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Regardless of your business type, it's important to offer your customers modes of payment that are more convenient than cash. That's the only way you're going to be able to expand and keep your customers happy. And in order to do that, you need to sign up with a reliable payment processor.
However, payment processors sometimes charge extra chargeback fees, processing, and long-term fees from merchants. And this can negatively impact your business by heavily reducing your profits. But why does this happen? Well, that happens because the payment considers you a high-risk merchant. Want to know what high-risk merchant accounts are and determine if your business falls into the same category? Read along. This blog talks about a high-risk merchant account, from what it is, how it impacts your business, which businesses are at risk, and how you can deal with the same.
What is a High-Risk Merchant Account?
You can think of a high-risk merchant account as a status that payment processors assign to a merchant who wants to use their payment services. Payment processors mark certain accounts as high-risk, with a higher rate of chargebacks, frauds, or return volume.
But why is a merchant account labelled as high-risk? Read along to find out!
Why is a Merchant Considered a High-Risk Merchant?
Payment processors typically label merchant accounts as high-risk for a variety of reasons. While the reasons may vary from one processor to another, some of the most common reasons include the following:
1. Poor Credit Score
A poor credit score indicates that the individual or the company hasn't been making timely payments or has a bad credit history. So, having a poor credit score might lead to a payment processor labelling you high-risk.
2. New in the industry
If you have never dealt with a payment processor in the past or have processed minimal transactions, you could be considered a risky merchant. That's because there's simply not enough information for the payment processor to verify. The longer you're in business, the lesser the risk you pose to payment processors, reducing your chance of being labelled as a high-risk merchant.
3. High-Risk Industry
Sometimes, merchants with excellent business histories and credit scores are also labelled high-risk. And this happens because they operate in a high-risk industry, i.e., where chargebacks are more frequent or there's a high risk of fraud. For instance, companies with a subscription-based model are often labelled risky because there's a high chance of customer chargeback.
4. High Volume of Transactions
What volume of transactions is considered high varies from one payment processor to the other. However, if a payment processor has set a limit to transactions worth $10,000 a day, and you surpass that, you might earn yourself a high-risk merchant tag.
5. International Payments
You might be considered high-risk if you're selling your products or services to customers from different countries with a high risk of fraudulent transactions or fraud. All countries except for Australia, Japan, Canada, the U.S., and the ones in Europe are considered high risk.
6. Involvement in Card-Not-Present Transactions
If your business involves extensive card-not-present transactions, you're at a higher risk of chargebacks and fraud. And because of this, your payment processor might consider you a high-risk merchant.
Usually, online auctions, dating websites, home-based businesses, and probably all online businesses come under this category.
Types of Business Considered as High Risk
Here are the common business types that are considered high-risk by payment processors:
High-Risk Merchants VS Low-Risk Merchants
High-risk merchants, as stated earlier, are the ones the payment processors consider risky and more prone to fraud. On the flip side, there also are low-risk merchants which usually exhibit the following characteristics:
- Operating in an industry that is labelled as low-risk.
- Using one currency for processing payments.
- A transaction volume of less than $20,000 a month.
- Average transactions are less than $500.
- Low rate of chargebacks and returns.
- Operating from low-risk countries such as Canada, Japan, the USA, or anywhere within Europe.
If you, as a merchant, exhibit similar attributes, you'll be categorized as a low-risk merchant by most payment processors. However, that doesn't mean your status won't change. As you expand your business to different countries, experience a higher transaction volume, or more chargebacks, your payment processor might change the risk level to high-risk. And when that happens, you may have to find a new payment processor altogether.
How can High-Risk Merchants Find Payment Processors?
While it can be challenging for high-risk merchants to find payment processors, it isn't impossible.
You must emphasize that your products and services are of the same quality as low-risk merchants. Also, how payment processors identify you doesn't impact your reputation. So, it won't be too complex to find a reliable payment processor. However, here are some things to keep in mind to speed up the process:
1. Identify Your Risk Factors
You'd first want to identify the factors that might portray your business as high-risk. Once you do, you can find payment processors that offer services to businesses that have similar risk factors as yours. This way, finding a payment processor will become easier.
2. Thoroughly Read your Processor's Contract
After identifying your risk factors, you must shortlist a few payment processors and review their contracts. This will help you determine what criteria they use to identify a merchant as high-risk. Once you're aware of the criteria, you'd know instantly if a particular payment processor is a good match.
3. Be Transparent Right From The Beginning
Yes, finding a payment processor that accepts a high-risk merchant can take more time. However, that never means you should lie to your payment processor. Because eventually, they'll discover it and suspend your merchant account or even completely delete it. So, be completely transparent with your payment processor right from the beginning.
4. Check Security Standards and Fee
Your payment processor should be PCI-DSS compliant and have anti-fraud and anti-chargeback systems to protect your business. In addition, you must know what transaction fee, long-term contract fee, interchange, or chargeback fee the payment processor requires from you. This will help you determine if a particular payment processor is secure and affordable.
5. Check The Customer Support Capabilities
The customer support from your payment processor should be impeccable. After all, they're the ones you'll reach out to in case things go south (fraudulent transactions or false chargebacks).
What Should High-Risk Merchant Accounts Expect from a Payment Processor?
Existing and operating in the market as a high-risk merchant isn't easy. Initially, you may find it hard even to find a payment processor that'll allow you to use their services. However, there are some more things high-risk merchant accounts must be aware of:
- Higher Payment Processing Fees: You may have to pay a higher fee for every transaction the payment processor completes than a low-risk one.
- Additional Interchange Fees: This is the fee charged by banks for accepting card payments. Similar to the previous one, you'll have to pay an additional amount for this one.
- Higher Chargeback Fees: You may have to pay an additional chargeback fee. And this can be a bummer because the chargeback fee is already too high.
- Longer Contract Fees: If you end up engaging in a long-term contract with the payment processor, you'll have to pay more.
Opting for a payment processor is necessary for every online business, but finding the right one can be more difficult if you're considered a high-risk merchant. However, it's not as bad as it seems and won't damage your reputation. With the right knowledge and understanding, you can find a payment processor that best suits your business and provides a great experience for your customers when it comes to making payments.
Karthik Narayanan is the Co-founder, CPO & CTO at inai, a global payment stack simplifying native payments with a single integration. He is a serial entrepreneur with over a decade of experience in product and engineering. Over the last 5 years, he has worked with 200+ businesses ranging from SMEs to Bigtechs.