Merchant accounts allow businesses to accept credit card transactions by holding the money from a sale once the payment gateway approves the purchase. The funds remain in the merchant account until a scheduled transfer happens, which puts the funds into the merchant's bank account. Since not every transaction is successful, the merchant account allows for money to be pulled from when necessary. When a return or a dispute happens, the money is drawn from the merchant account instead of the merchant's bank account.
A merchant account is necessary to process credit cards, and ultimately do business. However, merchants that are classified as high-risk can have a hard time finding a merchant account provider. Here is what high-risk merchants need to know about merchant accounts.
Factors of High-Risk Merchants
There are many categories and verticals that classify merchants as "high-risk." These merchants primarily fall into one of three risk areas:
Reputational risk consists of merchants that provide goods and services that are "unsavory" or viewed with morally charged positions. These include merchants in industries in adult entertainment, gambling, and high-interest rate lending, among others. They are typically vice related.
These merchants are in industries that typically have high loss or chargeback issues. Some examples are businesses that have extended delivery times, online products and services, trial offers, ticket sales, travel, and subscription billing models.
This category of businesses is greatly affected by a wide range of laws and industrial rules. Merchants dealing with high-rate lending, gaming, CBD, alcohol, and nicotine are typical businesses with regulatory risks. Credit processors are less likely to offer their services to a business that is highly volatile and at the mercy of multiple regulatory bodies.
Common Problems Faced by High-Risk Merchants
Exorbitant Processor Fees
Payment processor companies may charge extremely severe rates for their services, along with strict rules that can stifle earnings. This can place high-risk merchants at a disadvantage and lower income from credit charges.
The payment processor company might implement reserves as a security measure against your high-risk business. These reserves are agreed to sums that serve as deposits until the processor receives a certain amount in their accounts. Reserves ensure that payment processor companies still get paid while your company undergoes financial difficulties.
High-risk merchants are susceptible to chargebacks. When a merchant receives a chargeback or dispute, it means that the card network is forcing a transaction reversal. This reversal is meant to serve as a form of consumer protection from fraudulent activity committed by both merchants and individuals.
When a chargeback happens, the transaction amount is taken from the merchant account and refunded back to the customer. The only way for merchants to regain the transaction amount is by responding with a dispute response document that disproves the cardholder’s claims.
Because high-risk merchants are susceptible to disputes, it is vital to stay aware of the dispute volume received. If your dispute ratio is too high, it can cause your merchant account to be shut down. The overall standard for merchants is to keep their dispute ratio under 1%. Often, a merchant will find their company in serious trouble with their bank or the card brands because of a high-volume of disputes before they act on the chargeback issue. If they wait too long or ignore the issue, it can lead to losing the ability to process payments, receive fines and penalties, or enter into a chargeback monitoring program with the card brands.
Selecting the Right High-Risk Merchant Account
High-risk merchants should seek assistance from payment processors and companies that are specialized in high-risk businesses. This ensures that your payment processor understands the unique needs and challenges of high-risk merchants. Choosing the wrong payment processors also leads to delays in declined applications, hits on credit reports, and lost revenue.
Additionally, high-risk partners possess the resources to maintaining an ongoing payment process. This is achieved in collaboration with a highly developed network of banking partners that understand the unique challenges that affront high-risk merchants. A high-risk payment consultant possesses specialized knowledge that recognizes the usual trends and patterns in high-risk transactions. This leads to the formation of strategic and preventative action that can save a great deal of time and money for your business.