What Is a High-Risk Merchant Account and Do You Need One?

Are you having difficulty getting approved for a merchant account? If you are in an industry where things seem to be more difficult for you to get things operational, then you are probably in a high risk industry. In this case, you would need what we call, a high risk merchant account and it’s something that isn’t always as easy to do. Let’s identify what is a high risk business and why you would need a high risk merchant account.

What Is a High-Risk Merchant Account?

A high risk merchant account is a type of merchant payment processing account that would be considered enhanced risk or reputational risk by most payment processing companies.

When your business is granted a merchant account, the payment processor is granting your business a line of credit. If one of your customers files a dispute, the payment processor is responsible for paying the chargeback and then billing the business. This process creates financial liability for the payment processor if they are unable to collect the dispute from your business. High risk businesses can have higher dispute rates and this is why payment processors may be more reluctant to grant you an account. In other cases, if your business operates in a legally complex area (age restrictions, state restrictions, etc), a payment processor is required to conduct enhanced due diligence on their part to maintain compliance; not all payment  processors are able to do this due to lack of infrastructure, policies or appetite.

A high risk merchant account is designed to meet all the needs of a business that falls under this category. The terms, fees, and underwriting process are different from a standard account, but once you are approved your ability to accept payments will be the same as any other regular merchant account.

What Makes a Business "High-Risk"?

Several factors go into this classification and the classification differs from one payment processor to another. However, here are some of the common factors:

Industry type is the most common reason. Certain industries are considered high-risk based on the products or services offered regardless of how well it operates. These include:

• Firearms and FFL dealers
• CBD and hemp products
• Adult products
• Online gaming and gambling
• Travel agencies and ticket brokers
• Nutraceuticals and supplements
• Debt collection and credit repair
• Subscription box services
• Vape and e-cigarette retailers
• Bail bonds

Chargebacks - Your payment processing  history matters a lot. Being upfront with payment processors can go a long way in the case you have had high disputes in the past. Many high risk payment processors are generally more accepting to higher risk industries having some dispute ratios over 1% on a case by case basis.

International sales – Having a higher number of international sales can also be a factor. Processing payments across borders introduces longer shipping times, higher rates of fraud and currency conversions.

Business model -  Subscriptions, trial offers, large tickets or businesses that deliver goods or services significantly after the time of sale (like travel or event tickets) create a larger time of liability for disputes from customers.

Credit history - Personal credit history is reviewed during underwriting. A poor credit profile or past financial issues can make a business a higher risk liability regardless of what business they operate.

How Is a High-Risk Merchant Account Different from a Standard One?

There are a few key differences:

Higher processing fees. Payment processors typically have higher costs to maintain your account as they have to dedicate more compliance monitoring software and individuals involved in manual reviews to ensure your account remains within compliance. This is the trade-off for getting approved when standard processors won't take you.

Reserves. Many high-risk accounts require a reserve, where the processor holds back a percentage of your monthly sales (typically 5-10%) for a set period as a buffer against chargebacks. The money is yours and it can be released back to you once you have established history taking payments with your payment processor.

More thorough underwriting. You can expect to provide more documentation upfront during the onboarding process. Common document requests include business bank statements and payment processing statements, industry specific documents and additional website requirements.

Chargeback monitoring. High-risk accounts are subject to more scrutiny around dispute rates. Keeping your chargeback ratio below 1% is important to stay in good standing. Some high risk payment processors may require you to work with a third party dispute mitigation platform.

Do You Need a High-Risk Merchant Account?

If  your business falls under a high risk category, you need to have a high risk merchant account.

Having standard merchant account when operating in a high risk industry can have negative impacts to your business. In many cases, you will be denied an account but if you are approved your business runs the risk of termination. A sudden account termination can freeze your funds and leave you unable to process payments for days or weeks; which can be devastating for any business.

Getting set up with a high risk merchant account helps eliminate many of the risks when it comes to accepting payments.

That said, not every business that gets denied is actually high-risk. Sometimes getting denied for a merchant account doesn’t mean you can’t get accepted with a high risk payment processor. If you've been denied and you're not sure why, it's worth talking to a payment specialist before assuming you need a high-risk account specifically.

Signs You Might Need a High-Risk Merchant Account

Here's a quick reality check to see if you actually need a high risk merchant account:

• You've been denied by a payment processor and weren't given a clear reason
• Your business sells products or services in one of the industries listed above
• You've had your account terminated without warning
• You're currently processing through a third-party aggregator (like Square or Stripe) and your business has been flagged or your funds are being held
• Your business operates in a legal gray area or is heavily regulated
• You sell internationally and process a significant volume of foreign transactions
• You offer subscriptions, trial offers or memberships where customers may cancel and dispute charges

What to Look for in a High-Risk Merchant Account Provider

Not all payment processors work with high risk industries. Here are a few things to look out for when you are shopping around:

Transparent pricing. Some high-risk processors take advantage of the fact that merchants in this space have fewer options. Work with a payment processor who is clear about their pricing and shares the contract terms before you sign.

Clear reserve terms. Ask upfront how the reserve works, what percentage is held, for how long, and what triggers the release of those funds. An experienced payment processor will have clear terms and a specialist that can explain it to you.

Chargeback support. A good processor will help you manage and fight chargebacks, in some cases they can refer you to a mitigation platform that works with their network.

Industry experience. Look for a processor that has worked with businesses in your specific industry. They'll understand your needs and they can walk you through the onboarding process.

How Redde Payments Approaches High-Risk

At Redde, we work with businesses across a range of industries, including those that other processors turn away. We believe that if your business is operating legally and serving real customers, you deserve to take payments.

We're upfront about our pricing and terms, and our team takes the time to understand your business before turning you away. Whether you're a firearms dealer, a supplement brand, a CBD dispensary or a travel business, we can help you find a path to accepting payments reliably.

If you've been denied or had your account terminated and you're not sure what to do next, reach out to our team. We'll take a look at your situation and give you an honest answer about what your options are.

The Bottom Line

Why go through the extra trouble for getting a high risk merchant account? If your business falls under a high risk category, it’s simply too risky to try and fit in with a non high risk payment processor. You run the risk of holds, termination and even being placed on MATCH by your standard payment processor for violating their standards.

A better approach is to understand what is expected from your business category and team up with a payment processor that can walk you through their on-boarding process. Redde Payments is an industry expert in this category, our team can help guide you through this process to help improve your ability to accept payments.