What is a High-Risk Merchant?
To understand this question and its answers perfectly, you must first know exactly what a high-risk merchant account is. A merchant account is one that allows business to accept all forms of cashless payments, most often in the form of credit or debit cards. Since the release of credit payments take longer for banks to process, a merchant account provider deposits the amount of the transaction directly into the merchant’s account and then claims the money from the issuing bank, with an added fee of course. High risk accounts are for those businesses considered a high risk due to the nature of their business operations or because of the great number of chargebacks their merchant accounts have previously incurred.
Which Businesses are considered High Risk?
Such businesses include insurance companies where the risk of legal disputes are high, charitable organizations, since donors are not buying anything so are more likely to withdraw their transactions. Businesses with transactions that exceed $1,000 are also high risk since the hefty price tag usually comes with scrutiny on the product being sold.
This does not necessarily mean that your business is involved in any illegal activities, but simply that the nature of the business your company deals with has a greater chance of not being viable financially or has a higher chance of legal issues.
New businesses that do not possess a significant reputation yet, are also considered high risk. The same can be said for experienced businesses that possess a bad credit score due to past decisions which resulted in huge financial losses and setups who have had their applications for low risk merchant account terminated for any number of reasons.
Businesses which often handle many international imports and exports can also be labelled as high risk, as the rules and regulations regarding transactions across borders are often finicky and fraught with red tape, meaning that financial service providers hesitate in dealing with them.
How Does a Business Get a High-Risk Merchant Account?
So, if your business unfortunately falls into these categories, it would be highly unlikely that you would be able to obtain a regular merchant account. This does not mean you would have to go out of business or avoid cashless transactions. You can consider obtaining a high-risk merchant account, but what exactly does this entail?
A high-risk account involves working with a financial services provider who is willing to assume the liability associated with the increased risk that your business operates under.
The services offered in high risk accounts are often far pricier, but also advantageous when compared to their low risk counterparts.
They include services such as multi-currency transactions for those businesses that deal primarily with international transactions. There is also a great relaxation in the amount of allowed monthly volume of processed sales. Such an account will also help you to process recurring transactional accounts which usually occur on a monthly basis.
How much will these added services cost your business? The fee structure of high risk merchant account involves following sections:
• Set-up fee
• Captures fees
• Processing fees
• Penalties for chargebacks
• Merchant account reserves
These are the registration fees that you will have to pay to the acquirer once you have been assessed and accepted as a high-risk merchant. It is vital that you read the fine print before signing any contract to avoid nasty surprises about hidden fees or any termination of account charges that you might incur in the future. Set up fees can go as high as thousands of dollars.
These are the charges for utilizing the payment gateway of the financial services provider you are dealing with. The fees vary and depend mostly on the volume of processed sales and can range from fifty to a few hundred dollars. Since there is an upper limit to the number of transactions that can be processed, additional charges are incurred for every extra transaction processed.
These are further divided into two types. Firstly, there is a fixed monthly charge and thereafter an additional percentage is charged on every individual transaction. While this amount is usually minimal for low risk accounts, it can be as much as ten percent of a sale for a high-risk account.
Penalties for Chargebacks:
As stated previously, high-risk merchants are often having more chargebacks than other businesses. To deal with this issue acquirers add strict penalties when dealing with chargebacks or any other type of rule infringement that your company might be guilty of. It is again vital to check carefully before signing any contract.
Merchant Account Reserves:
This is a requirement of most Acquirers and it is basically a savings account.
This is a reserve of cash intended for use only when the amount filed in a chargeback is too great for the merchant to pay from their regular account; thus, the reserve cash would have to be utilized to solve the dispute. The amount hat has to be in this reserve account averages around 5 to 10 percent of the monthly sales.
There are a great deal of financial services providers willing to capitalize on your businesses high-risk status to maximize their profits. Therefore, it is of utmost importance to carry out the necessary research into every possible financial services provider you might choose to work with.
Try to sign up with an acquirer who has a great track record, as well as an honorable reputation when dealing with its clients. They should also be able to help to effectively manage the risks associated with businesses of your nature and are able to offer tailor-made solutions to reduce the cost of your high-risk merchant account. Keeping yourself armed with the above-mentioned points and knowing what to generally expect regarding fees may be the key to negotiating a contract that is perfect for your business and ensures that your business is set up for success.