What Is a High-Risk Merchant Account?

What Is a High-Risk Merchant Account?

Did you know that 1.1 million establishments in the U.S. opened between March 2020 and March 2021 alone? However, 965,995 firms also closed. Small businesses accounted for over 86% or 833,458 of closures.

Running out of money is among the top reasons for business closures. It can result from poor cost management or the inability to get financing. In other cases, it’s due to not having enough sales.

A lack of sales can, in turn, stem from not offering various payment options to customers. Unfortunately, it’s a problem many high-risk merchants face.

Fortunately, a high-risk merchant account provides a solution to such issues.

In this guide, we’ve covered the facts you must know about high-risk merchant accounts. So read on to discover what they are, who they’re for, and why you might need one.

What Is A High-Risk Merchant Account?

A high-risk merchant account is a specialized bank account for payment processing. It lets businesses considered high-risk merchants accept credit and debit card payments. Funds from these transactions then sit in the account for a settlement period.

The settlement period varies, but it can take anywhere from 24 hours to 2 months. At this point, the payment processor deducts processing fees from the funds. Once settled, the funds get transferred to the merchant’s bank or checking account.

How Do Businesses Become High-Risk?

Banks, business payment processing solutions, and payment service providers have varying risk criteria. For example, some deem businesses high-risk because of their heavily regulated industry. Examples include the alcohol, firearms, and tobacco sectors.

Businesses with higher average transactions may also be high-risk. These include jewelry stores; they often process thousands of dollars with each sale.

Firms with seasonal sales may also classify as high-risk due to inconsistent revenues. Construction and farming businesses often fall under this risk factor.

A higher possibility for chargebacks and fraud can also make businesses high risk. Other factors include recurring billing and subscriptions. The guide in the following link explains these risk factors in more detail. 

Businesses may also classify as high-risk merchants if they accept international payments. These include e-commerce sites and travel-related businesses that often cater to customers worldwide.

Sometimes, being a new business is, in itself, a high-risk factor. Another is if you’re part of the one-third of Americans with a low or poor credit score.

How Do You Know You’re A High-Risk Merchant?

Some banks, payment processors, and payment service providers are straightforward about this. For instance, they often have listings of businesses they consider high-risk. They may also tell you you’re high-risk if you apply for a low-risk account.

So before applying for a high-risk merchant account, check if your firm makes it in those lists. 

Other institutions may not be as clear and can deny an application for a low-risk account. If this happens to you, ask them why, and they’ll likely tell you you’re a high-risk merchant.

How Do High-Risk And Low-Risk Accounts Differ?

High-risk merchant accounts often have higher transaction fees. Depending on the account provider, the charges can be up to five times higher. For example, a low-risk account’s interchange fee may only be 0.3%, while it can be as high as 1.5% for a high-risk account.

High-risk accounts also take longer to approve, sometimes up to a week. By contrast, you can open a low-risk account within minutes.

High-risk merchant accounts also often have more requirements. For example, they may require several months of business bank statements. Account providers may also check a merchant’s personal credit history.

High-risk merchants must also usually agree to longer lock-in contract terms. It can be anywhere from three to five years. Low-risk accounts are often a monthly or yearly agreement.

Do High-Risk Accounts Have Any Benefits?

Yes. High-risk accounts benefit merchants by letting them accept payments using various methods. They also help businesses combat chargeback fees and crimes like fraud and scams.

All those benefits also extend to customers. 

Diverse Payment Method Options

A high-risk account allows for debit and credit card payment processing. You won’t be able to accept such payments if you’re a high-risk merchant and you don’t have a high-risk account.

Some high-risk merchant accounts even accept cryptocurrencies. With 1 billion people worldwide expected to use crypto this 2022, this is a nice perk.

Higher Chargeback Ratios

A chargeback is a charge returned to a payment card. It occurs when card owners successfully dispute items on their statements.

High-risk merchant accounts have chargeback ratios higher than low-risk accounts. It’s the number of chargebacks divided by the total number of transactions.

Having a higher ratio and threshold helps merchants avoid hefty chargeback fees.

Acceptance Of International Payments

High-risk accounts let merchants work with international customers. After all, they allow businesses to accept payments in different currencies. That allows business owners to expand their firms outside their home country.

More Secure Payments

High-risk merchant accounts use advanced fraud mitigation technologies. After all, account providers know that high-risk businesses are more prone to fraud. So they use more innovative fraud and scam detection tools to prevent such crimes.

Fewer Limitations On Products And Services

You also get more freedom on the products and services you can sell with a high-risk merchant account. For example, if you have an e-commerce store and want to sell alcohol, you may be able to do so with a high-risk account. Another is if you want to sell a subscription service or let your clients set up a recurring payment.

Happier Customers

All those benefits can help boost customer satisfaction rates. For example, people tend to like stores that accept various payment methods. They also seem to like contactless payments better; in 2021 alone, over 80% of U.S. consumers used this method.

Open A High-Risk Merchant Account Today

While the term high-risk merchant account sounds negative, it has many benefits. Without it, many businesses, from farms to online stores, have limited payment options. Not having one can also cause them to lose many potential clients.

So if you own a high-risk business, it’s time to open a high-risk merchant account. It can give you more freedom and more clients from all over the world.

Did you like this article? Then you’d surely love our other nifty business and finance guides, so be sure to check them out now!

Leave a Reply