How to Open a High-Risk Merchant Account

For businesses operating within high risk industries, a high risk merchant account and all of the benefits they provide is essential to accept credit and debit card payments, ensuring safe, secure and efficient business operations.

There are many factors for high risk merchants to consider when opening one of these accounts. Each high risk industry has their own set of unique needs, in which some providers may be more accustomed to understanding than others.

Cardflo is a merchant account provider offering merchant accounts for high-risk models. With advanced risk tools, we specialise in providing tailored high risk merchant accounts to the unique needs of high risk companies that operate within high risk industries.

This blog outlines the considerations a business should make when researching and negotiating a high risk merchant account.

What is a high-risk merchant account?

A high-risk merchant account is a specialised type of bank account designed for businesses with higher financial instability or fraud risk. This can be determined by a variety of factors such as industry type, financial history and specific operational practices.

Businesses in industries like adult entertainment, gambling, travel, telemarketing, subscription services and vape products are often classified in the high-risk category.

Additionally, businesses with high chargeback rates, poor credit history, high transaction volumes, recurring billing models, legal and regulatory scrutiny, cross-border transactions, and those in new or unstable markets face this designation.

These accounts temporarily hold funds from customer transactions before transferring them to the main account of the business. Serving as an intermediary between the customer and the business, funds are deposited into the merchant account immediately after a transaction is processed.

Provided by banks and financial institutions, these accounts are crucial for efficient payment processing. While some providers offer comprehensive solutions including hardware and software for payment gateways, many focus solely on the merchant account, requiring businesses to source additional components from third-party providers.

This setup enhances security, maintains cash flow, and allows businesses to also accept payments from a wide range of payment methods, thereby enhancing their professional image and customer trust.

High-risk merchant accounts come with higher fees, rolling reserves, and stricter terms. The fees vary but they are more expensive than standard accounts. Examples of typical fees are:

• Approx. 4% for domestic transaction fees
• Up to 10% on overseas transaction fees
• Approx. £50 to £100 per month in monthly fees, or around 15% of your transaction money in the rolling reserve.

These high risk accounts help to mitigate the risks involved whilst also providing essential payment processing capabilities, especially for high-ticket items, tech support services, and cryptocurrency-related businesses.

Despite the challenges, including complex approval processes, high risk payment processing and potential account instability, these accounts enable high-risk businesses to access broader markets and handle international transactions.

Opening a high-risk merchant account: Step-by-step

The process of opening a high risk merchant account can be broken down into three processes. Merchant services play a crucial role in providing tailored payment solutions for high-risk businesses, helping them navigate complex processing challenges, including securing accounts despite high chargebacks and unique financial situations.

1. The planning process - do you need a high risk merchant account? Which merchant account provider is best suited for your business/industry's needs? What factors do you need to consider?
2. Application stage - once your business has selected an account provider, what documentation and steps are required to make an application? What aspects of your business are considered high risk? How can you ensure this process is as streamlined as possible?
3. Setting up and maintenance - you now have a high risk merchant account! How do you best utilise this and the tools that it comes with? What should you monitor in order to identify and neutralise risks and how would you use these observations to optimise business entities and processes?

Step one: Decide if you need one

It is important for you to decipher whether you need a high risk merchant account, or if a general merchant account would suffice. A business may not need a high-risk merchant bank account if it operates in a low-risk industry with a history of minimal chargebacks and fraud.

This is often the case for businesses with straightforward refund policies, low risk payment processing requirements and a stable financial performance history. Sectors such as general retail, local services (like plumbing or landscaping) and low-ticket consumer goods usually fall into this category.

Additionally, businesses that strictly adhere to regulatory guidelines, focus on one-time transactions rather than subscriptions, deal in low-value transactions and employ robust fraud prevention measures are considered low-risk.

Domestic operations, transparent business practices and good credit histories also contribute to a lower risk profile. Examples of such businesses include local retail stores, service providers like hair salons and dry cleaners, educational institutions, healthcare providers and professional services. These businesses benefit from standard merchant accounts with lower fees and fewer restrictions due to their predictable risks and stable regulatory environments.

What industries typically need high-risk merchant accounts?

A high-risk merchant bank account is typically needed by businesses that operate in industries or engage in activities that are considered to have a higher risk of chargebacks, fraud, or regulatory scrutiny.

These businesses often face more stringent requirements from banks and payment processors and may incur higher fees due to the perceived risk. Common examples of industries who would likely require a high risk merchant account include gambling and dating sites, like Bet365 or Match.com.

They face several challenges that are both common in high risk businesses, and also some that are more industry specific. Both types of sites experience high chargeback rates, with users frequently disputing charges due to dissatisfaction, forgotten subscriptions, or fraud.

The gambling industry, in particular, faces extensive regulatory scrutiny and is vulnerable to fraud and money laundering, necessitating robust security measures for a high risk payment gateway. Dating sites also contend with significant fraud risks, such as fake profiles and scams, and the recurring billing model common in both industries can lead to disputes over automatic renewals.

High-risk merchant accounts protect these types of businesses by offering advanced fraud prevention tools, comprehensive chargeback management and regulatory compliance support. These accounts provide flexible payment solutions, risk mitigation strategies and enhanced security measures such as tokenisation and encryption to safeguard sensitive data.

How to decide which high risk merchant bank account is best for your business?

Choosing the right high-risk merchant bank account involves understanding your business's needs and researching reputable payment service providers offering strong fraud prevention, chargeback management and regulatory compliance support.

Consider factors like fees, customer support, and scalability. Using the examples from earlier, Bet365 would need to be able to manage high-risk transactions and regulatory compliance, whereas Match.com would prioritise robust fraud prevention services to identify any potential fake profiles.

By carefully evaluating these factors, you can select a high-risk merchant account that meets your business's requirements while ensuring secure and efficient payment processing.

Step two: Complete application, including a risk assessment

After selecting a provider, it is time to make an application. This involves gathering all essential and necessary documentation and licensing. Required documents will vary from business-to-business, account-to-account. Typical examples include:

• business registration details
• bank statements
• processing history
• government IDs, or permits.

You will likely also have to state information about the nature of your business, this helps the account provider assess potential risk. There will be a background check into the business, which will involve credit checks, supporting documents and industry's risk factors.

This all goes towards building the risk profile of your business during the underwriting process. If necessary, you may decide to negotiate terms once accepted.

How to increase the chances of getting accepted for a high risk merchant account?

Researching into which provider best suits the needs of your business will often then lead to getting accepted by that provider. To increase the chances of getting accepted for a high-risk merchant account, select a provider experienced in serving high-risk businesses and gather all necessary documentation, including financial statements and processing history.

Demonstrate stability through a track record of responsible financial management and implement robust fraud prevention measures to mitigate risks. Ensure compliance with regulations, offer personal guarantees if possible and be transparent about past challenges. Seek referrals, follow up regularly and be responsive to requests for additional information. By presenting your business in the best possible light and addressing any concerns proactively, you can enhance your chances of approval.

Poor credit scores can affect the chances of being accepted. This often results in higher transaction and monthly fees, stricter contract terms, such as longer contract durations and hefty early termination fees, and potentially a required rolling reserve where a percentage of revenue is held back.

Additionally, a very poor credit score may lead to application rejection or the need for extensive additional documentation to prove business viability. Therefore, improving credit, demonstrating strong business performance, and seeking specialised providers are essential steps to mitigate these impacts.

Credit repair services can assist in improving low credit scores and strengthening overall financial health, making a business appear more stable and reliable to providers.

What terms are there to negotiate?

Fees - these include transaction fees, maintenance fees, setup fees, processing fees. chargeback fees, early termination fee, ordinary termination fees and any other potential charges that are industry specific or tailored towards your business' needs. This may involve the inclusion of a reserve fund to cover potential chargebacks and losses. This is common for high-risk businesses.

Fraud prevention - high risk businesses often have to account for fraud. Fraudulent activity and scams may be the reason a business may require a high risk merchant account. Fraud prevention is vital to mitigate financial losses, reduce chargeback rates, comply with regulations, safeguard customer data, preserve reputation, and enhance operational efficiency.

Prioritising fraud prevention demonstrates commitment to security and reliability, contributing to long-term sustainability and success in competitive markets.

Contract length - most may offer a standard contract length, although negotiations may make them longer or shorter.

You may also discuss holdback periods for processing funds. This often occurs for new businesses or those with higher risk profiles. Shorter holdback periods or staggered release schedules can improve cash flow. A schedule for rolling reserve release can also be negotiated in the contract, in terms of the frequency and quantity of cash release.

Customer service - this is regarding the availability, attentiveness and quality of customer support. Negotiations may involve the level of support available, accessibility and response times. This could also include customised reporting.

Step three: Set-up, integration, and maintenance

Implementing robust security measures will protect your business from fraud and minimise financial risks, particularly for high risk businesses who are exposed to higher data and security risks.

Merchant account providers can provide fraud detection and prevention tools, such as address verification services (AVS), card verification value (CVV) checks, transaction monitoring and can help identify and prevent fraudulent activities.

Setting up a systematic process for managing and disputing chargebacks is also critical, as high-risk businesses are more susceptible to chargebacks. Employing automated systems to track and respond to chargebacks promptly can save time and resources while protecting your revenue.

How to integrate a high risk merchant account into your high risk business?

Integrating the merchant account involves several technical and procedural steps to ensure seamless and secure payment processing.

1. The payment gateway - This involves incorporating the payment gateway provided by your merchant account provider into your website or POS system. This integration often involves using APIs (Application Programming Interfaces) which optimise functionality, flexibility, and efficiency of payment processing, plugins, or custom coding tailored to your specific platform.
2. SSL (Secure Sockets Layers) certificate - Ensuring your website or payment processor has an SSL certificate is crucial for encrypting transaction data which helps protect against data breaches.
3. PCI DSS (Payment Card Industry Data Security Standard) compliance - Meeting PCI DSS compliance is essential to safeguard cardholder data and maintain trust with customers.
4. Sandbox testing - Conducting thorough testing it is vital, starting with transactions in a sandbox environment to ensure all systems function correctly and proceeding to live testing to verify the proper processing and deposit of funds.

What about after it has been set up?

There are a number of actions you can take after opening a high risk merchant account.

• Regular monitoring and optimisation of your payment processes can reduce decline rates and enhance the customer experience. This optimisation might involve refining your checkout process, updating fraud prevention settings, or negotiating better terms with your service provider to maintain a competitive edge.
• Consistently monitoring transactions for irregularities or potential fraud allows for timely intervention and protection of your business.
• Leveraging reporting tools provided by your merchant account provider can offer valuable insights into transaction patterns and potential issues.
• As industries develop, new risks may emerge. Therefore, it is also important to keep updating security protocols with changes in regulations, risk factors and compliant requirements that are relevant to the specific industry that your high risk business is involved in.
• Consider consulting with legal counsel to assist in the navigation of risks, compliance with legal, privacy, data security requirements and for handling disputes and chargebacks. These may include reputable law firms, in-house counsel, or specialised legal services for smaller businesses. Legal counsel protects the interests of high risk business so that they operate within the set legal boundaries of their industry, reducing the risk of legal disputes and financial penalties.

Conclusion

In conclusion, opening a high-risk merchant account is essential for businesses operating in high-risk industries, enabling secure and efficient payment processing despite the inherent challenges.

By carefully assessing your business needs, selecting the right provider and navigating the application process with thorough preparation, you can mitigate risks and ensure long-term success. Continuous monitoring, integration of robust security measures and proactive management of your account will help maintain smooth operations, allowing your business to thrive even in a high-risk environment.