Opening a High Risk Merchant Account

The silver lining of having a high risk business is that there will be a smaller and less overwhelming pool of merchant account providers to choose from when you’re trying to set up credit card processing. Instead of having to research and choose from thousands of providers, you can focus your efforts on a narrower market that specializes in high risk credit card processing.

High risk can mean a lot of different things, and some providers break that down into subcategories. Is your business high risk, as in on the MATCH List? Or high risk in that you’ve had one too many chargebacks this quarter? Or, high risk could mean something as simple as selling high-ticket items online.

In this blog, we’ll look into four main high risk categories and what they mean: high risk products, high risk business practices, high risk business records, and high risk business environments. And most importantly, lay out tips to find the right high risk merchant account provider in each scenario without wasting any time or paying more than you need to.

High Risk Products

Sometimes, successful businesses that look great on paper—meaning they have great credit, low chargeback ratios and solid processing histories—may be considered high risk simply because of the types of products they sell. They’re ones that banks just don’t like to be associated with due to clashing political stances, stigmas, legal gray areas, heavy regulation, or some characteristic they deem questionable or edgy.

Examples of products some merchant account providers steer clear of are firearms and ammunition because of the political controversy and changing regulations that surround this market; adult products and services because they’re risqué and frowned-upon by some; head shop products like glass pipes because, although they are used for legal tobacco products, they can also be viewed as drug paraphernalia; CBD products, because they are not yet accepted by banks on a broad scale; and any products that are government-regulated, questionably-legitimate (“hype” products like nutraceuticals or weight-loss products), or borderline criminal.

So, if you’re selling high risk products, one of the first questions you’ll want to ask a merchant account provider is “Do you have experience with my business type?” Before you fill out any applications, talk rates, and get into the details with a sales rep, make sure the company’s underwriting team has actually boarded your business type before.

Be honest and upfront about all the types of products you sell, and ask the sales rep to confirm with the underwriting team when the last time they boarded your business type was. Time is money, and sales reps are sometimes too eager for the sale to mention your approval odds, and any business owner has better things to do than waste it on fruitless applications.

Fortunately, a high risk merchant account provider may offer resources to help you offset the risks of selling high risk products online. For instance, BankCard USA is one of the only high risk merchant account providers that bundles advanced age verification software with merchant services for age-restricted ecommerce businesses.

High Risk Business Practices

So, your products aren’t high risk. They’re not government-regulated, politically contentious or new to the market. Unfortunately, you still may fall under the high risk umbrella because of how you sell them.

Subscription billing, also known recurring billing or auto-pay, is a great selling tool for memberships, media, software-as-a-service, loyalty programs and more, but too often it results in chargebacks from customers who dispute the recurring payments.

Those chargebacks can be charged to the merchant account provider if the business is unable or unwilling to pay them. Any chargeback-prone business models raise a red flag during the merchant account application process.

Before you apply for a merchant account, you’ll want to make sure the refund policy for your subscription business is clearly written, that you have clear customer dispute resolution protocols in action, and that your subscription is “opt-in” instead of one that automatically charges the customer after a free trial or renews itself when the original subscription time comes to an end. These can catch customers off guard, and merchant account providers will want to see that your subscription billing model is set up in a way that minimizes customer disputes.

You can read more about how to avoid common subscription billing mistakes here.

Grandiose offers are another risk factor for merchant account providers. And again, although it can be a great selling tool to offer customers a free offer, free trial, an extended warranty, or a guarantee like “If you aren’t 100% satisfied, get your money back up to a year after you buy,” these signal that your business could run into financial trouble if offers don’t work out like you expected.

For example, say you offer a one-year warranty on your products and a batch of them are shipped with a manufacturer glitch, and hundreds of customers now need new ones. Having to redeem all those offers you originally made will come at a cost. Free trials are effective if you know customers are going to love your product, but if you’re a new business, do you have enough insurance to cover the extra costs if they don’t?

Multi-level marketing and “get-rich-quick” sales models are also considered risky by certain merchant account providers. If you’re anywhere close to a pyramid scheme, or advertise unsubstantiated claims about your products or services, you’ll want to make sure to clean up those areas so they are perfectly legal and have transparent advertising.

Before you apply for a high risk merchant account, think about customer disputes that could arise and adjust your offers accordingly. If you’re a new business, go easy on the grandiose claims, guarantees and offers until you have a solid processing history and can make fact-based decisions. It will increase your approval odds because the merchant account provider will be undertaking less risk by offering you services.

High Risk Business Records

OK, so you don’t sell high risk products, and you don’t have a high risk sales model. How does your business look on paper?

Records that will be scrutinized when you apply for a merchant account include credit reports, credit card processing histories, chargeback ratios, and MATCH listings. Let’s tackle them one by one.

Credit reports give the merchant account provider an idea of how well your business pays off its debts. Business credit scores and business owner credit scores are pulled up. If you, the business owner, have a lower-than-average credit score, it’s not an end-all. You may very well get approved. But if it was higher, you could most likely get a lower credit card processing rate.

So if you have a business partner or associate with better credit, consider having them sign on as the primary guarantor of the merchant account to optimize your rates. Merchant account providers are financially liable for your company if it runs into trouble with excessive chargebacks or fines and can’t afford or is unwilling to pay them, so if there’s any indication of financial risk, they usually charge you higher rates to protect their investment.

Processing histories are another factor in a merchant account application. No processing history can indicate inexperience, which translates to more risk for the merchant account provider, as can poor processing history. Do you still owe your last processor money? Was your average ticket size and monthly volume as you described it on your application? Honesty is the best policy on any new application.

Chargeback ratios are arguably one of the most important criteria for a merchant account with low rates. If you have had a monthly chargeback ratio of over 2 or 3%, you should have a system in place to combat them. You can read more about ways to prevent chargebacks here.

However, individual support for your unique business is just as important. The merchant account provider you’re considering should offer built-in fraud protection and chargeback prevention support so that they can help your cause. Many, including us, will approve businesses with poor chargeback ratios because we’re confident that our service will help them turn things around.

Finally, the MATCH List is the big kahuna of high risk factors. All legitimate merchant processors have access to it and can add merchants who have committed fraud, ignored PCI compliance, had extremely excessive chargebacks, and more. Again, it’s not an end-all (unless you’re currently operating illegally), but it will severely limit your options for merchant account providers.

High Risk Business Environments

So if you’re still reading this and thinking, “my business meets none of these criteria,” keep reading.

Some merchant services providers consider any business that operates in a card-not-present environment to be high risk because of the increased fraud and chargeback risks. When the physical card and cardholder are not present for a purchase, and are instead buying online or over the phone, there’s no real way to prove that the buyer is the real cardholder.

You can use fraud filters and other safety nets, but there’s always the chance of “friendly fraud”—when the buyer commits fraud by disputing a payment they made as an unauthorized purchase because they know they can get away with it and essentially get something for free.

Unfortunately fraud is rampant and no online or mail order/telephone order (MOTO) business is immune to the risks. Offshore businesses carry a high risk as well, and only select merchant services providers offer accounts for them. The high risk merchant account provider should offer an online payment gateway that has customizable, advanced fraud detection and prevention tools so that you can offset the risks.

Questions to Ask and Resources to Consult

Any high risk merchant processor you’re considering should be on the Visa Global Registry of Service Providers and have a positive BBB rating. Your negotiating power can be impactful on your merchant account agreement, so exercise it! Here are some questions to ask any potential high risk merchant account provider before you sign an agreement:

  • “Do you have an early termination fee?” This should be negotiable, and you don’t want to get stuck in a years-long contract.
  • “What are your monthly fees?” The merchant account provider should be able to give you a sample processing statement, and the fees should be crystal clear. Even if they offer you a low rate, hidden fees can make their services more expensive than other providers. So factor in the fees and shop around to see if another provider can beat their fees and their rates, not just the rates.
  • “Will there be a merchant reserve?” Merchant reserves are meant to protect high risk merchant account providers from footing any surprise bills that the company incurs. But, they vary from processor to processor and your cash flow is important, so you’ll want to negotiate against the merchant reserve if possible. In extreme high risk cases, the reserve may be required by all processors, but removable after a few months of consistent, successful processing. So if you do initially have to have a merchant reserve, ask what their conditions and timeframes are like to have the reserve lifted.
  • “Do you offer complimentary PCI Compliance, Fraud Prevention, and Chargeback Support?” All of these services should be built into your merchant account, not added on for a fee.
  • “Is your customer service department available 24/7?” If it’s not, this is probably not the best-equipped company to meet your needs.
  • “Is that the lowest rate you can offer?” While some of the rate merchant account providers charge is merely passed through to Visa, MasterCard, Discover and American Express, you may be able to negotiate the small markup the merchant account provider keeps for their services. Even if it only saves you pennies a transaction, that could add up. So it’s worth trying to get them down even a miniscule amount, even if they’re already offering you a competitive rate. It can never hurt to try.

We offer free, zero-obligation consultations, so if you have any questions about high risk merchant accounts, even if don’t end up with our services, we’re here to help guide you through the competitive merchant services industry to find the right credit card processing solution for your high risk business.

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