Most online businesses are unaware of the term high-risk merchant account unless their business gets specified as such. A high-risk merchant account becomes a must if your business involves excessive chargebacks and high-risk credit card processing.
But what exactly is a high-risk business account?
In this article, we will discuss high-risk merchant accounts and how they work.
What is a high-risk merchant account?
A high-risk merchant account refers to a payment processing account for companies deemed of higher risk to banks. It is crucial for those businesses that come with a:
- Higher risk of chargebacks
- Higher risk of credit card processing
- History shows many refunds
In such cases, the bank puts a rolling reserve on your account that refers to the amount of money required to cover the possibility of fraud or chargebacks.
However, high-risk businesses are required to pay higher fees for merchant services.
How does a high-risk merchant account work?
Customers must understand the difference between a low-risk merchant account and a high-risk merchant account. Most Merchant account providers use specific criteria to categorize accounts as high-risk or low-risk merchant accounts. Even though the criteria might differ from one provider to another, there are some fundamental factors followed by every provider. These are:
For low-risk merchant account:
- The monthly transaction is less than $20000
- When the average credit card processing is less than $500
- Zero or low chargeback proportion
- Country or the industry in which the business regulates is low risk
For high-risk merchant account
- The monthly transaction is more than $20000.
- The average credit card transaction is more than $500
- The country in which business sells its product is known for conspiracies
- History of bad credit and high chargebacks
An example of a business that requires a high-risk merchant account is the travel industry. In the travel industry, several components lead to cancellations that, in turn, cause refunds and chargebacks.
Some other industries that are prone to chargebacks and can require a high-risk merchant account are as follows: gambling, forex trading, CBD vape shops, Airlines, car parts, brokering, and collection agencies.
The fee of the high-risk merchant account
Unfortunately, the fee of high-risk accounts is more than the regular accounts for low-risk businesses. It includes several inevitable fees, processing charges, and account fees.
These criteria for fees were laid a long time back as a standard. However, today you can find several payment processors that offer competitive rates customized according to your business. Moreover, you do not need to go for long contracts for five to seven years.
Nevertheless, many high-risk payment providers might charge set-up fees, monthly fees, PCI fees, or termination fees (applicable if the contract is canceled before its completion). For this, you need to read the contract carefully. All the details, fees breakdown are always provided clearly in the contract.
Rolling reserve for a high-risk merchant account
Banks take the help of rolling reserves to protect themselves from chargebacks or fraud cases on the business side.
Most of the time, it depends on the business classification or the processed volume. In the case of the rolling reserve, a specific part of credit card processed volume is conserved (around 5-10%). The part is conserved for a particular period, usually six months, and then the reserve is expelled.
Also, the rolling reserve calculated by the bank is directly professional to the risk that the business presents. And once the defined period is over, the payment is automatically settled with one of your weekly statements.
It is the fees that apply when a cardholder asks for a chargeback. So, it is the money that covers the administrative costs of processing chargeback.
The application process for a high-risk merchant account
An application form is needed to be filled online to get a high-risk merchant account. Moreover, you would require a trustable payment processor to receive credit card payments.
The documents that you need to apply for a high-risk merchant account are as follows:
- Incorporation certificate
- Shareholders certificate
- Copy of passports
- Copy of utility bills
- Transaction history for last six months (including the number of chargebacks)
- License number and name of the organization that issued it (in case of a licensed business)
Risk management experts will review all your documents, and they will determine whether your business authorizes a high-risk merchant account or not.
The team will also scrutinize your credit card transaction history according to the acceptable chargeback ratio. If your credit history is poor or the cases of chargebacks or fraud are pretty high, you might find it challenging to get a high merchant account.
Further, remember that an experienced payment platform adopts a case-by-case approach and follows certain aspects that decide whether you get a merchant account or not. They also rely upon general evaluation and card network guidelines of compliance.
What are the benefits of choosing a high-risk merchant account?
- Global coverage
You can sell to clients living in other countries outside low risk and even accept payments in other currencies. Thus, you get a larger market and better profit.
- High chargeback protection
Getting a high-risk merchant account will allow you to keep your merchant account in better shape. For example, when a merchant with a regular account exceeds the chargeback limit, the account may get terminated, and the credit card payment is paused. However, it is easier to keep a high-risk merchant account in running condition.
- Expand your business
A high-risk merchant account allows you to sell a broader range of products and services, which is certainly not permitted with a low-risk merchant account.
- More profit
A more comprehensive range of products to sell will allow you to make better profits.
Wrapping it up
There is no doubt that a high-risk merchant account costs way more than a regular account. However, if you run a high-risk business with a more excellent chargeback ratio, then the high fee becomes productive in the long run. Also, if you run a business that involves several daily transactions, you can adjust the costs with a payment processor.
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