Low-risk merchant accounts are financial accounts that businesses use to process electronic payment transactions considered to have minimal risk of chargebacks or fraud. These accounts are set up through a merchant acquiring bank or payment processor.

Businesses are categorized as low risk based on a variety of factors including industry, transaction volume, transaction size, the countries in which they do business, and their chargeback ratio.

Low-risk merchant accounts have lower processing fees, more favorable contract terms, and simpler approval processes compared with high-risk merchant accounts. To maintain their low-risk status, businesses need to keep their chargeback ratio low, show consistent transaction patterns, and adhere to industry standards and regulations.

Below, we’ll cover the differences between low-, medium-, and high-risk merchant accounts and what you need to know about how risk status is classified.

What’s in this article?

• Low-risk merchant accounts
  
• Medium-risk merchant accounts
  
• High-risk merchant accounts
  
• Reclassification process
  
• Payment processing options for low-risk businesses
  

Low-risk merchant accounts

A merchant account is a type of bank account that businesses use to accept and process electronic payment card transactions. A business might be eligible for a low-risk merchant account if the bank or financial institution issuing the account deems the business to have minimal risk of financial issues such as chargebacks or fraud. A low-risk classification affects the terms and conditions a business will receive from merchant service providers. Low-risk merchant accounts typically come with lower transaction fees and fewer additional charges, less stringent reserve requirements and contract terms, and a simpler approval process compared with high-risk accounts.

Typical characteristics of businesses classified as low risk include:

• Low-risk industries: Businesses in stable industries with a history of low fraud rates, such as retail, are often classified as low risk.

• Low transaction volume: Businesses that have a lower volume of transactions typically pose less risk to the payment processor.

• Small average transaction size: Businesses eligible for low-risk accounts usually have an average transaction size under $50, reducing potential losses on any single transaction.

• Low chargeback ratio: A low chargeback ratio indicates fewer customers dispute charges.

• Consistent business history: Established businesses with a consistent operational history tend to be considered low risk.

• Stable operating regions: Businesses that operate primarily in countries with lower fraud rates and stable economies are usually deemed low risk.

• Cardholder-present interactions: Businesses that operate in person, where the cardholder is present for transactions, often have lower risk levels compared with online businesses.

Medium-risk merchant accounts

Medium-risk merchant accounts serve businesses that fall between low-risk and high-risk categories. Businesses classified as medium risk are less likely to face financial issues such as chargebacks or fraud than high-risk businesses but more likely to face these issues than low-risk businesses. A medium-risk classification affects the terms and conditions set by merchant account providers. Medium-risk merchant accounts typically come with slightly higher fees and stricter terms than low-risk accounts but more flexibility than high-risk accounts. They also give businesses access to a wider array of payment options and currencies than low-risk accounts, which facilitates broader market reach.

Typical characteristics of businesses classified as medium risk include:

• Medium-risk industries: Medium-risk businesses might operate in industries such as online gaming or health and beauty, which are considered more prone to chargebacks or fluctuations than low-risk industries but less risky than high-risk sectors.

• Midrange transaction volume and size: These businesses might have higher transaction volumes or larger average transaction sizes than low-risk entities but not as high as high-risk businesses, with average sales between $50 and $100.

• Moderate chargeback rates: Medium-risk businesses typically have moderate chargeback rates, lower than those of high-risk businesses but higher than those of low-risk businesses.

• International business: Medium-risk businesses might engage in international sales, which introduces transaction risks related to currency exchange and cross-border regulations.

• Complex business models: The business model for medium-risk businesses might be more complex than those considered low risk, potentially involving subscription services or memberships, which carry a higher risk of chargebacks.

• Moderate regulatory scrutiny: These businesses might operate in industries with moderate regulatory scrutiny, unlike high-risk industries that are heavily regulated or low-risk industries that have fewer regulations.

High-risk merchant accounts

High-risk merchant accounts serve businesses that payment processors and banks consider to have a high risk of chargebacks, fraud, or other financial complications. Typical characteristics of high-risk businesses include:

• High-risk industries: Businesses in industries with high chargeback rates (such as travel or adult entertainment) are typically considered high risk.

• High transaction volume: High-risk businesses often have a high volume of transactions, increasing the potential risk for the provider.

• Large average transaction size: These businesses might regularly process high-value transactions of $100 or more, which could lead to substantial losses in the event of a chargeback.

• High chargeback rates: A high rate of chargebacks is likely to classify a business as high risk.

• International business: High-risk businesses often engage in international sales, which introduces risks related to currency exchange and cross-border regulations.

• Complex business models: They might have business models that involve recurring payments (such as subscriptions), which have a higher risk of chargebacks.

• High regulatory scrutiny: These businesses often operate in industries that face intense regulatory challenges and scrutiny.

A high-risk classification affects the terms and conditions a business will receive from merchant service providers and comes with challenges that businesses classified as low risk or medium risk do not face. These challenges include:

• Higher fees: Businesses with high-risk merchant accounts typically face higher transaction fees, monthly account fees, and potential additional costs that payment processors impose to offset their risk.

• Rolling reserves: High-risk accounts often require a rolling reserve, which means a portion of the transaction amount is held by the merchant service provider for a certain period as a safeguard against potential chargebacks or fraud. This can affect the business’s cash flow.

• Longer contract terms: High-risk accounts often come with longer, more binding contract terms, which can include strict cancellation policies and automatic renewal clauses that are not as favorable to the business owner.

• High chargeback fees: Chargebacks can come with high fees for high-risk accounts, further affecting profitability.

• Account termination risk: High-risk businesses face a greater likelihood that their merchant accounts will be terminated if the processor decides the level of risk has become too high or if there is a substantial increase in chargeback rates.

• Limited provider options: Not all merchant service providers cater to high-risk businesses, which can limit options and lead to less competitive terms.

• Strict approval process: Obtaining a high-risk merchant account can be a rigorous process involving background checks, financial scrutiny, and potentially longer approval times.

• Reputational concerns: Being classified as a high-risk merchant can carry a stigma and potentially affect relationships with business partners or customers.

Reclassification process

It is possible for a business to transition from a high-risk to a low-risk merchant status, but it requires significant time and effort. Businesses must demonstrate consistent improvement in the factors that classify them as high risk. Here are some steps businesses can take to lower their risk status:

• Reduce chargeback rates: One of the most effective ways for a business to get reclassified is by reducing chargeback rates. Clear communication, excellent customer service, and fraud prevention tools can help minimize chargebacks.

• Maintain low fraud rates: Advanced fraud detection and prevention measures can help keep fraud rates minimal. Regularly updating security protocols and educating customers on secure transactions can also help.

• Financial stability: Demonstrate financial health through consistent revenue, proper cash flow management, and maintaining a positive balance sheet. Consistent transaction volumes can help prove your business’s stability to merchant account providers.

• Transparent business practices: Transparent business operations, billing practices, and marketing strategies can help lower your risk status.

• Simplified business model: If your business model places you in a high-risk category, adjustments or diversifications that align with lower risk industries can help.

• Positive processing history: A track record of reliable and rule-abiding credit card processing behavior over a lengthy period can lead to a lower risk classification.

• Compliance: Compliance with industry regulations and standards such as the Payment Card Industry Data Security Standard (PCI DSS) can reinforce the security and reliability of your business.

• Open communication: Regular communication with your merchant acquirer or payment processor can demonstrate your commitment to reducing risk and make them more likely to reconsider your classification.

Once a business has implemented these kinds of changes, it can request a review of its risk classification from its merchant account provider or seek alternative providers who might offer more favorable terms based on the new risk profile. This process can be slow and requires patience as well as a commitment to maintaining lower risk standards.

Payment processing options for low-risk businesses

Low-risk businesses have access to a wide array of payment processing options. Different options cater to different business needs. Some are more suitable for ecommerce platforms, while others are a better fit for brick-and-mortar stores. When choosing a payment processing option, low-risk businesses should consider factors such as transaction fees, ease of integration, customer support, and any additional features that can improve their operations or customer experience. Low-risk businesses typically enjoy more favorable rates and terms, which gives them the flexibility to choose solutions that are the best fit for their business model and customer needs.

Payment processing solutions that are favored by low-risk businesses include:

• Merchant accounts: A merchant account is where a business accepts credit and debit card payments for online and in-store purchases before the funds are transferred to the primary business bank account. Merchant account providers often have competitive rates and customized services for low-risk businesses.

• Payment gateways: For online sales, businesses can process payments through payment gateways such as Stripe. These platforms are easy to integrate with ecommerce websites and offer a range of tools to manage online transactions securely.

• Ecommerce platforms: Ecommerce businesses might choose to process payments through platforms such as Shopify, WooCommerce, and BigCommerce, which integrate with online stores.

• Bank payment processing: Low-risk businesses might be able to use payment processing services offered by their banks, providing a simplified way to manage finances and accept payments through a single institution.

• Point-of-sale (POS) systems: For businesses that operate in person, POS systems with integrated payment processing for in-person card payments are a popular choice. Providers such as Stripe have comprehensive solutions that include hardware and software.

• Invoice and billing services: For businesses that invoice clients, services such as Stripe Invoicing have integrated payment solutions that let customers pay invoices online via credit card or bank transfer.