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Published 11 June 2024
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5 minutes

What Are High Risk Merchant Accounts?

Certain types of businesses will need to open a high-risk merchant account, even if they have a good credit rating. You’ll need to apply for a high-risk merchant account through a specialist provider. We explain how it works, what’s involved in applying and the fees you can expect to pay.

What makes your business high risk? A bad credit rating, high chargeback or fraud rate, or history of insolvency will certainly count against you when you’re trying to get approval for a merchant account. But even if you have a viable business and a good track record to show for it, some sectors are still considered a particularly risky proposition for banks.

For example, heavily regulated industries, such as gambling or alcohol, and businesses that handle very expensive goods are risky, as well as those that risk damaging the reputation of the bank such as adult entertainment services. But even sectors that seem harmless – travel or events, for instance – can be considered risky because there is a delay between payment and delivery, meaning cancellation and chargebacks, when you have to return a customer’s payment after a dispute, are more likely.  

Luckily, even if your business is considered high risk, you could still be approved for a high-risk merchant account. Offered by specialist providers, they typically charge higher fees and have stricter application processes to account for the increased level of risk and potential for chargeback, fraud and losses.

In this article, we explain high-risk merchant accounts, how they differ from regular accounts, how much they cost, and how to choose the right one for your business. 

Do I need a high-risk merchant account?

If your business falls into a high-risk category due to the sector you operate in or your trading history, you may well find that traditional banks or payment processors will be wary of approving you for a conventional merchant account. 

In other words, the decision probably won’t be up to you. The only providers that are likely to offer you a merchant account will be those that offer dedicated accounts for high-risk businesses. 

» MORE: What is a merchant account

What makes a business high risk?

There are a number of factors that could place your business in the high-risk category, including:

  • Industry: Businesses in riskier sectors, such as gambling, adult entertainment, events, travel, pharmaceuticals and alcohol, are more likely to experience chargebacks or fraud. 
  • The nature of your products or service: Selling luxury goods is inherently riskier than selling routine or cheaper items because of the potential for significant losses if there’s a dispute. 
  • Chargeback: If you have experienced particularly high chargeback rates (which cost your processor or bank as well as your business) in the past, you could be considered risky by a merchant account provider.
  • Age: Newer businesses with no financial history to prove their viability could be seen as risky. 
  • Poor trading history: Alternatively, you could have been trading for a while but your business has a poor credit score or you personally have experienced insolvency.
  • Location: Some countries have a reputation for fraud or an unstable economy. Whether your business is based there or you sell to customers there, this could count against you.  
  • Fraud: If your business has lost data or money to fraudsters in the past, regular merchant account providers may think you’re too risky to work with.
  • Regulations: If you operate in a heavily regulated sector, it could affect your ability to operate and you’ll have a greater chance of breaking the law and facing penalties.
  • Your own creditworthiness: If you or any of the other directors or owners of your company have a poor credit rating or a history of insolvency, it could affect your ability to open a merchant account.

How does a high-risk merchant account differ from a regular account? 

There are some major differences between regular merchant accounts and high-risk merchant accounts:

  • Higher fees: The cost of processing each transaction, including interchange fees, is higher to compensate for the increased risk of losses. You may also have to pay a larger initial set-up fee to open the account. 
  • Stricter requirements: You may be bound by much harsher obligations than a regular merchant account, including longer contract terms and high early exit fees.
  • Longer settlement times: It could take longer for the customer’s payment to be processed and settled in your business bank account while more stringent fraud and verification checks are conducted. 
  • Rolling reserves: A rolling reserve is a percentage of your turnover retained by the bank or processor for a specific period to insulate them from costly chargebacks or losses.

These characteristics might sound negative, but there is another way to look at it: By opening a high-risk merchant account, you’re gaining the ability to sell a wider variety of products or services, and to access new markets that other businesses may not be able to enter.   

How much does a high-risk merchant account cost?

The main cost of any merchant account is the processing fees, which are typically 1% to 2% of the transaction amount. That means taking a £100 payment would cost you between £1 and £2. With a high-risk merchant account, the fees are in the region of 4% to 10%. You’ll also have to pay anything between £50 to £100 in monthly fees and sacrifice up to an additional 15% for the rolling reserve. This adds up to a significant portion of your overall takings, something you’ll have to factor into your plans and projections. 

How to choose a high-risk merchant account

If your business falls into any of the above categories then you’ll probably have to open a high-risk merchant account in order to take card payments. Here’s what you should consider when choosing a provider:

  • Fees: Fee structures can vary, with some providers charging low transaction fees and higher monthly fees, while others do the opposite. Assess how each pricing structure would affect your takings.
  • Customer service: High-risk businesses typically experience more chargebacks and disputes, so you need a provider that is willing and available to help when things go wrong. Ideally, they’ll have round-the-clock support via phone, email and live chat.
  • Other clients: It’s a good sign that they’re a suitable provider for you if they work with other businesses in your sector. 
  • Security: Security is always important in payments, but especially so in high-risk sectors. Look for a provider that offers advanced security measures, such as fraud detection and prevention, data encryption and firewalls. 

» MORE: How to open a merchant account

Image source: Getty Images

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