In many cases, it is not desirable for a merchant to be labeled “high risk” when it comes to credit card processing. Being placed in this category can sometimes make it harder to find low rate payment processing and can lead to a multitude of other fees as well. However, the moniker is not as clear-cut as it may seem, and for that reason it warrants more in-depth study.
What Is Considered High Risk Processing?
Before you can begin to process credit card payments, you must first obtain a merchant account from a bank or other financial institution. What you will end up paying for this account will depend on several variables, including the type of business you have, the type and method of transactions you will be performing, and how risky your industry is historically. Obviously, the acquiring bank is highly motivated to award accounts only to those enterprises it believes will not default on the account. Those companies that are considered to be at higher risk are, by definition, more likely to do this. Therefore, the fees a high risk business is charged for a merchant account are often significantly higher.
What Factors Make You High Risk?
Chargebacks are the primary negative effect that high risk enterprises bring to an acquiring bank. These occur when a customer goes directly to their bank to request a refund without attempting to get it from the business first. Although sellers can dispute the chargeback, it is a time-consuming process that often ends in defeat. Furthermore, if the customer wins, they not only get a refund but they also are not required to return the product in question. To add insult to injury, a seller’s record shows all of the chargebacks that have been imposed – even the ones that the customer did not win. These black marks make merchant account providers squeamish, causing them to add a one-time fee for each chargeback and to raise general costs as chargeback numbers rise. In the worst-case scenario, your account might even be terminated. You would then be placed in the “high risk” category and will be forced to apply for a high risk merchant account with substantially increased fees and stipulations.
There are also other factors that can lead to a label of “high risk.” Certain types of products and services are inherently more risky. These include online gambling, telemarketing, pharmaceuticals, adult materials or services, airline tickets, cryptocurrency such as Bitcoins, dating services, electronic cigarettes, timeshares, and computer software and hardware. In addition to what you sell, you might be considered “high risk” if you fall into one of the following categories:
- You have lost a previous merchant account due to excessive chargebacks.
- Your business is new, and you have little or no credit history.
- The products you sell have high dollar ratios.
- Your industry is known to have high chargeback ratios.
- You sell products or services in places known for high chargebacks, or you sell internationally.
- You accept multiple currencies.
- You have poor credit.
The bottom line is that you are marked as “high risk” because merchant account providers believe there is a substantially greater chance that you will not satisfy the terms of your agreement.
The Downside of “High Risk” Status
Since chargebacks are the main reason for merchant account providers’ concern in calculating risk, they assume that you as a high risk client will automatically see more of these forced refunds. To combat what they perceive as the inevitable, they often pile on fees right from the start. You might, for instance, be required to pay more than $300 for the initial setup and then be expected to shell out consistently higher monthly and processing fees. These costs can impose a very heavy burden on your business. In fact, many fail as a result.
In addition, you might be required by your merchant account provider to open what is known as a merchant account reserve. This savings account bears no interest and is used by your merchant account provider bank as a sort of insurance policy. If you can’t afford to pay a chargeback with the funds you have on hand, this account will be tapped. The problem is that these accounts generally withhold anywhere from five to ten percent of your sales for six months. Although the money is still yours, you can’t access it for 180 days. For a struggling business, that can seem like a lifetime.
Another huge disadvantage of high risk status is the increased chargeback fees you will pay. Any merchant who experiences a chargeback will be required to pay the bank for the administrative costs involved. However, a high risk merchant will be charged significantly more for these one-time fees. These elevated costs become even more difficult to swallow for a merchant who is now also being forced to pay all of the other amplified fees associated with this status.
The Hidden Advantages of Being “High Risk”
On the surface, doing business with the “high risk” label attached to your name might seem like an absolute negative. However, some business owners actually seek this status. For one thing, you are allowed to sell higher volumes of products. Also, you can accept all different kinds of currencies from your international customers. Finally, you can allow your customers to use recurring billing options that are not always available on low-risk accounts.
For the majority of businesses, however, it makes sense to be considered low-risk if at all possible. If you aren’t sure which category your company should be classified into, think about the industry within which you work. Is it involved in so-called fringe or dangerous products? Do you sell in countries where financial regulations are lax, making the potential for chargebacks higher? Are there other reasons why a merchant bank might believe you are significantly more likely to fail? Do you have poor credit or a history of chargebacks? If you answered “yes” to any of these questions, it is likely that you will be put into the “high risk” basket.
Once this designation is imposed on you, there is nothing you can do to change it in the immediate future. If you are noticing that your chargebacks are slowly increasing over time, don’t wait for your merchant account provider to tell you that your risk classification has changed and you are now required to pay increased fees. Take the reins into your own hands, and work hard to reduce your chargebacks. Here are just a few ways:
- Provide excellent customer service.
- Enhance your security systems and keep them updated.
- Make refund policies and contracts transparent.
- Use a cloud-based EMV point-of-sale system.
Chargebacks are an unpleasant fact of life for all businesses, and they are rampant in certain industries. If you do all you can to minimize them and they still cause you to be considered to be a high risk merchant, all you can do is to find the best high risk merchant account provider. Look for a company that offers transparent rates, up-to-date systems and helpful customer service. High risk or not, you deserve to be treated with respect and dignity.