What does a high-risk merchant account mean?

Merchant accounts are accounts provided by a payment provider. It enables businesses to accept credit cards, debit cards, and digital payments and access their funds through online payments. However, not all merchant accounts are the same.

Part of the reason behind this comes from different business sectors, some of which are considered high-risk businesses. For this reason, these enterprises often apply for and use a high-risk merchant account instead of a standard or low-risk merchant account.

In this article, we explore what high-risk merchant accounts mean and how they differ from low-risk merchants. We also look at the typical industries they operate and how to apply for your high-risk merchant account. Finally, we cover the fees you can expect to pay if you are considered a high-risk business.

Let’s have a closer look.

What does a high-risk merchant account mean?

Banks and payment service providers consider some industries to be at higher risk than others.

It can be due to a couple of risk factors, which include:

• Your business is a new entrant;
• High monthly trade volumes (over £15,000);
• The average transaction value of that’s over £50;
• High volumes of chargebacks or refunds;
• The income channel, such as subscriptions versus pay-on-delivery;
• Length of time between payment and delivery of product or service;
• Financial instability;
• History of fraud;
• Poor credit ratings;
• Dealing in high-value international transactions;
• And others.

In short, a high-risk merchant account is a solution offered to businesses that operate in a risky business sector. It is also provided when the business owner or company itself has a poor credit rating or low credit scores.

The consequences of this include: 

• Paying higher transaction fees;
• Paying higher payment processing fees;
• Encountering greater business control when you try to secure merchant services during the application process;
• Being put on a rolling reserve;
• Facing longer processing times;
• Longer settlement period;
• Being required to maintain higher cash reserves to cover potential losses;
• Being obligated to sign for a longer contract period;
• Paying an early termination fee, or monthly fees, or annual fees;
• Being required to make personal guarantees.

We cover these elements in more detail below as we set out the differences between high-risk merchants and low-risk accounts.

How do high-risk merchant accounts differ from other types of accounts?

To secure payment processing for your business operating in high-risk industries, you must approach a payment processor that offers high-risk merchant services. However, there are essential elements to consider as you take this step. You must be prepared for specific things because of the higher risk associated with your business or industry.

Longer application process

High-risk merchants are often subject to a much longer merchant account application process. They may be required to produce detailed and thorough documentation to prove they will pose less risk to the payment services provider through their business activities.

Higher set-up fees

While standard or low-risk merchant accounts can sometimes be set up without any fees, high-risk merchant account holders often need to pay high set-up fees to open their accounts.

Charge higher transaction fees

As a high-risk merchant account holder, you are more likely to pay higher transaction fees. These are the costs your payment provider deducts from every transaction either as a percentage, a fixed sum or both. Often, the transaction fees can range from 4% to 10%, compared to the 1% to 2% charged to regular merchants who operate low-risk merchant accounts.

Cash reserve requirements

Cash reserve requirements are used to protect your financial services provider in the event of potential losses from chargebacks. This is usually referred to as maintaining a rolling reserve, which keeps a portion of your card transactions for a specific period before releasing them to you. This is generally used as a payment buffer. That is the primary basis for maintaining chargeback fees.

Longer settlement period

You could face a much longer settlement period depending on your payment services provider. This refers to the case when your customer pays you. Across the industry, most merchant service providers will take around three days to settle the payment into a merchant account. However, with a high-risk merchant account, you are looking at a period of up to one week for the funds to reflect in your account.

Additional requirements

It is important to note that businesses operating in high-risk sectors may also be subject to additional requirements, depending on their chosen merchant account provider.

It’s essential to note that low-risk or standard merchant accounts are not subject to these requirements. Thus, the primary differences between a high-risk merchant account and a standard merchant account are as follows.

High-risk merchant accounts

Low-risk merchant accounts

– Your business is a new entrantHigh monthly trade volumes (over £15,000) – The average transaction value of that’s over £50 – High volumes of chargebacks or refunds – Dealing in high-value international transactions in multiple currencies – The income channel, such as subscriptions versus pay-on-delivery – Length of time between payment and delivery of product/service – Financial instabilityHistory of fraudPoor credit rating

– Have a well-established business with multiple years in operation – Earn revenue of less than £15,000 per month – Have an average credit card transaction of less than £50 – A shallow chargeback frequency (or none) – Operate in one currency – Sell low-risk products (e.g. household goods, books, clothing, etc.) – Use 3D Secure technology for fraud prevention

These are the fundamental differences between a high-risk business and a low-risk merchant operating through standard merchant accounts, although there may be others.

Is your business high-risk?

Many merchant account services have different criteria for classifying high-risk accounts. However, a few industries directly fall into this category.

Some examples include:

• Adult entertainment industry;
• Dating and escort services;
• Bail bonds;
• Hemp oil, cannabidiol (CBD), cannabis seeds; 
• Tobacco and vape products;
• Alcohol products;
• Monthly membership and subscription services requiring recurring payments;
• Firearms, stun guns and tasers;
• Gambling and online gaming;
• Insurance;
• Investment schemes;
• Lending;
• Cryptocurrencies;
• Technical support and web development;
• Foreign exchange and money transfers;
• E-wallets;
• Credit repair, debt management and collection agencies;
• Domain registration, ISP and hosting services, VPNs;
• Search engine optimisation (SEO) services;
• File sharing;
• Multi-level marketing (MLM);
• Affiliate marketing;
• Events and tickets;
• Software downloads;
• Prepaid phone cards;
• Vehicle sales and car parts;
• Tattoo studios;
• Supplements, nutraceuticals and health and wellness products;
• Online pharmacies;
• Travel, tourism, timeshare, airline and lodging;
• Payday loans;
• Online auctions;
• Direct sales and pyramid selling;
• Nightclubs and bars;
• Pawnshops;
• Charities and non-profit organisations;
• Jewellery, watches and accessories;
• Vehicle sales and car parts;
• Antiques dealerships;
• E-books;
• Brokers;
• Consultancy services;
• Music and software downloads; 
• Crowdfunding;
• Replica items;
• Lotteries;
• Furniture and electronic stores.

If you fall into any of these categories, your business may be deemed high risk, and your access to various merchant services could be limited. Operating in a high-risk sector means you can be subject to paying a higher monthly or annual fee, higher chargeback fees, and processing fees.

What to do if your business is high-risk

Merchants with a bad credit rating or those operating in a high-risk industry still have options and may gain access to payment gateways despite being generally considered high-risk.

Here are a few steps you could follow to present your case to your payment services provider:

• Improve your credit rating: Although high merchant accounts cater to businesses and business owners with poor credit ratings, improving your credit rating before your application is still a good idea. In this regard, you should avoid late payments and clear any overdue debts.
• Maintain healthy cash levels: Good cash and liquidity levels are a strong signal of financial stability and could lower your business’s risk perception. It’s also essential to keep your accounts up to date.
• Reduce chargebacks: Offer accurate product descriptions, good delivery times and strong customer service. You can do this by clearly displaying your company’s legal name, publishing a refund and return policy, displaying contact details for your customer support team, losing all the methods and timing for product delivery, and having an SSL certificate on your site that is also HTTPS.
• Be transparent: When applying for a high-risk merchant account, be as fully transparent with your provider as possible. You will most likely be asked for detailed information about your business and finances, and you should be forthcoming in this regard.
• Have your documents ready: Whether you need six months of bank statements, several years of tax returns or other criteria that your provider may ask for, ensure you have thoroughly prepared for the process.
  
  Examples of documents you may be required to present include:

• Bank account information;
• Company incorporation certificate;
• Shareholders’ certificate;
• Organisational structure;
• Copy of passports and utility bills for local directors and shareholders holding more than a 15% stake;
• Processing history for at least six months before your application.
  

• Be open to their guidelines: If there are ways to reduce your risk perceptions, your payment provider will discuss these with you. You should take the suggested steps they’ve outlined by being open to their suggested measures.
• Accept that you will face a longer application process: In order for your payment services provider to offer you a high-risk business bank account, they’ll need to analyse your risk profile and study past patterns of your finances, in addition to your payment processing history, partnerships, and personal credit history. Expect that this process will take time.
• Be prepared for higher payment processing and chargeback fees: Although the interchange rate will vary from provider to provider, higher-risk merchants will incur higher payment processing fees and higher chargeback fees.
• Be ready to meet cash reserve requirements:
  • Some providers may collect a certain amount of cash for your business that reaches a specific threshold. It may include rolling reserve requirements that could go as high as 10% and last for a period of around six months.
  • Alternatively, you may deal with a capped reserve, in which your payment processor holds a portion of each transaction until a cash reserve reaches a predetermined level.
  • In addition, you could face paying an upfront reserve, which means paying the full amount upfront.
  • You may also face volume caps in credit card processing. It can happen if your sales volume exceeds a predetermined limit.

With these steps, you can streamline your process to obtain a high-risk business account and demonstrate that you are taking preventative measures to reduce the risk involved and associated with your business.

What are the typical high merchant account fees you’ll need to pay?

Credit card processors and acquiring banks typically charge high-risk merchants higher fees for offering them a high-risk merchant bank account and the ability to process payments. However, these fees are often split into fixed and fluctuating fees, and the difference between them should be considered.

Fixed fees remain constant irrespective of your risk profile and include refund, security, termination, and Payment Card Industry compliance fees. Fluctuating fees increase as your risk level increases. These fees may include chargeback fees, transaction rates, monthly fees, and rolling reserve requirements.

Final words

Any business that wants to process payments must have a merchant account. However, if your business is high-risk, you must showcase that you are financially responsible and do not pose a credit risk to your payment services provider.

Once accepted for a high-risk merchant account, you can process payments as a standard, as a low-risk merchant would. However, the key difference is that you must prove your financial stability and commitment by paying higher fees and adhering to more stringent payment acceptance criteria.

Frequently Asked Questions

What does a high-risk transaction mean?

A high-risk transaction is typically exposed to a high risk of fraudulent transactions, which can result in significant loss.

What are the features for determining the best high risk merchant account provider?

To decide if a high-risk merchant account provider is right for you and your business, you should consider factors such as their pricing and fees, a monthly or pay-as-you-go model, payment transfer time, compliance, customer support, customer and third-party reviews, features and capabilities of the payment gateway, type of payments accepted, etc.

Why do I need a merchant account?

A merchant account is an absolute necessity if you wish your business to be able to accept credit and debit card payments or payments made through a digital wallet.

What are high-risk merchant account fees?

High-risk merchant account fees can be classified as both fixed and fluctuating. However, in most cases, you will be required to pay higher fees such as per-transaction fees, terminal fees, chargeback fees and others.