High-Risk Merchant Accounts
Do I need a high-risk merchant account?
When applying for a merchant account, your business will be assessed in terms of risk — that is, the risk to the bank or financial institution providing your account, of working with you. A range of sectors, including charities, travel and tourism, tattoo studios and affiliate marketing may be considered ‘high risk businesses’.
If you operate in a ‘high risk’ sector (which we list towards the end of this article) or have been denied by a bank in the past, then a high-risk merchant account could enable you to do business.
How are businesses assessed as high-risk?
When it comes to assessing risk, a financial provider will look at both the enterprise in question and the sector it works in.
For the enterprise itself, high-risk factors include:
- How many years the company has been trading.
- How financially stable the company is.
- The credit worthiness of the directors and owners (possibly offset when personal guarantees are involved).
- The income channel — i.e. subscriptions versus pay-on-delivery — and length of time between payment and delivery of product/service.
Then, the sector is likely to be analysed via:
- Credit Risk: Industries that have a delay between payment and delivery tend to be deemed as higher risk. That’s because if the company goes out of business before they can fulfill the order, the acquirer assumes liability. Airline carriers, tour operators and dropshippers are good examples of such ‘high risk’ sectors.
- Regulatory Risk: Some sectors are heavily regulated and are susceptible to drastic changes. Such unpredictability reduces the stability of long-term business models, and in turn, increases the risk involved. Additionally, there are more laws to break (knowingly or otherwise), which has consequences too.
- Reputational Risk: Banks rely heavily on reputation, and so any activities that could jeopardise this are deemed high-risk i.e. facilitating legal-but-frowned upon transactions.
If your business is considered ‘high risk’ in any of the above ways, it’s likely a traditional bank may deny your account application. But that’s where a high-risk merchant account can come in very useful indeed.
What are the cons to having a high-risk merchant account vs a normal one?
Higher transaction fees
High-risk merchant accounts generally come with higher transaction fees. You might be looking at roughly 3.95%, versus the 0.95% fee for other accounts.
Higher set up fees
Risk comes at a price, like in any area of finance. Setting up your high-risk merchant account will cause greater setting up fees.
Longer settlement period
A longer settlement period is inflicted to help reduce the chances of a charge back. This might be up to around a week compared to the usual 3 days.
A rolling reserve is used to reduce the bank’s potential loss from chargebacks. This means a portion of your card transactions are collected by the acquiring bank which is used as a payment buffer.
How to choose a high risk merchant account provider
Do they work with other merchants in your industry?
Choosing a provider that’s familiar with your industry has some advantages. For one, they will be more understanding of what typical transactions are like, and they may even be better equipped to detect fraudulent activity.
Do they offer customer services by phone?
If you operate in a high risk sector, it is likely you are going to encounter more issues around payments. Having a customer services telephone number to call or live chat will be so much better than relying on someone to respond to email or support tickets.
What is their total fee structure (monthly fee, transaction fee and discount rate used)?
Some providers will charge high monthly fees but low transactions, whilst others do the opposite. When choosing between high-risk merchant account providers, it’s important to get all the relevant fee information and then use your typical transaction volume to produce an estimated monthly cost to your business.
If you only take order online, do they specialise in payment gateways?
There is so many types of fraud possible with online payments that is well worth selecting a merchant account provider that has experience taking online credit card payments for high risk merchant services. They are likely to use a more secure payment gateway and have process in place to reduce fraud and chargebacks.
Typical high-risk merchant fees & pricing
- Around 4% for transaction fees and up to 10% on overseas transaction fees.
- Around £50 to £100 per month in monthly fees.
- Around 15% of your transaction money in the rolling reserve.
How to increase your chances of getting accepted for a high-risk account
Keep your accounts up to date
Having your accounts up-to-date will go a long way to proving your current financial situation.
Make sure your T&Cs are fully compliant
Ensuring that your terms and conditions are fully compliant, so you’re within the legal framework of regulatory practices and restrictions, will help convince providers that you won’t cause issues down the line.
If you are using 3rd party fulfilment, make sure your contract protects you
Using 3rd party fulfilment can increase the risk of your company around orders and refunds. Make sure your contract with them leaves you protected, should any problems arise.
Get a number of quotes and do your research
Getting a range of quotes will put you in a better negotiating position in any business situation. Approaching a number of providers, and taking the time to read customer reviews, will make sure you’re fully informed and able to get the right high-risk merchant account for you.
Showing you can minimise chargebacks will leave you with more chance of getting accepted. You can do this by implementing fraud filters, properly formatting statement descriptions and by having a quick and easy refund system.
Consider off-shore merchant accounts
Broadening your net of potential providers will only increase the chances of getting accepted, and may also land you with more preferable terms.