High-Risk Merchant Accounts: Understanding the Ins and Outs

While business owners commonly face funding challenges, the challenge becomes amplified for high-risk business owners. That’s where a high-risk merchant account can help. This article covers everything you need to know about high-risk merchant accounts, including what makes a business high-risk, how to obtain a high-risk merchant account, the pros and cons, and more.

Key Points: 

• High-risk merchant accounts are payment processing accounts geared to businesses operating in high-risk industries and more prone to chargebacks, fraud, regulatory hurdles, and legal issues. 
• Higher-risk businesses include industries like adult entertainment, online gambling, nutraceuticals, firearms, and several others.
• High-risk credit card processing can expand a business's customer base and offer financing options. Still, it may also result in higher fees and stricter provider requirements.
• High-risk merchants should research and compare payment processing providers, check for security measures, consider fees and contract terms, look for integration and support, and evaluate underwriting processes.
• High-risk merchant accounts can significantly affect payment processing fees due to the higher risk of chargebacks and fraud.

Understanding High-Risk Merchant Accounts

Obtaining financing through traditional or low-risk means can be challenging for high-risk business owners. While high-risk merchant accounts offer a solution, it’s first essential to consider a few key points to better understand them:

• High-risk merchant accounts cater to industries deemed as higher risk, like adult entertainment, online gambling, nutraceuticals, and firearms.
• High-risk industries have higher chargeback or fraud risks and regulatory challenges.
• High-risk merchant accounts have stricter underwriting requirements, higher fees, and transaction limits than traditional accounts.
• High-risk merchant accounts also have advantages like greater payment processing flexibility, faster funding times, and the ability to process various payment types.

What Is a High-Risk Merchant Account?

High-risk merchant accounts are payment processing accounts geared to businesses operating in high-risk industries and more prone to chargebacks, fraud, regulatory hurdles, and legal issues. Although obtaining such an account can be difficult and has disadvantages, it can provide a lifeline for such businesses.

Here are some other vital points to keep in mind:

• High-risk merchant accounts undergo stricter underwriting and may have higher fees and transaction limits than traditional accounts.
• High-risk merchant accounts allow businesses to accept various payment types, including credit cards, ACH, and e-checks.
• High-risk merchant accounts also often come with faster funding times.
• Businesses should always research high-risk merchant account providers that have experience specializing in riskier industries and consider factors like pricing, support, and technology.

Why Would a Merchant Be Considered High Risk?

Different payment processors and financial institutions may have different criteria for assessing risk. However, merchants are commonly considered high risk for several of the following reasons:

• Nature of Business: Sensitive or controversial industries, such as online gambling, adult entertainment, and firearms, are considered high risk.
• High Chargeback Rates: Merchants with high chargeback rates pose a financial risk to payment processors because chargebacks happen when consumers dispute transactions with their bank or credit card company, leading to transaction reversals and refunds.
• Poor Credit History: Because of the potential for significant losses due to fraud or chargebacks, payment processors may view merchants processing high-value transactions as high-risk.
• Limited Processing History: Payment processors could consider merchants without a long credit history high risk because they lack a track record of responsible credit behavior.
• International Transactions: Merchants processing cross-border transactions or with international customers may be deemed high-risk due to the heightened likelihood of fraud and chargebacks.
• Reputation: Merchants with a bad reputation, such as those with many customer complaints or negative reviews, may be categorized as high-risk.
• High Average Transaction Amounts: Merchants processing high-value transactions may be seen as high-risk because of the possibility of significant losses in case of fraud or chargebacks.
• Regulatory Requirements: Merchants in heavily regulated industries like healthcare or finance may be deemed high-risk due to the complicated compliance requirements.
• Subscription-Based Business Models: Merchants using a recurring billing model could be considered high-risk because of the higher likelihood of chargebacks and disputes over subscription fees.

What Industries Are Usually Labeled as High Risk?

Here are some industries typically considered high-risk:

• Online Gambling and Casinos: Online gambling and casinos are high-risk for payment processors due to chargebacks, fraud, non-payment, and legal uncertainties resulting from offshore locations and regulatory complexities.
• Adult Entertainment: Besides the risks of chargebacks and fraud, adult entertainment is considered controversial and a reputational risk. The industry also faces legal and regulatory scrutiny.
• Firearms: Firearms businesses selling guns, ammo, and parts are often considered high risk by payment processors due to potential liability, high chargeback ratios, reputational damage, and federal regulations.
• Nutraceuticals: The nutraceuticals industry is considered high-risk due to its new and evolving nature, high rate of chargebacks and fraud, and lack of regulation and standardized manufacturing practices.
• Online Pharmacies: Online pharmacies are high-risk due to selling counterfeit drugs, legal complications, and complex regulations that pose challenges for payment processors.
• Travel and Hospitality: Travel and Hospitality businesses are high-risk merchants prone to frequent chargebacks, fraud, and identity theft due to sensitive customer information and a large volume of transactions.
• Tech Support and IT Services: Tech support and IT services are high-risk due to vulnerability to fraud, particularly if operating offshore or with international customers, and high chargeback ratios from dissatisfied customers disputing service quality.
• Forex Trading and Cryptocurrency: Forex Trading and Cryptocurrency are high-risk due to volatility, regulatory uncertainty, and susceptibility to fraud, including money laundering and terrorism financing.
• Multi-Level Marketing and Direct Selling: Multi-Level Marketing and Direct Selling businesses are high-risk due to regulatory scrutiny, reputational risks from unethical practices, legal issues, chargebacks from unsatisfied members, and vulnerability to fraud and pyramid schemes.
• Ecommerce: Ecommerce businesses can sometimes fall into the high-risk category due to their acceptance of card-not-present transactions, which refers to card payments made without the physical presence of the customer's card.

High-Risk vs. Low-Risk Merchant Account: What’s the Difference?

Understanding the differences between high-risk and low-risk merchant accounts is essential for businesses to make informed decisions when selecting a payment processor. Here's how they differ from each other:

• Processing Fees: High-risk accounts have higher processing fees than low-risk accounts due to the greater risk of chargebacks and fraud.
• Application Process: High-risk businesses must provide more documentation, including financial statements and business plans, to prove their legitimacy, making the application process for their merchant accounts more rigorous than for low-risk accounts.
• Chargeback Fees: High-risk businesses face higher chargeback fees compared to low-risk businesses.
• Cash Reserve Requirements: Financial institutions may mandate high-risk businesses to keep a cash reserve to cover potential losses, according to the business’s risk level.
• Volume Caps: High-risk businesses may face volume caps, or processing limits, which restrict the amount of money they can handle in a given period, to decrease the possibility of losses for the financial institution.
• Approval Rate: Due to the lower probability of low-risk businesses engaging in high-risk or fraudulent activities, low-risk merchant accounts approve at a higher rate than high-risk accounts.
• Underwriting Process: Financial institutions require more extensive underwriting for high-risk merchant accounts than low-risk accounts to evaluate the risk associated with the business before approval.

What Are the Pros and Cons of High-Risk Credit Card Processing?

High-risk credit card processing has pros and cons for businesses. It can help businesses expand their customer base and access financing. Yet, it may come with higher fees and stricter requirements from providers. Below is a more detailed overview.

Pros:

• Ability to Process Payments: High-risk businesses can accept credit card payments to maintain their customer base and revenue.  
• Expanded Customer Base: Accepting credit card payments allows high-risk businesses to expand their customer base beyond those who pay with cash or check.
• Access to Financing: High-risk credit card processing may make it easier for high-risk businesses to obtain financing, as it demonstrates a reliable source of revenue.  
• Competitive Rates: Although high-risk credit card processing may have higher processing fees, some providers offer competitive rates and fees comparable to low-risk processing.

Cons:

• Higher Fees: High-risk credit card processing fees are typically higher than low-risk due to the increased risk.
• Chargebacks: High-risk businesses are more likely to experience chargebacks, which can result in fees and lost revenue.
• Cash Reserves: High-risk merchants may be required to hold a cash reserve to cover chargebacks, which can tie up capital and limit cash flow.
• Stricter Requirements: The application process for high-risk credit card processing is often more stringent, and businesses may be required to provide more documentation and proof of financial stability.
• Limited Options: Some financial institutions may hesitate to work with high-risk businesses, which can limit their options for credit card processing providers.

How Long Does It Take to Set Up a High-Risk Merchant Account?

Setting up a high-risk merchant account can take days to months, depending on the provider and the complexity of the business. Factors that impact the timeline include:

• Application Process: The application process for high-risk merchant accounts can involve more than low-risk accounts, as providers may require more documentation to assess risk.
• Underwriting Review: After applying, the provider will typically conduct an underwriting review to assess the risk of the business. This review can take several days or weeks, depending on the provider's process.
• Compliance Checks: Providers may require high-risk businesses to undergo time-consuming compliance checks to ensure they're legitimate and compliant with relevant laws and regulations before offering high-risk merchant services..
• Technical Setup: Once approved, the provider must set up the technical infrastructure to process credit card payments. Depending on the provider and the complexity of the business's needs, this can take several days or longer.

How Do I Get a High-Risk Merchant Account?

Businesses must follow several crucial steps to obtain a high-risk merchant account. While the process may differ based on the payment processor's requirements and industry, the following steps are typical for getting such an account:

• Review Finances: Before applying for a high-risk merchant account, a business should constantly review its finances to ensure a healthy cash flow, no debts, and a good credit score that meet the requirements of the high-risk merchant account provider.
• Compile Documents: High-risk merchant account providers require more documentation, so businesses should gather financial statements, licenses, tax returns, and bank statements.
• Research Providers: The business should research high-risk merchant account providers that meet its needs and are reputable, have clear terms, and offer competitive rates.
• Submit an Application: Once a business finds a provider, it should submit an application with detailed information, including industry, sales volume, and payment processing history.
• Underwriting Review: The provider then assesses the business’s risk by conducting an underwriting review, which may involve credit and background checks and reviewing the payment processing history.
• Compliance Checks: The business may need to pass compliance checks to prove its legitimacy and adherence to applicable laws and regulations.
• Technical Setup: After approval, the provider sets up technical infrastructure for processing credit card payments, including installing payment processing software and hardware like a card reader or point-of-sale system.
• Test and Launch: The final step for the business is to test the payment processing system after completing the technical setup to ensure proper functioning. Once testing is complete, it's time to launch the high-risk merchant account and start processing payments.

Common Challenges Faced by High-Risk Merchants and How to Overcome Them

High-risk merchants can face numerous challenges. Here are 7 of the most common challenges and how to overcome them.

• Chargebacks: To address chargeback challenges, high-risk merchants can offer refunds to dissatisfied customers, implement fraud detection and prevention tools, and monitor their chargeback ratio while taking measures to decrease it.
• Fraud: High-risk merchants can combat fraud by using fraud prevention tools like verification codes, monitoring transactions for suspicious behavior, and adding an extra layer of security through 3D security.
• High Processing Fees: High-risk merchants can address high processing fees by finding processors for high-risk businesses, negotiating fees with current processors based on transaction volume, and trying alternative payment methods with lower fees.
• Limited Payment Options: To confront the challenge of limited payment options, high-risk merchants can use alternative methods like e-wallets, cryptocurrencies, or bank transfers, provide multiple payment options to cater to customer preferences, and partner with payment providers that offer a wide range of payment options.
• Reputational Risk: High-risk merchants can tackle reputation risk by being transparent, responding professionally to negative reviews, and monitoring their online reputation while taking corrective measures to address any issues.
• Compliance Requirements: High-risk merchants can meet compliance requirements by staying updated with industry regulations, hiring a compliance expert, and implementing policies to avoid violations.
• Limited Access to Financing: High-risk merchants can confront limited financing access by building a strong credit score, exploring alternative financing options such as a merchant cash advance, and partnering with specialized high-risk merchant lenders. 

How to Choose a High-Risk Merchant Account Service Provider

Choosing the right payment processing partner is necessary to succeed as a high-risk merchant. These actionable tips can help you select a high-risk merchant account service provider that meets your unique needs.

• Research and Compare Providers: When choosing a high-risk merchant account service provider, research and compare specialized payment processors with a proven track record of working with businesses in your industry.
• Consider Fees and Contract Terms: Consider fees and contract terms when selecting a high-risk merchant account provider. Look for transparent pricing and favorable contract terms that suit your business needs.
• Check for Security and Fraud Prevention Measures: When selecting a high-risk merchant account service provider, check for security and fraud prevention measures like 3D security, tokenization, and address verification. Also, ask about their chargeback prevention strategies and policies.
• Look for Integration and Support: Consider payment processors that integrate with your current systems and provide responsive customer support with helpful resources like integration guides and developer tools.
• Read Reviews and Ask for Recommendations: High-risk merchants should always read reviews and ask for recommendations from other business owners in their industry before selecting a payment processor.
• Evaluate Their Underwriting Process: High-risk merchants should select a payment processor with a transparent and strict underwriting process that does not contain hidden fees.

What to Look for in a High-Risk Merchant Account Service Provider

When searching for a high-risk merchant account service provider, these are some of the most critical points to keep in mind:

• Experience: Look for a provider with a proven track record of working with high-risk businesses.
• Accepted Industries: Check if the provider accepts merchants in your industry; some providers refuse to work with certain sectors.  
• Chargeback Management: A good provider should have a system in place to manage and minimize chargebacks.
• Flexible Contracts: Avoid providers that lock you into long-term contracts with crippling early termination fees.
• Transaction/Additional Fees: Make sure you understand the transaction fees and any other costs associated with the service.
• Security & Fraud Prevention: Ensure the provider offers robust security measures and anti-fraud protection to safeguard your transactions.
• Support: Look for a provider that offers responsive and helpful customer support, available via multiple channels.
• Payment Gateway Options: Payment gateway options are platforms and software that enable online transactions between customers and merchants. Choosing a provider that offers multiple options will increase payment flexibility.
• Customization: Look for a provider to tailor their services to your business needs.
• Reputation: Research the provider's reputation in the industry and read reviews from other merchants to get a sense of their reliability and level of service.

Best High-Risk Merchant Account Service Providers

Here are some of the top high-risk merchant account service providers, along with their key features, pricing, and pros and cons:

• PaymentCloud
  • Features: Customized solutions for high-risk industries, chargeback prevention tools, ACH processing, mobile processing, POS systems, multiple payment gateway integrations, fraud prevention measures, and more.
  • Pricing: PaymentCloud doesn't have a fixed list of fees. Fees mentioned include a virtual terminal rate of 2.90% plus 30 cents and a swiped or keyed-in rate ranging from 3.00% to 6.50%.
  • Pros: Exceptional customer support, flexible contract terms, competitive pricing, a variety of payment options, popular software integrations, and no-cost credit card processing support. Forbes also rates it its “Best Overall” high-risk merchant account service provider.
  • Cons: The platform has limited third-party shopping cart integration, undisclosed fees, and a monthly payment gateway fee.
• Durango Merchant Services
  • Features: Tailored solutions for the highest-risk industries, chargeback prevention tools, ACH processing, international payment processing, fraud prevention measures, multiple payment gateway integrations, POS equipment and software, and other features.  
  • Pricing: Durango's pricing is not listed online, so you need to contact them for a quote. However, transaction fees typically start at 1.00%. They also offer equipment for sale rather than just through long-term contracts, with hardware prices ranging from $170 to $400.
  • Pros: Forbes named Durango the top high-risk merchant account service provider for the highest-risk businesses. They offer a fast application process, no setup fees, reliable customer support, fraud protection services and education, and the ability to process cryptocurrency payments.
  • Cons: Durango does not disclose its fees online. However, their transaction fees are higher than some competitors. They also offer limited reporting and analytics features.
• Soar Payments
  • Features: Customized solutions for high-risk industries, including chargeback management tools, ACH and e-check processing, mobile processing, multiple payment gateway integrations, fraud prevention measures, international payment processing capabilities, next-day funding for qualified businesses, POS equipment and software, 24/7 customer support, and more.
  • Pricing: Soar Payments offers a quick online service quote but does not publicly disclose its fees. They may charge higher fees to some businesses, with transaction fees for mid-risk merchants starting at 2.49%. Additionally, they have a $495 early termination fee.
  • Pros: Soar offers excellent customer support, flexible contract terms, and a variety of payment options. You can receive an instant price quote with an all-online application process and enjoy a strong, U.S.-based customer support system. They also provide industry-minimum pricing.
  • Cons: The platform does not support businesses with a bad credit rating and does not work with ultra-high-risk (UHR) companies. They have higher transaction fees than competitors and limited integration with third-party shopping carts.
• Host Merchant Services (HMS)
  • Features: Tailored payment solutions with online and mobile payment options, chargeback prevention, fraud protection, and 24/7 customer support. They also offer POS solutions, transparent pricing, PCI compliance, and fast funding.
  • Pricing: Compared to other high-risk merchant account service providers, HMS offers transparent pricing with no hidden fees. They charge per-transaction fees, including interchange fees and an additional fee for different business types, such as retail storefronts (0.25% and 10 cents per transaction), restaurants (0.20% and 9 cents per transaction), and e-commerce (0.35% and 10 cents per transaction).  
  • Pros: A clear and transparent pricing structure with no cancellation fees, no monthly account fees, no-cost credit card processing, and a wide range of payment options. It also caters to a wide range of industries. It is considered the best for large high-risk businesses, according to Forbes.  
  • Cons: Integration with some popular shopping carts is limited, and HMS may charge higher fees for smaller or newer businesses.
• SMB Global
  • Features: Offers high-risk merchant accounts for various high-risk industries, domestic and offshore processing options, multiple payment gateway integrations, chargeback prevention and management tools, and 24/7 customer support.
  • Pricing: Does not disclose pricing information online and requires potential clients to apply for a quote. There is, however, a $500 early termination fee for select high-risk merchants.
  • Pros: Great for international businesses with offshore processing options, and they work with businesses with bad credit. It also offers numerous software integrations and various payment options.
  • Cons: Lacks transparent pricing and reliable customer support and may have higher fees and longer processing times for offshore processing. Free terminals are only available for certain qualifying businesses with undisclosed requirements, and there are no listed app integrations on the website.

How High-Risk Merchant Accounts Impact Payment Processing Fees

High-risk merchant accounts generally have lower fees compared to merchant cash advances, but still come with high payment processing fees due to the elevated risk of chargebacks and fraud. Let's explore some of the ways how:

• Higher Transaction Fees: High-risk merchant accounts typically have higher transaction fees because of the increased risk of processing payments for these businesses.
• Additional Fees: High-risk merchants may also be subject to additional fees such as setup, monthly, and chargeback fees.
• Rolling Reserves: High-risk merchant account providers may require a rolling reserve, a percentage of each transaction held in reserve, to cover chargebacks and potential losses, which can affect the business's cash flow.
• Limited Options: High-risk merchants may have fewer payment processing provider options, leading to less competition and higher fees.
• Customized Solutions: High-risk merchant account providers can create customized solutions that meet the business's specific needs, which may result in higher fees.
• Underwriting Effects: The more stringent underwriting requirements high-risk merchants may face can lead to longer processing times and potentially higher fees.
• Fraud Prevention: Additional security measures, such as fraud detection software or PCI compliance, can incur higher fees.

Best Practices for Managing Chargebacks with a High-Risk Merchant Account

High-risk merchants may encounter substantial difficulties with chargebacks, resulting in lost revenue, potential fines, and in worst-case scenarios, account suspension. Below are some recommended measures to effectively manage chargebacks when operating a high-risk merchant account:

• Monitor Chargebacks and Disputes Carefully: Since high-risk merchants tend to have higher chargeback rates than low-risk ones, it's essential to keep a close eye on chargeback ratios and dispute rates to identify issues before they spiral out of control.
• Keep Accurate Transaction Records: Accurate transaction records are crucial to defending your case during a chargeback dispute. Keep detailed documentation, including transaction receipts, shipping confirmations, and customer signatures.
• Prompt and Effective Response to Customer Inquiries and Concerns: Customer satisfaction is vital to preventing chargebacks. Address their concerns and inquiries promptly and effectively to avoid disputes.
• Implement Fraud Prevention Measures: Implementing fraud prevention measures, like address verification, security codes, and identity verification, can reduce the risk of fraudulent transactions and chargebacks.
• Work Closely With Payment Processors and Partners: Maintain good relationships with payment processors and partners for smooth transaction processing, timely dispute resolution, and effective fraud prevention.
• Use Chargeback Management Tools: Chargeback management tools can simplify and expedite the dispute resolution process, saving time and effort.
• Review Your Chargeback Policies Regularly: Review chargeback policies regularly to ensure compliance with regulations and card association rules.
• Train Your Staff on Chargeback Management: Make sure your staff is well-trained in chargeback management, dispute resolution, and fraud prevention to minimize chargeback risk and maximize revenue.