A high-risk merchant account is a payment processing account for businesses considered to be of high risk to the banks. As high-risk businesses are more prone to chargebacks, they come with the need for paying higher fees for merchant services.
If a business comes with a high potential of chargebacks, or the history shows many chargebacks and refunds, the bank may put a rolling reserve on your account. It’s the amount of money that will cover the possibility of chargebacks or fraud.
What are the differences between low-risk and high-risk merchant accounts?
Before you apply for a merchant account, it’s good to know whether you’re a high-risk merchant or a low-risk one. Merchant account providers have their criteria for categorizing businesses in terms of their potential risk, but there are several things characteristics for both groups of merchants.
So, what are the differences between low-risk and high-risk merchant account?
What is a low-risk merchant?
Note that every payment processor has its own set of guidelines, but there are some characteristics common for all the players on the market.
General indicators for low-risk merchants are the following (but there are many other factors, and it’s based on compliance’s general evaluation):
Less than $20,000 processed monthly
Average credit card transaction is less than $500
The industry that a merchant operates in is considered low risk (these are, for instance, low risk-clothes and shoes, household goods, baby products)
Zero to low chargeback ratio
The country a business operates in is considered low risk (European Union countries, USA, Canada, Australia, Japan)
Minimized returns.
What is a high-risk merchant?
The more chargebacks a business comes with, the higher the risk. Hence, the main factors that matter are industry reputation and processing history (it’s recommended to keep your chargeback ratio lower than 0.9% of your total transactions).
Here are overall characteristics of a high risk merchant, but note that it widely differs based on a certain payment processor’s guideline:
More than $20,000 monthly sales volume
Average credit card transaction higher than $500
A business sells products and services to countries known for high levels of fraud
Bad credit history and excessive chargebacks.
Who needs a high-risk merchant account?
An example of high-risk businesses is the travel industry, as there are various factors there that can cause cancellations. This usually ends up with a number of refunds and customers who file chargebacks. Some others are gambling, forex trading, and adult-themed websites, to name a few.
There are many other industries or business models that are prone to chargebacks, so here’s the list of the most common types of businesses that need high risk merchant accounts.
So, if you run a business in the industries mentioned above and similar, you need a high-risk merchant account to accept credit card payments on your website. If you are a high-risk merchant, you need to deal with higher costs of merchant account than regular merchants.
Wondering whether your business needs a high-risk merchant account? Contact us for pre-approval.