtedly be denied. 

  1. The location of your business’s headquarters:

If you sell to consumers in the United States yet your business is based in another country, you expose yourself to a greater risk of fraud. This varies by the payment processor, but obvious examples include pornography and drug paraphernalia. 

  1. Purchases at a high cost:

If your average purchase price is exceptionally high, you may be deemed a high-risk customer. Expensive the purchase, the more likely it is to be a victim of fraud. 

Businesses that a payment processor may classify as high risk come in many forms and sizes. Examples are airline, escort services, casinos, electronic cigarette vendors, collection agencies, fantasy sports websites, firearms vendors, life coaches, pawnshops, vacation planners, and furniture or electronics retailers.

The Consequences (and Perquisites) of High-Risk Merchant Accounts 

High-risk merchant accounts are not easy to obtain. For more than two decades, Instabill has supported high-risk sectors and their merchants by partnering with like-minded acquirers and identifying cost-effective high-risk credit card processing and other payment processing solutions. 

Perhaps more than ever, acquirer banks and payment service providers are approaching high-risk merchants with caution in one form or another: 

  • Increasing the number of required KYC papers and stricter underwriting procedures 
  • Accepting only specific sorts of high-risk businesses 
  • Imposing transaction volume limits, security configurations, and requiring chargeback prevention techniques 
  • It is a new era in the history of high-risk merchant accounts: Acquiring banks, credit card issuers, and household name brands have been increasingly wary of the danger posed by specific merchants and enterprises.

Processing payments as a high-risk merchant 

As unfair as it may seem, if your business is classified as a high-risk merchant, payment processing will be more expensive for you. That is not to say that you must be taken advantage of. While major payment processors may be unwilling to work with you, there are legitimate services that will. Conduct research, weigh your options, and carefully study your contract’s conditions before signing. Accepting high-risk credit card processing, in theory, significantly surpasses any costs incurred.

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