If you are planning to operate an online company, having a high-risk merchant account is required and this is subject to a high risk of chargebacks and will also want to accept credit cards, so what should you do in order to determine if you are going to need a high-risk merchant account or not?
But, before you can be able to create a high-risk merchant account, you must first find and obtain an acquiring bank that is willing to underwrite your firm, but, it is also preferable that you get help from a reputable payment service provider so that you will be able to maximize your chances of obtaining an account.
Defining a High-Risk Merchant Account
A payment processing account for firms that are classified as high risk by the financial institutions is what the term “high-risk merchant account” means. The reason behind this is that high-risk organizations are more inclined to experience chargebacks, so as a result, they must pay greater costs for merchant services due to their increased vulnerability.
In the event that your company has a high risk for chargebacks, or if your account has had numerous chargebacks and refunds in the past, your bank may place a rolling reserve on your account. It is the sum of money that will be set aside to cover the likelihood of chargebacks or fraud on your credit card.
Comparing a Low-risk Merchant Against a High-Risk Merchant Account
Identifying whether you’re a high-risk or a low-risk merchant is important when applying for an account with a credit card processing company. Merchant account providers have their own criteria for classifying companies based on their potential risk, but there are many other traits that are common to both types of merchants.
Below are the distinctions between a low-risk merchant account against a high-risk merchant account.
Low-Risk Merchants Explained
It is important to note that each payment processor has its own set of criteria, but there are certain qualities that are shared by all of the competitors on the market in terms of security.
The following are broad signs of low-risk merchants (although there are many more criteria to consider, and this is based on compliance’s overall appraisal of the merchants):
- Every month, less than $20,000 is handled.
- In most cases, credit card transactions are less than $500 in value.
- The industry in which a merchant does business is regarded to be low risk and these are, for instance, low risk-clothes and shoes, household goods, baby products
- Chargeback ratios ranging from zero to low
- The nation in which a company operates is regarded to be low risks such as European Union countries, USA, Canada, Australia, and Japan
- Returns are kept to a bare minimum.
High-Risk Merchants Explained
The more chargebacks an organization receives, the greater the risk. As a result, the primary considerations are industry credibility and processing history (it is suggested that your chargeback percentage is less than 0.9 percent of all transactions).
The following are the general criteria of a high-risk merchant, although keep in mind that they vary significantly depending on the payment processor’s guidelines:
- Monthly sales volume of more than $20,000
- The average purchase thru credit cards exceeds $500.
- There is a high risk of fraud on a company offering goods and services.
- There exists a high rate of chargebacks along with poor credit history
Here’s What to Know if A High-Risk Merchant Account is For You
The travel sector is an example of a high-risk company since there are several causes that might result in cancellations and this often results in a large number of refunds and consumers filing chargebacks. Other examples include gambling, FX trading, and adult-themed websites.
There are several additional sectors and company structures that are prone to chargebacks; thus, the following is a summary of the most prevalent sorts of organizations that need high-risk merchant accounts.
Therefore, if you operate a company in any of the aforementioned sectors or a comparable one, you will need a high-risk merchant account in order to take credit card payments on your site. If you are classified as a high-risk merchant, you will face greater merchant account fees than other merchants.
The Merchant Account Fees for High-risk merchants
When considering the cost, the drawback here is that high-risk merchant accounts tend to be more expensive as compared to low-risk merchant accounts. Costs are an unavoidable part of doing business, and you should budget for increased processing and account maintenance expenses.
However, you should keep in mind that high costs for high-risk merchant accounts were established many years ago, and you may now discover payment processors that provide affordable rates adapted to your company. Commission rates of 15% or even greater fees continue to be an outmoded practice. You are not required to sign multi-year contracts. Similarly, for additional expenses.
Numerous high-risk payment providers may still charge you a setup fee, monthly and yearly fees, or even a PCI fee; thus, carefully read the contract. Additionally, if you choose to terminate the account before the contract’s expiration date, an early termination charge may apply. The termination cost should be specified in the contract, so carefully read it before signing.
Because the payment processing market is continuously evolving, the search is for getting high-risk payment processors that charge you exclusively for transactions that happen on your website or in your app.
A revolving reserve for merchants who take on significant risk
A rolling reserve is another fee associated with a high-risk merchant account. It provides the bank with an extra layer of security against chargebacks or unusual activity (such as fraud instances) on your part. Thus, a portion of the credit card volume handled is safeguarded which is often 5-10%, depending on the business model and volume processed and this is being held to serve as a reserve for a specific amount of time for up to six months and then it will be released.
When the risk associated with the firm is greater, so is the rolling reserve to be determined by the acquiring bank is going to be. After the specified time period has passed, the funds are released and automatically credited to one of your weekly statements.
Notably, the rolling reserve may be extended to low-risk merchants who are just getting started and lack credit history.
Fees for chargeback
Additionally, keep in mind that chargeback costs may apply if a cardholder files a chargeback and requests that the bank contests the transaction. This money is used to offset the administrative expenses associated with chargeback processing.