Millions of Americans take the use of credit cards at businesses for granted. They believe that the use of credit cards is as simple as using cash or debit cards. Payments via credit cards have slowly replaced earlier approaches to payments such as checks and money orders. However, the process for a business to begin accepting credit cards can be complex and time consuming. Many companies must devote serious time and energy to finding the right payment processor to process their card payments. The issues around finding the right provider are particularly acute for what is known as high-risk merchants. These merchants have to deal with a number of different problems if they even hope to set up credit card payments at their business.
What is a High Risk Merchant?
In order to decide whether or not a high risk merchant account is right for a company, the owner should figure out if they operate in an industry that is deemed to be high risk or if their personal credit characteristics put them into this bucket. Most individuals believe that a high risk merchant is one who has an aggressive growth strategy and pushes their business to places where most other competitors would not. But the term actually refers to a general industry or business type that a company might operate in. To understand what a high risk merchant account is, one must first look at the factors that a credit card processing company would look at when determining whether or not to work with a particular company.
There are a variety of reasons that banks consider business verticals to be high risk. A few of them are:
- Reputational Risk
- Chargeback Risk
- Regulatory Risk
- Financial Risk
When a bank could come under fire by its shareholders or the general public for being attached to a processor that operates in certain business industries that might be seen as unfavorable, this is commonly known as reputational risk. Industries such as online adult entertainment and casinos are good examples of potential reputational risk for certain banks.
The risk to the credit card processing company is that individuals might engage in fraud or there may be a large number of chargebacks. Such events would cost a credit card company a considerable amount of money over time. A high risk merchant would be a merchant who works in industries where these negative events occur more often than in an average business. One example of this kind of business is an e-commerce website that offers niche based high ticket products and may have many returns.
There are other fields where potential legal challenges could lead to chargebacks and instances of fraud. The credit repair industry is one in which companies have been classified as high risk merchants and have been unable to find traditional credit card processing companies to handle their payments. The same is true for companies that operate in industries such as travel, debt consolidation, and more.
Any company that operates in a high risk industry runs the risk of having a large number of credit card chargebacks. Many high risk merchants, when shopping for payment processing services, find that standard credit card processing providers simply will not work with their business. In some situations, a company may be able to secure an account with a high risk processor, with higher fees for accepting payments in order to compensate for the extra risk.
This is risk that a bank and processor take on when they operate in verticals that have state or federal oversight and regulatory requirements such as Guns and Ammunition, Alcohol and Tobacco and Online Sports Betting. These types of industries have constant licensing and compliance requirements along with annual regulatory changes. Monitoring the above along with making sure the business is adhering to state laws is an ongoing account maintenance task and additional risk.
There is a financial risk to any processor and bank sponsor in the debit and credit card industry, even more so with high risk players. For example, if a merchant runs 3 months of fraudulent transactions and then closes their bank account, the processor is unable to pull funds to cover the chargebacks that come in over time. The processor and bank have to bear the cost of those chargebacks. There could also be fines from Visa and MasterCard if the processor did not catch any red flags. Those fines can be on a per transaction basis and can be in the thousands of dollars for each one.
How High Risk Processors Can Help
High risk focused merchant account providers are a solution to the problem facing thousands of businesses across the United States. These high risk merchant account and payment solutions often come from reputable companies that specifically focus on helping out high risk merchants. These are companies that are tailor-made to work with specific fields and process their credit card payments.
Some high risk merchant account companies charge a fee to help cover potential externalities that could cause problems for the card processor. There may be higher monthly payments or higher charges for each credit card transaction. But whatever the situation, in many instances the company will still work with the high risk merchant in order to process these transactions.
How to Get Started if You Operate a High Risk Business
Any company that is looking to get a high risk merchant account needs to find out if they are actually a high risk merchant. They can often do this by applying for a traditional card processing agreement or talking to an accountant. If it turns out that they are a high risk merchant, they should still look at setting up a credit card processing solution. Companies should only work with processors that have a proven track record and years of experience in the business.
They must be careful to avoid scams and companies that are trying to take advantage of them and their peculiar situation. Companies should be involved in the process of reviewing their credit card processing agreement. They should not simply accept whatever information is coming to them from the processing company. Instead, they should be vigilant and make sure they are getting the best deal possible for their account.
High risk merchants should never rush into a credit card processing agreement. They need to study the agreement closely and review all pertinent information. These companies also need to make sure that they are frequently reviewing their credit card needs and credit card acceptance policies. Companies have to make sure that a high risk merchant account will help their bottom line instead of hurting it over the long term.
Flow Payments is a leader in the high risk processing space and has decades of experience working with thousands of merchants who have been deemed high risk by banks and processors. We offer transparent and low pricing while providing exceptional service to all of our merchants. Contact us today for a free quote.