Why You May Need a High-Risk Merchant Account?

There are certain sectors, businesses, and even individual merchants that payment processors deem to be high-risk. Unfortunately, this makes it harder to find banks that will provide merchant accounts.
Christopher Harvey
6 min read

There are certain sectors, businesses, and even individual merchants that payment processors deem to be high-risk. Unfortunately, this makes it harder to find banks that will provide merchant accounts.

To offset the possibility of friendly fraud and chargebacks, a custom high-risk merchant account with specific payment solutions is needed. This high-risk merchant account will often have higher fees when you begin accepting credit and debit card payments. However, there are also several benefits.

Here are the instances in which you might need a high-risk merchant account and what to expect.

What Is a Merchant Account?

Before delving into the details of high-risk merchant accounts, it’s worth looking into what a merchant account is. Basically, a merchant account is a type of bank account that merchant services providers offer. They allow merchants to accept credit and debit card transactions while mitigating risk for the processor.

All payments taken by the merchant are held in their merchant account when each payment is processed. Only after a specified timeframe of ranging from one to two days is the money then deposited into the merchant’s business account. That way, the processor can be sure they can cover any chargebacks or fraud.

What Is a High-Risk Merchant Account?

Payment processors group merchants based on their business model, product type, and processing volume. The outcome is that some merchants are considered high-risk. While this might seem unfair, it’s important to remember that the judgment is not personal. Rather, it means your business is more likely to face payment issues.

Your business may, for example, be prone to friendly fraud and chargebacks. Or, you might not have the best financial management track record. In either case, the only option to accept payments is opening a high-risk merchant account.

High-risk merchant accounts come with increased rates and fees. This is to compensate for the fact that payment processors expect your business to experience issues that put them at risk. However, different payment processors have different ways of grouping merchants. So, you may be considered high-risk to some but medium-risk to others.

What Businesses Are Considered High-Risk?

Businesses operating in sectors that typically experience high levels of fraudulent activity are generally considered high-risk.

Friendly fraud is among the most common issues for online merchants, accounting for 90% of all fraud in the digital goods industry. This occurs when consumers request a chargeback on a product from their bank, even though they received what they purchased. And, unfortunately, some sectors and business types are more susceptible than others.

In some cases, however, merchants are deemed high-risk because of their financial history. So, if you have a low credit score, you’ll find it far harder to open a standard merchant account. You may be able to overcome this obstacle if you can prove you have a steady sales volume. Other than that, a high-risk merchant account would probably be the only available course of action.

Examples of High-Risk Sectors

If your business operates in one of the following sectors, you are more likely labeled as a high-risk merchant:

● Alcohol.

● Antiques.

● Charities.

● Cryptocurrency.

● Debt management.

● Events.

● Forex.

● Health and wellness.

● Insurance.

● Payday loans.

● Travel.

The Impact of a High-Risk Merchant Account on Your Business

Your business may pay more if your payment processor believes it to be high-risk. For starters, your transaction fees will probably be closer to 4%-6%, rather than the standard 1%-2% for low-risk accounts. You may also face higher fees for chargebacks than low-risk merchants would. However, you can counteract this particular charge with chargeback mitigation tools.

Other cons associated with high-risk merchant accounts include longer contracts and reserves. But, just remember that not all high-risk merchant accounts are the same, so shop around for favorable terms. In addition, there are some benefits you should bear in mind.

The Benefits of a High-Risk Merchant Account

Of course, the most obvious advantage is that you get to open up a merchant account even though you’re high-risk. In that regard, high-risk merchant accounts are a lifeline for many businesses. There are a few other unexpected benefits, too.

1. Flexible Payment Options

While low-risk merchant accounts sound attractive from a financial perspective, they are in many ways more restrictive than high-risk accounts. With a high-risk account, you can sell a wider range of products and services. You are also less restricted on the types of revenue you can collect. So, as a high-risk merchant, you can offer recurring payments and process higher sales volumes, while most low-risk merchants can’t.

2. International Transactions

Similarly, low-risk merchants are severely limited when it comes to offering international transactions. So, if you have a high-risk merchant account, you’ll be in a better position to accept international payments in different currencies.

3. Long-Term Growth

In offering more products, recurring payments, and support for international transactions, high-risk merchants have plenty of opportunities for long-term growth. Not only are they more free to expand into international markets, but they can also offer more to their consumers. So, in many cases, the positives out-way the negatives.

Do You Need a High-Risk Merchant Account?

Many businesses are saddled with high-risk merchant accounts, including those considered most likely to face issues like friendly fraud. Merchants with poor credit may also have no other option but to apply for a high-risk account. However, that doesn’t have to be a bad thing.

Admittedly, you will have to face higher costs. But, with chargeback mitigation and other tools at your disposal, you can reduce those charges. Plus, high-risk merchant accounts allow you to offer more flexible payment options to a broader pool of consumers. That’s great news for businesses with big plans for long-term growth.

Contact an expert at Cathedral Payments today and get a free evaluation of what risk level your business is. If you know you have a high-risk business Cathedral will work with you to get the lowest rates immediately and can offer tools to lower the rates over time.

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