What is a High-Risk Merchant Account, and Do I Need One?

A high-risk merchant account is a merchant account that allows businesses designated as ‘high-risk’ to accept payment for goods and services by credit or debit card.  Merchant account service providers might attach certain terms and conditions to the account to protect themselves in the event of something untoward happening, but that would depend on the situation at the time of application.

There are a number of factors that can result in a business being tagged as ‘high-risk’. Merchant service providers and their partnering banks carry a massive risk when approving merchants for accounts, and certain factors are considered to be a risk. Risk factors include:

• The type of goods or services offered
• Bad credit record
• New companies
• opt-out subscription services
• opt-out free trials
• long-term money-back guarantees
• outbound telemarketing

Merchants are often able to lose their ‘high-risk’ tag over time as they build a good track record of no chargebacks or payment queries. It is very possible for businesses with a previous bad credit record or new businesses to have their status reassessed after a few months. Some industries, however, are considered high risk and will always be treated with caution.

What industries are regarded as high risk?

Industries that attract a high level of chargebacks are high-risk businesses. Chargebacks are when a customer disputes a payment transaction and requests that it be revered. Chargebacks have a negative cash implication for issuing banks, merchant account service providers and merchants so the aim is always to keep them to a bare minimum. Some industries however are inclined to attract chargebacks and these industries are considered high risk. Some examples of high risk industries are:

• Chat or webcam sites
• Adult content services or products
• Gambling
• “Get rich quick” investments
• Travel/tourism businesses
• Technical support services
• Online pharmacies
• Tobacco sales

One reason some of these industries attract chargebacks is because it is not always easy to prove that the customer did make the purchase or order the service.  Sometimes it is just an actuarial, statistical fact that an industry has high chargeback rates for reasons that are unknown or unclear.

Some merchant account service providers will also refuse certain industries for ethical, legal or related reasons, such as pornographic websites, guns and ammunition, or certain drugs.

High-risk industries do get approved merchant accounts:

High-risk businesses can still apply for a merchant account so that they can accept payments by credit or debit card. Each application will be reviewed based upon on the underwriting criteria of the merchant account service provider.

All card networks have chargeback monitoring programs, and chargebacks are a key criteria for monitoring high-risk industries. A chargeback threshold will be set for each high-risk merchant account, and the aim would be to keep chargebacks below this threshold. There are additional charges for each chargeback a high-risk merchant accrues, so merchants are encouraged to do what they can to reduce chargebacks. It is not always possible for high-risk merchants to eliminate chargebacks because much depends on their customer base, industry and location. High-risk merchants must do what they can to address factors within their control like building in clear refund policies for customers to understand before payment is made.  A large number of chargebacks could potentially trigger an audit of a merchant account which could result in the account being suspended or closed.  But keeping chargebacks at a low level for six months or more could potentially permit a business to be reconsidered as a normal-risk business, qualifying it for better rates or terms.

For more information about, a high-risk merchant account and who needs one, or to open a merchant account, please call (888) 924-2743 or go to Charge.com.