What is a High Risk Merchant Account: A Clear Guide

In today’s digital age, merchant accounts are essential in facilitating seamless transactions for businesses across all sectors. But what exactly defines a merchant account and why are some considered to be high risk?

Delving into the nuances of payment processing, we explore the intricacies of merchant accounts, shedding light on the factors that elevate their risk status. This categorisation extends to a broader range of businesses known as high risk businesses, which encounter similar obstacles in securing merchant services due to their elevated risk profile.

From credit scores to transaction volumes and industry types, we dissect the elements that contribute to the classification of high risk merchant accounts. We will use popular real-world examples of high risk industries including travel, adult and e-cigarettes. Each of these industries are perfectly legitimate but face complex challenges.

Moreover, we provide insights into the process of selecting a high risk merchant account provider and the importance of thorough consideration and due diligence. For these high risk businesses, finding specialised payment gateway solutions that cater to their unique needs is crucial for facilitating secure and efficient transactions.

What is a merchant account?

A merchant account is a bank account for accepting customer payments by credit and debit cards or electronic transfer. They allow businesses to facilitate both card present and card-not-present transactions.

The merchant account acts as the proxy between card transactions and the deposit of money into the business bank account. It holds the funds until they are transferred.

Merchant accounts have become pivotal to the payment processing infrastructure as they are one of the primary ways of processing business and customer payments in our ever-growing cashless society.

What is a high risk merchant account?

A merchant account may find themselves in a high risk category if it poses a greater risk to the payment provider than a standard business account.

This is due to a variety of factors, such as:

• Credit score – If a merchant has a low credit score or bad credit, they’d be considered high risk.
• Transaction volume – Having a high volume of transactions, or a high average transaction rate, would make a merchant appear to be a high risk account. A UK merchant with a significantly high volume of transactions or a high average transaction rate (ATR) would be classed as a high-risk account. For example, if they processed over £15,000 in transactions per month or their ATR was £500 or more.
• New merchant – If a merchant is new to the industry and never processed payments before, or has little history of doing so, they might be considered high risk as they have no established record.
• International payments – Merchants that sell to customers in countries that have a high risk of fraud, identity theft and money laundering are likely to be considered high risk merchant accounts. High risk countries in terms of financial crime include Zimbabwe, Turkey, Albania, Iran, Pakistan and others.
• High risk businesses – Industries that are deemed high-risk due to a greater likelihood of chargebacks, fraud, or other financial risk factors also contribute to a merchant account being considered high risk. These include travel, gambling, online dating, e-cigarettes/vapes, adult, CBD products, events, cryptocurrency, and debt collection. These industries are part of a larger group known as high risk businesses, which face unique challenges in finding suitable merchant services providers due     to the inherent risks associated with their operations.

Finding the right payment processing solutions is crucial for businesses in these high-risk categories, as it helps manage the specific risk factors associated with their industry.

Consequences of high risk merchant accounts

To offset the high risk potentially posed for payment providers, high risk merchant accounts are subject to more fees and restrictions than low risk accounts. High risk accounts are typically subjected to:

• Higher payment processing fees. Processing fees may potentially be double the amount paid by their low risk counterparts.
• Chargeback fees - Although all merchants (including low risk merchants) must pay chargeback fees. However, those at higher risk pay higher chargeback fees. This could be to offset the increased likelihood of disputes arising from transactions in high risk categories.
• Other fees and conditions - High risk merchants may also be obliged to agree to longer contracts, higher setup fees, early termination fees, as well as a monthly or annual fee.
• Rolling reserves - Payment processors may also mandate a rolling reserve is put in place for high risk merchants. This means the payment processor holds back a certain percentage of the merchant's income until the processor can verify transactions are not fraudulent or at risk of a chargeback. This will impact the merchant's cashflow
  

High risk merchant account vs. low risk merchant accounts

A low-risk merchant account is essentially the opposite to a high risk merchant account. These usually have an average exposure to fraud and less (if any) regulatory oversight. These fewer challenging characteristics will usually mean low risk merchants are offered more competitive rates and favourable terms.

But it's not the case that merchants are either high risk or low risk.

There are several factors that differentiate high risk merchants from each other in the eyes of a payment processor such as:

• They only operate in one country and that is low risk (such as U.S.A, Canada, Japan, Australia and other countries in Europe).
• The business has a low transaction volume, and average transactions are under $500.
• They only accept one currency.
• Their industry is labelled as low risk.
• They have a low percentage of returns and very low (or no) chargebacks.

If a merchant is deemed high risk but can demonstrate one or more of the above considerations also apply, the business owner may be able to negotiate lower processing fees.

Can risk factors change for a merchant account?

Yes! It is important that merchants remember that their risk status can change as their business develops.

For example, the business may expand to operate in different countries, or it might pivot to serve different industries. These changes may affect the merchant's risk factors as determined by the service provider.

If any of these circumstances arise, merchant account providers may change the status of the merchant account.

If the merchant account provider cannot support high risk merchants, the contract could be quickly cancelled. This means the card payment services may be quickly withdrawn, causing huge disruption to the business.

Examples of high risk industries

It’s important to acknowledge that high risk certainly does not mean illegal. A business is likely to be labelled high risk where one or more of the following apply:

• Large amounts of money are held for a period of time before the goods or services are provided
• Highly regulated industries
• Industries offer goods or services considered socially sensitive or taboo

Let’s dive into a few real-world examples of legal but high risk industries.

For businesses operating within these high risk industries, finding a merchant services provider that understands their unique needs is crucial. High risk businesses should look for providers that specialize in high risk merchant accounts, which are designed to accommodate the specific challenges and risks associated with their operations. These accounts often come with more flexible underwriting criteria compared to regular merchant accounts, allowing for a broader range of transactions and higher chargeback thresholds. To secure a suitable merchant services provider, high risk businesses must thoroughly research potential partners, focusing on those with a proven track record of supporting high risk industries. Understanding how high risk merchant accounts work, including their fee structures, terms, and conditions, is essential for these businesses to manage their finances effectively and maintain compliance with industry regulations.

One: Travel

Merchant account providers tend to view payment processing for the travel industry as ahigh risk activity. This is typically due to historical issues of fraud and chargebacks, however there are many other factors such as:

• Length of time between booking and travel – The majority of UK holidays are booked between 4 and 12 months in advance.     This leaves a substantial amount of time for costly cancellations. By the time of the cancellation, a merchant may no longer have sufficient funds available to return to their customer.
• International, high-value transactions – Due to the high-value transactions that involve multiple international currencies, payers and payees, fraud and money laundering are great concerns.
• Chargebacks and fraudulent claims – On top of legitimate chargebacks, some travellers may submit fraudulent claims to cover the expense of their     travel.
• Delayed ‘buy now, pay later’ payments – Payments are often postponed or spread out over long periods of time due to ‘buy now, pay later’ payment options. With 40% of respondents more likely to book a vacation if they are given a BNPL option, this poses an additional layer of complexity to processing travel payments.
• Risk of bankruptcy and business failure – The COVID-19 pandemic hit the travel industry hard. Flights were grounded and airports were closed, halting global travel. In October 2020, ACI Europe stated that 193 of the 470 airports in Europe were at risk of facing bankruptcy. Payment processors therefore take into consideration the bankruptcy and     credit risk that travel merchant accounts pose.

A travel merchant account is therefore often subjected to higher fees, longer settlement fees, and rolling reserves to fund the potential cost of chargebacks.

Two: Adult entertainment

Adult entertainment ranges from online dating to sex toy producers and much more.

Explicit content, age restrictions and reputational risks are big concerns around the adult-related industries.

It’s a lucrative industry and some businesses must abide by strict rules and regulations. However, many banks still deny their applications for merchant accounts due to concerns about reputational damage for the account provider.

The big high street banks, for example, are highly protective of their family-friendly brands. This is likely to mean they have policies to exclude the adult industry from their services or exorbitant pricing.

Not all high risk merchants are equal

It’s important to note that not all adult businesses are viewed the same by a merchant account provider. A lingerie store, for example, is unlikely to be viewed as posing the same level of risk as an adult website.

Reputation is not the only risk factor for the adult industry.

Fraud of all kinds is also a big problem in the entertainment industry. What's known as 'friendly fraud' is rife and often comes in the form of chargebacks. An example of friendly fraud is when a customer receives their goods as expected, but then claims they did not arrive.

Three: eCigarettes and vapes

The UK vape and eCigarette industry surpassed the $2 billion mark back in 2021,continuing to grow substantially each year as new brands and flavours continue to be released.

eCigarette and vape businesses are often labelled as high risk because of regulatory uncertainties and potential chargebacks. The age verification process related to the sale of nicotine products can also be a problem.

Merchant accounts for companies selling these products often face higher costs, monthly credit caps, delays in funding and rolling reserves.  

(h2) How to choose a high risk merchant account provider

Before committing to a payment processor, a high risk merchant should carefully consider multiple account providers, carefully reading each contract. It's crucial for a high risk business to take deliberate steps in finding a payment processor that comprehensively understands the unique requirements of high risk merchant accounts.

Although an account provider may state they cater for high risk industries, it may not accept all businesses. Merchants should look for a payment processing company and high risk merchant account providers that tailor specifically to their circumstances and understand their industry.

Vendors tend to balance the risk of processing your payments by charging higher fees compared to what a low-risk merchant will pay. Look around at different merchant account providers to make sure the business is being charged a fair price.

The credit score of a business and its owners is important. These can impact the approval process, even if the payment processor works with high-risk merchants. If a merchant account is repeatedly rejected, the company should look for ways to improve its credit score.

Every merchant account application process is different, depending on the provider. However, a business will typically need to provide all business and tax documents as part of its application.

After the application has been processed, the payment provider will assess your level of risk and tailor an account accordingly.

Cardflo has a high-level of knowledge and expertise in working with high risk merchants. Whilst we cater for low risk merchants, our door is also open to discuss and find the best solution for high risk industries that have limited provider options.

For example, if you’re a CBD merchant, Cardflo can probably help your businesses. Talk to us today to save you precious time and costs.

Conclusion

Accepting card payments is vital for many businesses today. A merchant account serves as a conduit for businesses to accept card payments.

High-risk accounts are distinguished by factors including industry type and transaction volume. These incur higher fees due to increased risk for payment providers.

Sectors like travel, adult entertainment and e-cigarettes face elevated scrutiny due to factors such as chargeback volumes, regulatory uncertainties, and reputational risks. Payment processors may impose longer contracts, reserve funds and higher fees on these high risk accounts.

Selecting the right provider for a high risk merchant account requires a thorough examination of the contract and its terms. Look closely to see whether there has been any consideration of individual business needs.

Despite the many challenges, there are ways for businesses to improve their chances of account approval. They should look for ways to improve their credit score and ensure thorough documentation is provided during the application process.

It's crucial for merchants to understand their risk status - but it can evolve as their business changes.

Merchants should choose a payment service provider that demonstrates a good understanding of their high risk sector. This is a good way to avoid having their accounts suspended with little or no warning.

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