High-Risk Merchant Account and Credit Card Processing: What You Need to Know

What's a high-risk merchant account and why would your payment processor stick you with one?

Matthew SpeiserAug 10, 2020
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A high-risk merchant account is a merchant account given to a business that the payment processor deems to be at greater risk of fraud and chargebacks. Payment processors make that determination based on factors such as the nature of the business, its financial history and its location.

If you're saddled with a high-risk merchant account this designation will have a huge impact on how much it will cost you to accept credit and debit card purchases.

What is a merchant account?

A merchant account is an account provided by your payment processor in which funds from your business’s credit and debit card transactions are deposited after payment has been processed. From there, the funds are deposited into your business bank account. The benefit to merchants is that most payment processors will deposit funds into their account within one to two days of the transaction while they wait to receive the actual funds from the issuing bank (which can take longer).

Payment processors require customers to have merchant accounts to mitigate the risk they take on in processing payments. There’s actually quite a bit that can go wrong when payment is processed — the payment could be deemed fraudulent, the customer could demand a chargeback or the purchase could be a violation of the processor’s terms of service (among other issues). When this happens, the payment processor will require that the holder of the merchant account deal with the issue — but there is always a chance that the account holder will refuse or simply disappear.

If this happens, the payment processor is left holding the bag, so to speak. The funds from the transaction have already been transferred to the merchant’s business bank account, meaning the payment processor has no way of recouping their loss. A merchant account and the fees associated with it are essentially a hedge against that happening.

There are two types associated with merchant accounts — interchange-plus and tiered pricing. Interchange-plus pricing is expressed as a small percentage of a transaction (paid to the credit card network) plus a small fixed fee (paid to the payment processor). For example, if you use Shopify as your payment processor you’ll be charged a 2.6% plus 30 cents fee on every credit and debit card transaction. Interchange-plus pricing is usually negotiable, with low-risk merchants getting more favorable terms.

Tiered pricing is a bit more ambiguous. Basically, your payment processor will charge you a different per-transaction processing fee depending on how “qualified” it deems the purchase to be. Essentially, the more risky the processor deems the purchase, the higher the processing fee you will pay. How the processor qualifies the purchase can often be unclear to the merchant. In general, tiered pricing is more expensive than interchange-plus pricing.

What is a high-risk merchant account?

When you apply for a merchant account, you’ll need to provide business and tax information and, often, submit to a credit check. If anything in your application signals to the payment processor that you might be a high-risk merchant, you’ll either be refused a merchant account or given a merchant account with high rates and fees to compensate for the fact that the payment processor believes your account is more likely to experience fraudulent charges, chargebacks and other issues.

It’s important to note that every payment processor has different standards for what they consider “high risk,” so just because one payment processor deems you risky does not mean all payment processors will. But if you do end up having to take out a high-risk merchant account, you can expect to pay a lot more to process payments. According to the merchant services provider ShopKeep, high-risk merchants can pay up to 1%-2% more per transaction than low-risk merchants. In particular, here is what you can expect with a high-risk merchant account:

  • Longer contracts: If you’re a high-risk merchant, your payment processor will probably try to get you to sign a long-term contract so it can lock you in at rates that are favorable to it, even if you become lower risk over time.

  • Tiered pricing: Although some payment processors may offer interchange-plus pricing to high-risk merchants, it’s much more common for them to receive tiered pricing, which generally costs more per transaction.

  • Chargeback fee: This is a fee assessed by your payment processor on your account in the event of a chargeback. Generally, high-risk merchants have higher chargeback fees than low-risk merchants.

  • Automatic renewal clause: Another common feature of a high-risk merchant account contract is a clause that allows the terms of the contract to extend beyond the initial expiration date. You’ll need to look at your contract closely to determine when you need to give notice if you don’t want the automatic renewal clause to go into effect.

  • Early termination fee: If you want out of your contract before it reaches its expiration date, expect to pay an early termination fee. The fee you pay will depend on the terms you negotiate with your processor.

  • Liquidated damages clause: If the early termination fee isn’t bad enough, you may also have a liquidated damages clause in your contract, which specifies an additional amount of money you must pay for failing to meet the terms of the contract.

  • Keep a reserve: Some payment processors may require they keep an additional portion of your credit card sales as a hedge against fraud and chargebacks. There are three types of reserves a payment processor may require: rolling, upfront or fixed.

    • Rolling reserve: With a rolling reserve, a payment processor will withhold a portion of your daily sales for a specified period of time and then gradually release the funds back to you.

    • Up-front reserve: An up-front reserve is an amount of money that must be placed in escrow at the start of a contract and not returned until the full value of the reserve is met in payment processing fees.

    • Capped/fixed reserve: With a fixed reserve, the payment processor withholds an additional percentage of every transaction until the reserve reaches an amount agreed upon in the contract.

  • Account freezes or terminations: If your account becomes riskier over time, you might experience account freezes where you can’t accept any credit or debit card transactions. If the issue persists, your payment processor may terminate your merchant account outright. This issue is particularly common with payment service providers like Square and Stripe. These types of businesses offer one large merchant account shared by all their clients. If one client becomes riskier than the others, it’s in the payment service provider’s interest to remove it from the account, rather than drive up the price for its other customers.

If all of this sounds less than ideal, that’s because it is. But as a high-risk merchant, you don’t have a lot of bargaining power because there isn’t a large market for your business.

Types of businesses considered high risk

When you apply for a merchant account you essentially go through an underwriting process with the payment processor. Although different processors have different standards, here are some things that may be considered red flags and lead to your business being designated as “high risk.”

  • Bad business or personal credit score: Having a bad credit score signals to the payment processor that you might not be good with managing finances or more susceptible to fraud.

  • Merchant account history: If you have a history of chargebacks or fraud with another merchant account provider, this will obviously have a negative impact on your application.

  • Years in business: Merchant account providers are warier of customers with less experience with payment processing.

  • Where your business is headquartered: If you sell to customers in the United States but your business is headquartered in another country, you pose a higher risk for fraud.

  • Questionable products or services: This varies by payment processor, but obvious examples are pornography and drug paraphernalia.

  • High-cost purchases: If your average purchase amount is unusually high, you could be considered high risk. The more expensive the purchase, the greater the chance of fraud.

Businesses that may be considered high risk by a payment processor come in all shapes and sizes. Examples include airlines, escort services, casinos, e-cigarette vendors, collection agencies, fantasy sports websites, weapons vendors, life coaches, pawnshops, vacation planners and furniture or electronics stores.

What to do if you are considered high risk

If most payment processors identify you as a high-risk merchant, it can be hard to find a good deal on processing. To help, here are some best practices to keep in mind:

  • Do your research: Before you agree to work with any payment processor, read its website and customer reviews. There are lots of less-than-reputable payment processors out there. A sketchy-looking website or bad customer reviews can tip you off to a payment processor that won’t give you a fair deal.

  • Read your contract closely: For all the reasons mentioned earlier, it behooves you to read your merchant account contract so you can understand all the clauses that may end up costing you money down the road.

  • Work on your credit score: The higher your credit score, the less risky you are to payment processors.

  • Be scrupulous about who you sell to: This can be tricky, but if you feel a customer poses a risk for fraud, it’s in your best interest to avoid selling to them.

  • Don’t misrepresent yourself: If you’ve been having a hard time getting a merchant account, you might feel tempted to fudge the truth on your application. Don’t do this. You’ll eventually be figured out when the payments start coming in, and merchants who lie can be placed on the Terminated Merchant File (TMF) List. This is a list compiled and managed by Mastercard of business owners whose merchant accounts have been terminated in the last five years. Being on this list can make it much harder to find a merchant account in the future.

Payment processing as a high-risk merchant

Unfair as it might be, if you’re considered a high-risk merchant, payment processing is going to be more expensive for you. However, that doesn’t mean you need to be ripped off. Major payment processors may not want to work with you, but there are reputable services out there that will take your business. Do your research, evaluate your options and read your terms closely before signing any contract. Ideally, the benefits of accepting credit card payments will far outweigh any costs incurred.

Point-of-sale software

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Merchant account providers

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on PaymentCloud's website

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on Payment Depot's website

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A version of this article was first published on Fundera, a subsidiary of NerdWallet.