There are many factors that contribute in labeling any business high risk specifically, the nature of the business and manner in which it operates. High Risk Businesses which fall into high risk categories may have trouble getting a high risk merchant account from their local bank – many banks are reluctant to approve the merchant account if they decide that a company has a higher likelihood of chargebacks, complaints or fraud, since the bank may need to assume responsibility if the business doesn’t. Some examples of businesses that may need high risk merchant accounts would be adult businesses, telemarketing, online pharmacies, tobacco products, debt services, software downloads, ISP hosting, dating services, gambling, or businesses which are extremely large or very small, since both may be a target of fraud.
It is up to the underwriting department at the third-party processor, acquiring bank, aggregator, or provider to determine which merchant accounts are considered high risk. It is possible that your business will be considered high risk by one provider, where another may assign your type of business a normal risk factor.
Each merchant service provider has underwriters that are responsible for determining the risk factor associated with certain types of businesses and accounts. When determining whether a business type is unacceptable or restricted a provider considers criteria such as:
Certain business types are prone to having a high occurrence of chargebacks to sales. Any business type that has a typical chargeback ratio that is 1% or 2% higher, is usually considered high-risk or unacceptable by most credit card processors.
Certain business types are more susceptible to credit card fraud than others. Credit card fraud is more common in certain industries because of the products or services offered. Any business type that has a higher than normal fraud rate will be considered high risk or unacceptable by many providers.
Merchants that charge for products or services too far in advance heighten their exposure to excessive chargeback’s. Businesses such as subscription publications, online memberships, and other similar services are most affected by this guideline. Typically, a provider will limit the time in advance that a merchant is able to bill their customers.
Target market is the reason why certain business types fall in to the high risk merchant category. Specifically, businesses with an international client base are considered high risk. Exporters, international freight forwarders, and shipping businesses can all be considered high risk merchants due to their international customer base.
Business operation has an affect on the risk factor associated with the business. Businesses that use outbound telemarketing, door to door sales, multi-level marketing, and third-party order fulfillment services are all considered by most providers to be high risk merchants. This type of business operation increases the likelihood of chargebacks for various reasons.
The risk factor associated with a high risk merchant account can vary depending on how the merchant transacts their credit card sales. For instance, a courier service that utilizes a wireless terminal to swipe cards at a customer’s residence may be considered high risk, when the same business would be prohibited if they were to take credit card numbers over the phone. Card present merchant accounts are always considered lower risk than card not present merchant accounts.
Businesses that offer products or services that are illegal, or are closely related to illegal activities, will be considered high risk or prohibited by most providers.
Products or services sold using marketing that exaggerates results are at a high risk for chargebacks. Customers will ultimately issue chargebacks once they realize that the product or service that they purchased does not deliver the results promised in the marketing.
High-risk merchants still need some way of accepting credit cards, and that’s where High-risk merchant processors come into play. Their fees are generally higher, but is a still a better option than not being able to accept credit cards at all. When choosing a processor for your high-risk merchant account, making sure that you know what is most important does matter. The fees that you pay depend on the type of business that you have and the volume that you are projected to have from month to month.
Fees may differ, depending on whether your business primarily receives credit card payments over the internet, by phone or mail, in person, through a wireless terminal or entered via a touch-tone phone, so make sure the merchant account deals with your kind of processing before comparing rates.
Watch out for mildly deceptive terms as well as outright fraud. Avoid high risk merchant accounts that fail to provide a full price list of fees before you sign up. Read the fine print and make sure you understand what the percentages and fees will mean when translated into real dollars and cents for your business model. The best high-risk merchant account providers will be straightforward in listing fees, but some may deliberately make them difficult to find, and you don’t want to discover that your profits are disappearing to high fees after you’ve been approved and begun accepting credit cards.
When you’ve decided on a high risk merchant account with the best fees and a good reputation, apply online for approval. Make sure any website where you must enter confidential banking information is secure. You may only need to give information for initial contact online, and continue your application by following subsequent instructions, if the merchant provider believes you’ll be approved.