Opening a High-Risk Merchant Account? Here’s what you should know

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Online transactions are quickly taking over in global commerce, and this means there are more protocols and regulations in place. As a result, more accounts are treading the classification of being high-risk. 

A High-Risk Merchant Account has to navigate the world of online sales a bit differently from regular accounts. These accounts come with added restrictions and more fees. 

At EMC2 Billing, we’re equipped to handle the processing needs of high-risk merchants, and can approve your business in as little as 24 hours. In this piece, we’ll dive into the key things one should know about opening a high-risk merchant account. 

What’s a High-Risk Merchant?

High-risk merchants are any merchant that’s been classified as operating in an environment that comes with added risks. Typically this ‘risk’ is qualified as a higher incidence of fraudulent transactions. 

For example, online payments are typically carried out using a credit card, and the main credit card networks (e.g. Amex, Visa, Mastercard) all charge a fee to a merchant for using their network. Merchant Service Providers also charge a processing fee to help carry out this transaction (e.g., Stripe), and all this is deducted from the original seller. 

Both the credit card company (in this case known as a processor) and the MSP assume risk when they process this transaction on behalf of the seller (merchant). If a buyer’s credit card was stolen or used and the charge was determined to be fraudulent, both the processor and MSP bear some cost. Because of this, some merchants are classified as ‘high-risk’ when the processor and/or the MSP believe there’s a higher chance of fraud. They may be less likely to  choose to work with the merchant, and they’ll charge premiums or impose additional restrictions to cover their bases. 

How is risk determined?

The risk levels of your business are determined primarily by the MSP and when a business owner applies to open a merchant account with the MSP. The process begins with the MSP evaluating various details related to the applicant’s business as well as the owner’s personal history.

Some examples of this include:

  • Business financial returns
  • Years in business
  • Industry business operates in
  • Previous history of merchant accounts elsewhere, and whether the registered business has been blacklisted on any systems such as MATCH or Terminated Merchant File (TMF) held by the MSP or Credit Card.
  •  Personal credit history of business owners

What makes you a High-Risk Merchant?

A big contributing factor to whether a merchant account is classified as high-risk is the category the business opening the account operates in. Specifically, the product, service, industry, and any practices it engages in. 

But in general, there are three key activities in payment processing that commonly make any merchant high-risk, these are:

1. Card-not-present tractions are the norm

If a business is online, for example, then nearly all transactions occur virtually and the credit card or payment method is never presented physically for inspection by the seller. Naturally, this means any form of purchase that doesn’t involve the payment card being presented has a much higher opportunity for fraud to take place.

2. A high volume of transactions

If a merchant processes a lot of transactions, then this also increases the percentage of chargebacks that occur. MSPs will take the quantity of transactions into account in assessing whether a merchant is high-risk. 

3. High average order value

Coupling with high customer volume is the average order value that a merchant carries out. After all, a fraudulent transaction for $5 is viewed very differently by an MSP or credit card company from a transaction valued at $5000. This means MSPs will view any merchant that sells high ticket items online as riskier. 

Beyond these three, here are specifics that may deem a merchant account as high-risk.

Products

One aspect that may automatically qualify an account as high-risk is based on what sort of products the merchant sells. Credit Cards or MSPs may have historically seen a greater incidence of fraud when certain merchants sell specific products, and this has resulted in the broader categorization of ‘high-risk’ associated with these types of products:

  • Firearms and ammunition
  • Adult products
  • Drug paraphernalia
  • CBD products
  • Etc.

The list varies between different providers but these are common categories that will be flagged as high-risk.

Services

Similarly, merchants that provide certain services can also be considered high-risk.

Many forms of subscription billing, for example, regardless of the service sold is a common broad category that has merchants flagged as high-risk. Some examples of such a service are:

  • SaaS (Software as a Service)
  • Loyalty programs
  • Media memberships

These services are often ‘intangible’ and can result in a higher incidence of chargeback occurring as buyers don’t understand the service being provided to them or are unsatisfied with the results.

Decrease chargeback ratios and experience expert service with EMC2 Billing.

Industry

The merchant’s overall industry can immediately flag them as high-risk regardless of their historical performance and low incidence of chargeback occurring. Some common high-risk industries are:

  • Pharmaceuticals
  • Gaming
  • Adult Entertainment
  • Travel and Lodging

Practices

Certain practices offered by a merchant can also result in a higher risk category assigned to them. 

Some examples of this include when merchants offer promotions such as:

  • Free trial
  • Free product
  • Only pay for shipping
  • Extended warranty
  • Money-back guarantee
  • ‘Get rich quick’ offers

Any of these practices can mean a merchant is classified as high-risk. 

History

Now, if one’s merchant account doesn’t tick any of the above boxes, there’s still a chance it may be flagged as high-risk. This simply comes down to the historical records of the merchant and how they work in its favor. 

After all, if one’s business has had a long history of business with very few chargebacks and no issues with any other merchants or credit card providers, there’s a good chance they’re low risk.

Conversely, if the business is new, they have a very limited history of operating as a merchant. An MSP is taking a gamble with them, and a problem as simple as a dissatisfied customer can pose a threat to your company’s ability to have merchant processing. 

Some areas that an MSP may look into are:

Credit behavior

MSPs will look into both the credit scores of the business and its owners. They use this as a way to determine what processing rates should be provided. Low credit scores can still get approved but may result in higher processing fees. Furthermore, they’ll look into which credit card processors have engaged with the business and whether the company owes any outstanding debts. 

Chargeback ratios

This is one is considered one of the most influential factors in immediately determining if a merchant is high-risk. If a business has monthly chargeback ratios of 2% or above, then it is considered high-risk. MSPs will also check the MATCH list to see if one’s merchant is on the list for committing fraud or operating illegally or without compliance. If a merchant is on this list, then popular MSPs will usually prohibit them from opening an account with their services.

Are you a high-risk business? Find out why EMC2 Billing is the right MPS for you.

Factors to consider

Sometimes it’s inevitable to be a high-risk merchant. Aspects such as being part of a specific industry, or processing a high volume of transactions are just part of the business. 

In such cases, there are usually a few things to consider if one is a high-risk merchant:

1. Pay more per transaction in fees

High-risk merchant accounts always pay more per transaction than lower-risk accounts. If one is flagged as high-risk, then it’s common to see a 1 to 2% add-on to standard processing or transaction fees offered by the MSP. 

Some MSPs specialize in operating high-risk merchant accounts and these will commonly come with favorable fee rates, but in general, one can expect to pay more. 

2. Hold a reserve of cash

MSPs may also ask a merchant account to hold reserve accounts. These are either Rolling Reserve, Up-Front Reserve, or Fixed Reserve Accounts. They all are used by the MSPs to hold a set amount of funds as insurance. This ensures if there are any fraud or chargeback instances, the MSP can reverse those transactions using the funds held in reserve by them.

Rolling Reserve
This type of Reserve account is commonly used by MSPs to hold a certain percentage of a merchant’s daily revenue for a set term. After this term, the funds are released to the merchant to deposit into their bank.

Up-Front Reserve
Less common but also applicable are up-front reserves where an MSP may require a set value of funds to be transferred up-front when the merchant account is opened. These are then held in escrow and either released after a set term, or until an equivalent amount is collected via Rolling Reserve.

Fixed Reserve

Fixed Reserve is when the MSP and Merchant agrees on a set value to be held in reserve, as opposed to just a percentage of daily revenue that’s eventually released. This set amount is then collected via every transaction and once its met, no more percentage of revenue is collected and held in reserve by the MSP. 

3. Account freezes

In rare instances, MSPs may occasionally freeze a high-risk merchant account when they begin to detect any fraudulent activity in the account. In such a case, the account is frozen until an assessment is carried out by the MSP to determine whether it’s safe to continue operating the account. 

When this happens, any processing of payments by the account will be disabled until the freeze is lifted. An assessment by the MSP will usually result in either changes to the agreed-upon merchant agreement, permanent termination of the account, and in rare but extreme cases criminal action may be pursued. 

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Somewhat unavoidable in most cases, opening a high-risk merchant account is common these days given the prevalence of online product and service transactions. However, remaining vigilant about the MSPs you partner with and providing transparency about your business will help an MSP trust you and offer you favorable terms. Partnering with EMC2 Billing can set you at ease. Our Merchant Processing systems are uniquely tailored to high-risk merchant accounts. Find out more about us here.

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