In today’s cashless economy, businesses rely heavily on merchant accounts to process customer payments efficiently.

These accounts serve as intermediaries between transactions and business bank accounts, accommodating various payment methods including credit card transactions, debit cards, and electronic transfers.

With an increasing number of consumers opting for cashless transactions, the significance of merchant accounts has escalated.

This article examines the nuances of merchant accounts, exploring how businesses are categorised as high risk or low risk and provides insights into examples of low-risk merchant accounts within industries.

What is a merchant account?

A merchant account is a bank account used for accepting customer payments – typically by credit card, debit card, or electronic transfer.

They enable businesses to facilitate both card present transactions with a POS processing machine and card not present transactions (CNP), both online and over the telephone.

The merchant account is essentially the ‘middleman’ between the card transaction and the deposit of money into the business account, holding the funds until they are transferred.

Merchant accounts often involve traditional payment processors, which provide access to well-established systems that ensure seamless integration with popular payment methods, enhancing customer trust and convenience.

In our ever growing cashless market, more and more consumers use credit cards, debit cards and eWallets to pay for their goods and services. Research published in 2023, revealed that over a quarter (29%) of UK shoppers said they never or rarely carry cash these days.

That’s why merchant accounts are increasingly important to businesses payment processing infrastructure. Basically, you can’t process customer payments without one.

What is a low risk merchant account?

Low risk businesses typically qualify for a low risk merchant account, which is a type of payment processing account designed for businesses with minimal risk factors, such as a low chargeback ratio, lower fraud rates, and a stable financial history.

Low risk merchant industries include retail, software development, and other professional services.

These accounts typically enjoy lower processing fees and faster access to funds. They are usually also able to have a wider selection of accounts and products to choose from compared to high risk merchant accounts.

What is a high risk merchant account?

A high risk merchant account, often associated with a high risk business, typically poses a higher risk of chargebacks (where credit card, debit card, or direct debit funds are returned to the buyer).

They are also considered more likely to encounter fraud, or regulatory issues due to factors like industry type (e.g. adult entertainment, online gambling), poor credit history, high transaction volumes, or being classified as a high-risk business by banks based on various risk factors.

High risk merchants typically require specialised payment processing services with higher fees and stricter terms to offset their risk to the provider.

Understanding risk with merchant accounts

Since the financial crisis of 2008, the financial services industry has become more risk averse.

Therefore, whenever a business applies for a merchant account, their provider must determine the level of risk present.

Risk variables may include:

Financial stability

How long a merchant has been in business, their finances and profitability are all considered by an underwriter. Being new, having a high ratio of debt to equity and having scarce financial resources all elevate risk.

Industry

Some industries are more pertinent to risk than others. High industry risk profiles are cemented in years of payment processing history.

Payment method

The way a merchant accepts payments can impact the risk of their business. Accepting payments in advance, or annually, can pose higher risk in case the company goes out of business.

On the other hand, accepting payments after a service has been provided can reduce risk on a merchant account (e.g. billing for a monthly service at the end of the month).

Once these risk factors have been evaluated, it can be determined whether you are ahigh-risk or low-risk merchant account.

Examples of low risk merchant accounts

Low-risk merchant accounts tend to have many features in common.

Payment processors tend to pay attention to whether you have a low chargeback ratio, a limited number of returns, or a high credit score. Payment processors like it when the majority of your transactions are made when the card is present at the point of sale. Additionally, low-risk merchant accounts often process credit card transactions among other types of payments.

Industries that are low risk are usually mainstream businesses such as retail, hospitality and healthcare.

1.  Retail

Retail is considered to be a low risk industry for an array of reasons. One of the main reasons is that the products sold aren’t inherently risky such as books, clothing, and household items.

Most retail transactions are made using card-present transactions, so that's a big tick in the low risk box. For card-not-present eCommerce transactions, 3D secure technology is installed to help prevent fraud and minimise risk.

Due to the above reasons, low risk merchant accounts are usually readily available to well-established, stable retailers where the customer is right in front of you.

2.  Hospitality

The hospitality industry is considered lower risk for merchant accounts. Again, this is due to the face-to-face nature of the industry. It also poses lower risk of chargebacks as the services are provided then and there.

Guests at restaurants and hotels know they can contact a manager easily to discuss any issues they may have. They are more likely to reach a satisfactory solution and less likely to resort to raising a chargeback.

Refunding a customer is cheaper than a chargeback. It usually also means you can keep the ongoing relationship and have a returning customer.

Conclusion

A merchant account is a vital link between businesses and customer payments. It accommodates a variety of transaction methods like traditional credit cards, debit cards and eWallets.

With cashless shopping continuing to rise, these accounts are crucial for modern payment processing. They are also an important part of delivering a great customer experience.

Providers assess risk factors such as financial stability, industry type and payment methods to categorise merchants as high or low risk.

High-risk businesses face greater chargeback and fraud risks, often in industries like vaping or adult services, resulting in higher fees. Conversely, low-risk merchants, such as retailers and hospitality businesses, enjoy lower fees due to their lower chargeback rates.

Retailers benefit from mainly card-present transactions, while hospitality's face-to-face nature reduces chargeback likelihood. Both industries prioritise customer satisfaction to mitigate chargebacks, preferring refunds over disputes.

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