What is a High-Risk Merchant Account?: Details & Tips

In the bustling world of business, not all journeys are smooth sailing—especially for those in high-risk industries. If your business falls into this category, you've likely encountered the term 'high-risk merchant account.' But what exactly does it mean, and how does it impact your business?

Welcome to your go-to guide on everything you need to know about high-risk merchant accounts! We’ll break down the essentials, provide practical tips, and equip you with all the knowledge you need. 

What is a high-risk merchant account?

Every business needs a merchant account to process credit and debit card payments. But here’s the twist: not all accounts are the same. Companies that are more prone to chargebacks or fraud typically receive a high-risk label. 

This higher risk can create extra challenges for banks and payment processors, making them wary of potential financial or regulatory issues. That’s where high-risk merchant accounts come in. They’re specially designed for these businesses, allowing them to accept payments despite the added risks.

How are businesses assessed as high-risk?

High-risk businesses come with a few quirks that make banks and payment processors a little nervous. These traits put them in a different category than your average company.

However, what’s interesting is that there’s no single authority or set of rules that decides if your business is high-risk. Every bank and payment processor has its own standards. Some providers might not even work with certain industries, while others will dig into the details of your business before deciding. 

But even though there isn’t one set of rules to classify businesses as high-risk, there are some common characteristics that can lead to a business being classified as such: 

Industry reputation

If you’re a part of industries like adult entertainment, gambling, pharmaceuticals, or travel, you're company may have a bit of a bad reputation. These sectors are known for higher chargebacks and fraud, so payment processors tend to keep a close eye on them.

High chargeback rates

Get a lot of those "I want my money back" requests? Too many chargebacks make you a risky bet for financial institutions, and they’ll likely label your business as high risk.

International sales

Doing a lot of business overseas can raise eyebrows at the bank, especially if you’re working with countries known for high fraud rates. More international transactions often equal higher risk.

Bad credit history 

Financially shaky businesses don’t inspire much confidence. A bad credit score can quickly send your business into the high-risk zone for banks and processors.

Fraud risk

Businesses that deal with a higher level of fraud, or industries with a history of shady transactions, naturally get categorized as high risk. Payment processors don’t want to take unnecessary risks.

Subscription-based services

Recurring payments are a chargeback magnet. If your business relies on subscriptions, chances are you’ll be labeled high risk due to the higher likelihood of disputes.

Regulatory risk

Sectors like tobacco or firearms face strict regulations and legal uncertainty, which makes them risky in the eyes of financial institutions. Not to mention that compliance can be a constant battle.

High-ticket sales

Selling expensive items regularly—over $100—means you’re more likely to face fraud or chargeback issues, and payment providers might treat you like you’re walking on thin ice.

New or unestablished businesses

Just getting started? Without a solid financial history to back you up, payment processors might be a bit skeptical. They like to see proven stability before rolling out the red carpet.

If any of these sound like your business, you’re probably wearing the "high-risk" badge. But hey, all this means is that you get to work with specialized providers who know how to handle those bumps in the road!

Common high-risk industries

When it comes to payment processing, not all industries are created equal. Let's take a look at which industries tend to stir up the most trouble and why they end up on the high-risk list: 

Adult Entertainment

This sector faces its fair share of hurdles, from strict age verification rules to high rates of chargebacks. Whether it’s streaming sites or adult toy shops, these businesses often struggle with payment processing.

Travel and Tourism

Think about the challenges travel agencies and airlines face. Frequent cancellations, unpredictable weather, and political unrest can all lead to financial instability and high chargeback rates.

Gambling and Casinos

Whether it’s online casinos or sports betting, this industry has a lot on its plate—regulatory concerns, potential for fraud, and frequent chargebacks make it a high-risk venture.

Pharmaceuticals and Nutraceuticals

Selling medication and supplements involves navigating a maze of regulations and ensuring product safety. Online pharmacies and supplement shops often find themselves in the high-risk category due to these complexities.

Tobacco and Vaping

The tobacco and vaping markets come with their own set of challenges, including stringent regulations and health-related concerns, making them high-risk in the eyes of financial institutions.

Cryptocurrency

The unpredictable world of digital currencies brings its own set of risks. Cryptocurrency exchanges and wallet services grapple with volatility and evolving regulations, making them a high-risk bet.

CBD Products

The CBD industry is booming, but it’s not without its challenges. Regulatory inconsistencies and varying legal statuses across regions can make payment processing tricky.

Money Transfers

Handling money transfers, especially internationally, involves navigating fraud risks and regulatory hurdles. This sector often finds itself on the high-risk list for these reasons.

VPNs

Virtual Private Network providers deal with privacy concerns, fraud risks, and regulatory issues, placing them firmly in the high-risk category.

High-risk vs regular account

When comparing high-risk merchant accounts to regular ones, it’s clear that the differences go beyond just the label. To give you a better idea of what sets these two apart, here’s a simple side-by-side comparison to break down what you can expect from each.

In a nutshell, high-risk accounts give businesses in riskier industries the ability to accept payments and grow globally, but they come with higher fees and stricter rules. Regular accounts are simpler and cheaper, but they’re not designed for businesses dealing with frequent chargebacks or extra scrutiny.

Pros and cons of having a high-risk account

High-risk merchant accounts come with their own set of perks and challenges, and it’s crucial for businesses to know exactly what they’re signing up for. So, let’s dive into the pros and cons:

Advantages

• Expanding your payment options: One of the biggest benefits is that high-risk accounts allow businesses in restricted industries to process credit and debit card payments. If you're in a business that standard providers won’t touch, this is your ticket to offering card payments to customers.

• Room for higher volumes: If your business sees a high or fluctuating sales volume, high-risk accounts tend to be more forgiving with their volume limits compared to regular ones.

• Going global: These accounts usually support multiple currencies, making it easier to handle international sales and tap into global markets without extra hoops to jump through.

• Managing chargebacks: These accounts are designed to handle industries prone to chargebacks, so you’re less likely to face account freezes due to disputes.

• Boosted security: Since these accounts are built for higher-risk industries, they often come with enhanced fraud prevention systems to help keep your business and transactions secure.

Disadvantages

• Steeper costs: High-risk accounts typically come with higher fees across the board—whether it’s setup, monthly maintenance, or per-transaction charges, expect to pay more than you would with a regular account.

• Reputation matters: Being classified as high-risk can sometimes affect your standing with financial institutions and partners, making it a bit trickier to build relationships down the road.

• Rolling reserves: Some providers will hold a percentage of your funds in reserve, to cover any chargebacks. While it’s a safety net for them, it can put a dent in your immediate cash flow.

• Strict terms and conditions: These accounts often come with more detailed contracts and stricter rules, with potential penalties if you fall out of line.

• Slower payouts: You might find that it takes longer to access the funds from your transactions, which can be a hassle for managing your day-to-day finances.

How to qualify for a high-risk merchant account

Getting a high-risk merchant account is a bit more involved than a standard one, but don’t worry—here’s a straightforward guide to help you through the process:

Step 1: Get to know your risk profile

First off, figure out why your business is tagged as high-risk. This might be because of your industry (like adult entertainment, gambling, or CBD), frequent chargebacks, shaky financials, or being a new business with little history. Keeping your chargeback rate below 1% is a good goal to boost your approval chances.

Step 2: Gather your paperwork

You’ll need to collect several key documents. This includes proof of your business (like incorporation papers and licenses), financial documents (bank statements and tax returns), proof of your bank account (such as a voided check), and compliance documents to show your website meets legal standards.

Step 3: Find a specialized provider

Here’s where it gets tricky: most conventional payment processors shy away from high-risk businesses. Only about 5% are willing to handle such accounts, which can make finding a suitable provider a challenge. Payment processors play a crucial role in securing online transactions by verifying funds and protecting financial data from unauthorized access. At FirmEU, we can help you simplify this process with our vast network of 500+ partners. We offer a range of options to fit your needs, and our team of experts can help you navigate the fee structures and services to find the best match quickly.

Step 4: Show your financial strength

Show that your business is on solid financial ground. Provide evidence of steady income, positive cash flow (keeping 25% to 50% of your monthly transaction volume in your account), and a plan for managing chargebacks.

Step 5: Be open and honest

Honesty is crucial here. Be upfront about your business operations, financial status, and any past issues. If there are challenges or history that might raise questions, it’s better to address them head-on. Transparency builds trust with the provider and can boost your chances of getting approved.

Step 6: Be prepared for higher costs

High-risk accounts generally come with higher fees. Expect setup fees, monthly charges, and transaction fees that are steeper than standard accounts. You might also face a rolling reserve, where a percentage of your transactions is held back. It’s important to budget for these costs and understand the fee structure. Don’t be afraid to negotiate terms to get the best deal for your business.

Step 7: Maintain a good track record

If you’ve been processing payments before, make sure your record is clean. A history of minimal chargebacks and regulatory compliance will work in your favor. A good track record shows that you’re a dependable partner, which can help strengthen your application.

Step 8: Ensure compliance and security

Make sure you’re following all relevant regulations and security standards, like PCI DSS. Show that you’re committed to safeguarding customer information and staying on top of legal requirements. This not only helps your application but also demonstrates that you take security seriously. If you’re unsure where to start or need assistance, FirmEU can help you address these compliance needs and navigate the complexities of security requirements. We can guide you through the process, ensuring you meet all the necessary standards and keep your business on the right track.

Step 9: Review the terms carefully

Once your application is reviewed, you’ll likely face a risk assessment and credit check. If you’re approved, take the time to thoroughly review the terms and conditions of your account. Make sure everything aligns with your business needs and understand all aspects of the agreement. This will help you avoid any surprises and ensure you’re clear on what’s expected.

How to manage high-risk merchant accounts

Handling a high-risk merchant account can feel like walking a tightrope, but with the right approach, you can keep things balanced and under control. Here’s how to stay on top of things and keep your account running smoothly:

Stay proactive with chargebacks

Chargebacks can be a real headache, so it’s important to nip problems in the bud. Make sure your customers have clear ways to contact you and resolve any issues before they get frustrated enough to request a chargeback. 

Keep an eye on your chargeback ratio—ideally keep it below 1%—to keep things under control. You might also want to consider using specialized chargeback protection services to help manage and reduce disputes.

Boost your security measures

Security is a big deal for high-risk accounts. Use advanced fraud detection tools that can spot suspicious activities quickly, thanks to machine learning and AI. Make sure you’re using SSL encryption and tokenization to protect your customers' sensitive information. Also, double-check customer details to catch any red flags early on.

Monitor and adjust

Keep a close eye on your account activity. Regularly check transaction records, chargeback rates, and fees. If something looks off, tackle it right away. Be flexible and ready to adjust your strategies as needed to keep everything running smoothly.

How FirmEU can help?

Navigating the maze of high-risk merchant accounts doesn’t have to be a solo journey. FirmEU is here to simplify the process and help you secure the right payment processing solution for your business.

With our extensive network of over 500 payment processing partners, we will provide a tailored approach to find the best fit for your high-risk needs. We will handle the complexities of negotiations and help you find the most favorable terms and lowest fees available.

Our team has the expertise to guide you through each step, from understanding your risk profile to managing chargebacks and ensuring compliance.

So, don’t let the challenges of high-risk accounts hold you back. Reach out to us, and let’s work together to find a solution that supports your business goals. Give us a call today!

Final words

Dealing with high-risk merchant accounts can feel a bit overwhelming, but getting a good grip on the details can really help. Whether it’s managing chargebacks, handling financial reserves, or keeping up with compliance, knowing what’s involved can make everything run a lot smoother.

These accounts are a lifeline for businesses facing unique challenges, but they do come with their own set of hurdles. With the right approach, you can turn these challenges into opportunities and keep your payment processing running smoothly.

That’s where FirmEU comes in. We’re here to make navigating the high-risk merchant account world easier for you. With our broad network and know-how, we’ll help you find the best solutions tailored to your needs. 

So, don’t let the complexities get in your way—give us a call today and let’s get you set up for success!

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