Merchant accounts allow businesses to process credit card payments and other online payments. A high-risk merchant account is a bank account designed for businesses considered to be at a higher risk of issues such as chargebacks and fraud. This categorisation might be because of the nature of the business, its financial history or the industry in which it operates. The potential for high-ticket sales and card-not-present transactions can also influence this classification.

High-risk merchant accounts typically come with higher fees and stricter contract terms compared with standard merchant accounts because the financial institutions providing these accounts take on more risk. Although the term "high risk" might have negative connotations, many businesses operate in industries that are inherently risky, and it's important for the economic environment to have merchant account providers who cater to these businesses. Below, we'll look at high-risk merchant accounts in more detail: their characteristics, how they function and what it means to work with one.

What's in this article?

• Characteristics of high-risk businesses
  
• Common high-risk industries
  
• Advantages and disadvantages of high-risk accounts
  
• How to qualify for high-risk merchant services
  
• How to choose the right high-risk account provider
  
• Strategies for managing high-risk merchant accounts
  

Characteristics of high-risk businesses

High-risk businesses have certain characteristics that distinguish them from standard-risk businesses, and these characteristics influence the way in which financial institutions perceive and treat these businesses. Here are the main characteristics of high-risk businesses:

• Industry reputation: Certain industries are labelled as high risk because of a reputation for frequent chargebacks, refunds or a high level of fraud. Industries such as adult entertainment, gambling, pharmaceuticals and travel are often classified as high risk.

• High chargeback rates: Chargebacks occur when customers dispute a transaction. A business that frequently faces such disputes is seen as a liability to merchant service providers and is usually considered high risk.

• International sales: Businesses that have a large amount of international transactions are often deemed high risk, especially if they do business in or with countries known for high fraud rates.

• High-ticket sales: Businesses that regularly process high-value transactions of US$100 or more are at a higher risk of chargebacks and fraud and are more likely to be classified as high risk.

• Bad credit history: Financial stability is a key factor in determining a business's risk level, and a poor credit history can lead to a high-risk classification.

• Subscription-based services: Businesses that operate on a recurring payment or subscription model are high risk because these types of payments are more prone to chargebacks.

• Fraud risk: Industries that are prone to high levels of fraud or businesses with a history of fraudulent transactions are categorised as high risk.

• Regulatory risks: Industries that are heavily regulated or subject to changing legal environments, such as the tobacco or firearms industries, are often considered high risk because of the potential for legal issues and compliance risks.

• New or unestablished businesses: New businesses without a proven track record or established financial history are often categorised as high risk because they lack proof of stability and profitability.

Common high-risk industries

• Adult entertainment: This industry is considered high risk because of age restrictions, legal implications and high chargeback rates. These businesses include adult video streaming websites, adult toy shops and strip clubs.

• Travel and tourism: The travel industry faces high chargeback rates and financial instability because of cancellations and the impact of external factors, such as weather or political unrest. These businesses include travel agencies, tour operators and airline ticketing businesses.

• Gambling and casinos: The gambling industry is deemed high risk because of regulatory concerns, the potential for fraud and high chargeback rates. Affected businesses include online casinos, sports betting websites and lottery ticket sales services.

• Pharmaceuticals and nutraceuticals: The medication and supplement industry is fraught with regulatory scrutiny and risks related to product efficacy and safety. These businesses include online pharmacies and shops that sell dietary supplements.

• E-commerce: Some online retail shops are considered high risk because of the potential for fraud and chargebacks. Examples include shops that sell electronics or jewellery.

• Tobacco and vaping: Businesses in the tobacco and vaping industry face high risks because of regulatory issues and health concerns. These businesses include online cigar or cigarette shops and vaping product retailers.

• Telemarketing and telecommunications: This sector is known for high chargeback rates and regulatory scrutiny. Businesses include those selling products or services over the phone and Voice over Internet Protocol (VoIP) service providers.

• Cryptocurrency: The volatile nature of cryptocurrencies and regulatory uncertainties make businesses such as cryptocurrency exchanges and wallet services high risk.

• Legal services: Certain legal services, especially those related to personal injury or bankruptcy, are considered high risk because of the nature of billing and the potential for disputes. Examples include law firms specialising in contentious areas of law.

• Financial services: Businesses offering loans, debt collection or credit repair services are high risk because of regulatory scrutiny and the potential for financial instability. Examples include payday loan companies and credit repair agencies.

Advantages and disadvantages of high-risk accounts

High-risk merchant accounts come with a unique set of advantages and disadvantages that businesses must consider.

Advantages

• Market access: High-risk merchant accounts allow businesses in high-risk industries that might be barred from standard merchant services to accept credit and debit card payments, expanding their market reach and customer base.

• Global sales: High-risk accounts often support transactions in multiple currencies and are equipped to handle international sales.

• Increased security measures: Providers of high-risk merchant accounts usually have enhanced fraud protection and security measures to mitigate the risks associated with high-risk industries.

• Flexible volume restrictions: High-risk accounts often come with more lenient sales volume restrictions, accommodating businesses with fluctuating or high transaction volumes.

• Resilience to chargebacks: High-risk accounts are more tolerant of industries with higher chargeback rates, offering businesses a steadier platform for operations despite the inherent risks.

Disadvantages

• Higher costs: These accounts typically incur higher fees, including setup fees, monthly charges and transaction fees.

• Rolling reserves: Many high-risk accounts require a rolling reserve, in which a percentage of the transactions is held by the merchant service provider for a certain period, to cover potential chargebacks and disputes.

• Longer settlement periods: Funds from transactions might not be available as quickly as with standard-risk accounts, which can affect a business's cash flow.

• Stricter terms: Often, the terms and conditions for high-risk accounts are more stringent, with more complex contract requirements and more potential penalties for non-compliance.

• Reputational considerations: Being classified as a high-risk business can have an impact on reputation and can affect relationships with partners and financial institutions.

How to qualify for high-risk merchant services

To qualify for high-risk merchant services, businesses need to undergo a more rigorous application process compared with low or medium-risk accounts. Here's a step-by-step guide on how to prepare and what to expect:

• Understand your business's risk level: Acknowledge the factors that make your business high risk, such as industry type, chargeback rates or financial history. This will help you address potential concerns from merchant service providers.

• Gather the necessary documentation: High-risk merchant account providers will probably require detailed documentation about your business. This might include business licences, financial statements, bank statements, processing history and a detailed business plan.

• Choose a specialised provider: Look for merchant service providers that specialise in high-risk accounts. These providers are better equipped to accommodate the needs and challenges of high-risk businesses.

• Be prepared to demonstrate financial stability: Show that your business is financially stable with bank statements, a strong balance sheet or evidence of consistent revenue. This reassurance can mitigate concerns about risk.

• Have a chargeback mitigation plan: Because high chargeback rates are a concern for high-risk accounts, having a clear plan to reduce and manage chargebacks can make your application stronger.

• Expect higher fees and negotiate terms: Be prepared for higher fees and potentially a rolling reserve, but don't hesitate to negotiate terms with the provider. Assess all fees, terms and conditions before signing an agreement.

• Maintain a positive processing history: If you have a processing history, ensure that it shows your business in a positive light, with minimal chargeback rates and compliance with all regulatory requirements.

• Be transparent: Be honest about your business operations, financial status and history. Misrepresenting any aspect of your business can lead to account termination.

• Compliance and security: Comply with all relevant regulations and security standards, including the Payment Card Industry Data Security Standard (PCI DSS) if you're handling credit card information. Demonstrating a commitment to security can help strengthen your application.

Once you've applied, the provider will review your application, which might involve a risk assessment and credit check. If approved, you'll receive the terms of your account, which you should review carefully to ensure that they are aligned with your business needs. Qualifying for high-risk merchant services means demonstrating that your business, despite inherent risks, is a reliable and stable partner for financial institutions.

How to choose the right high-risk account provider

Choosing the right account provider is an important step for high-risk businesses looking to maximise their access to financial services. Consider these factors when evaluating potential account providers:

• Specialisation in your industry: Look for providers that specialise in or are familiar with your industry. They are more likely to offer tailored solutions and understand the unique challenges that your business faces.

• Transparent fee structure: High-risk merchant accounts typically come with higher fees. Make sure the provider is transparent about all costs, including setup fees, monthly fees, transaction fees and any potential hidden charges.

• Flexible contract terms: Some high-risk account providers might require lengthy contract terms or impose strict cancellation penalties. Look for providers that have flexible terms and the potential to adapt to changing business needs.

• Experience and reputation: Research the provider's reputation and track record. Look for reviews, testimonials and feedback from other businesses in your industry.

• Security measures: High-risk accounts are particularly susceptible to fraud and chargebacks. Confirm that the provider has strong security measures and fraud prevention tools to protect your business and your customers.

• Customer support: Assess their customer support for features such as 24/7 responsiveness and multiple modes of communication (e.g. phone, email, chat). You should be able to contact the provider easily for assistance with any issues that arise.

• Payment gateway compatibility: Check that the provider's payment processing solutions are compatible with your business's online platforms.

• International transactions: If your business operates internationally, ensure that the provider can handle transactions in different currencies and has experience with international payment regulations.

• Risk management tools: Because high-risk accounts are more prone to chargebacks and fraud, look for providers that have comprehensive risk management tools and advice on minimising these issues.

• Review the agreement: Before signing an agreement, carefully review all terms and conditions, paying special attention to fees, contract duration, cancellation terms and any clauses that could affect your business operations.

Strategies for managing high-risk merchant accounts

• Mitigate chargebacks: Implement a comprehensive chargeback prevention strategy with tools such as chargeback alerts and representation services. Develop a protocol for swiftly addressing chargeback disputes, incorporating real-time monitoring to detect and respond to chargebacks as they occur. Use detailed analytics to identify the root causes of chargebacks, and address them proactively.

• Detect and prevent fraud: Employ advanced fraud prevention tools that use machine learning and artificial intelligence (AI) to analyse transaction patterns and flag suspicious activities. Integrate multilayered verification processes, including 3D Secure, address verification services (AVS) and card verification value (CVV) checks. Consider dynamic fraud-scoring systems that adapt to evolving fraud patterns.

• Monitor transactions: Implement sophisticated monitoring systems to analyse transaction speed, frequency and anomalies in real time. Establish thresholds based on historical data to identify and flag transactions that deviate from typical patterns, so that you can intervene.

• Communicate with customers: Establish direct lines of communication with customers. Use automated tools to send notifications and updates about transaction statuses and provide straightforward channels for customers to report issues or disputes. This transparency can reduce misunderstandings and potential chargebacks.

• Keep detailed records: Maintain meticulous records of all transactions, customer communications and dispute resolutions. Implement systems that automatically log interactions and transaction details, ensuring that you have comprehensive data to contest chargebacks or fraud claims.

• Stay on top of compliance: Stay abreast of changing regulations in your industry and ensure compliance with local and international laws. Work with legal experts who specialise in high-risk industries to audit your practices regularly and ensure that you're adhering to best practices regarding compliance and risk management.

• Manage financial reserves: Manage your financial reserves to mitigate the impact of chargebacks and holdbacks (a percentage of revenue withheld from a card transaction by the bank or payment processor as a protective measure against potential fraud). Develop a financial buffer to cover unexpected liabilities without disrupting your operations.

• Use dynamic billing descriptors: Use clear and recognisable billing descriptors to reduce customer confusion and prevent chargebacks. Consider dynamic descriptors that provide specific transaction details and make it easier for customers to remember the purchase.

• Develop customised risk solutions: Work with your merchant account provider to develop customised risk management solutions tailored to your business model and risk profile. This might include specialised fraud-screening processes, unique transaction monitoring systems and tailored chargeback prevention protocols.

• Network with industry peers: Industry peers can have valuable insights and strategies for managing high-risk accounts. Participating in forums, attending conferences and networking with other high-risk merchants can provide perspective and innovative approaches to risk management.