High Risk Merchant Account Basics

High risk merchant accounts are a unique challenge in the payment space. There are various components that merchants and payment processors need to consider. Despite these challenges, a high risk merchant account can be an excellent opportunity for merchants and payment processors. 

High risk merchant accounts are merchant accounts applied to merchants deemed high risk for payment providers to provide payment processing for. These risks include higher fraud or chargeback rates, troubles with credit, new companies, or in industries that are unpredictable or potentially controversial. Sometimes certain kinds of companies are known to commit higher rates of fraud. These all come together to make payment processing a more risky effort by payment providers. 

High-risk merchant accounts require merchants to pay much higher fees to offset this risk. These can take the form of higher monthly fees or transaction fees. It is also expected that these merchants have to meet more stringent conditions regarding things like security. Many popular payment providers will not do business with high risk merchants as they do not want to deal with the extra challenges. 

Who Exactly are High Risk Merchants?

Industry 

One of the most critical factors determining which merchants need a high risk account is the industry they are in. The following types of businesses are often considered high risk. 

• Travel Agencies and Tourism
• Pawn Shops
• Gambling Businesses
• Furniture
• Adult Services
• Credit Repair
• Dating Services
• Bail Bonds
• Dispensaries
• Self Storage

There are many other business types and industries that are typically considered high risk. It is important to note that there is no universally accepted standard for determining which business types are high risk. This is set individually by payment processing companies and banks. 

Without this standard classification for high-risk merchants, it is typical for payment processors and banks to state that they will not work with entire industries. As such high risk merchant accounts are widespread for these businesses.

Transaction Type

The nature of the transactions companies accept can also qualify them as high risk merchants. If a company takes primarily card-not-present transactions, they are much more likely to deal with fraud and chargebacks. These add significant costs for payment providers, requiring high risk merchant accounts. 

Companies with high sales volumes or average transaction sizes can also be labeled high risk. This is due to the fact that chargebacks happen more frequently due to the sheer volume of transactions or are much more costly each time due to the size of the transaction. 

How to Become a Low Risk Merchant?

Fraud Prevention

The higher likelihood of fraud is the critical determining factor for most high risk merchant accounts. If a merchant wants to be reclassified as a low risk merchant, they must prioritize fraud prevention. A merchant can add extra verification steps in transactions in order to make fraudulent transactions less common. Additionally, they can include clear information in the billing that clients receive so they know who to call if they have any questions regarding a transaction; this reduces the risk of chargebacks.

Find the Right Payment Processor

While many popular payment processors such as Square or Stripe do not work with high risk merchant accounts, plenty do. Merchants will need to pay higher fees than other low risk merchants. But they work with processors specializing in fraud prevention and security. 

Additionally, these payment processors are much more willing to make a more customized payment solution to mitigate some of the risks that come with a particular merchant. This customization can offer much freedom for merchants. Depending on the payment processor, it is better to have a high risk merchant account with them due to these additional advantages rather than a low risk merchant account with another payment processor. 

Working with High Risk Merchant Accounts

Onboarding

Payment providers wishing to provide high risk merchant accounts must invest in-depth and effective onboarding. Taking on a high risk merchant is, by definition, risky. Onboarding procedures need to be geared toward mitigating that risk as much as possible. 

Additionally, onboarding for high risk merchants is much more complicated and time-consuming than for low risk merchants. This requires more investment on the part of a payment processor to get high risk merchant accounts up and running. Fortunately, there are onboarding solutions that allow payment processors to underwrite and onboard merchants, whether they are high risk or low risk. 

Security Procedures

With high risk merchant accounts, payment processors must invest in making sure their payment solutions meet the highest security standards. This dramatically reduces the likelihood of fraud that cuts into the profits of a payment processor. 

Additionally, payment processors that want to zero in on high risk merchants should work with merchants to improve their security. By assisting merchants with fraud prevention and security measures, both the merchant and processor can protect themselves from the additional risks of that particular merchant or industry. 

Mandatory Account Reserves

Some payment processors have high risk merchants who keep certain mandatory account reserves. These reserves are meant as collateral for the payment processors providing payment services for these high risk merchant accounts. 

Mandatory account reserves come in several forms. Merchants may be required to provide an upfront reserve at the start of the relationship with the payment processors. Rolling or fixed reserves occur when the processor holds a percentage of the merchant’s transactions as collateral. These can then be released to the merchant after certain conditions have been met or a certain amount of time has passed. 

Customer Service

Due to the additional challenges of high risk merchant accounts, payment processors must provide quality customer service. This allows both the merchant and processor to coordinate effectively on reducing fraud and ensure that each benefits from the relationship as much as possible. Quality customer service is also an excellent way for a payment processor to step out from its competition and attract more high risk merchants. 

Key Takeaways

High risk merchant accounts are more costly for both merchants and payment processors. The former deals with higher fees, and the latter deals with more instances of fraud. However, despite these costs, it can be a very profitable relationship for both.