Has your business been turned down for payment processing or had an account suddenly terminated due to your industry type? You may have been labeled "high-risk," a classification that can feel like a major roadblock to accepting customer payments.
This guide will navigate you through every step of the process, from understanding the common characteristics and industries to successfully applying for the specialized merchant account your business needs to thrive.
What is a high-risk merchant account?
A high-risk merchant account is a specialized payment processing account for businesses that are considered a greater financial liability to banks and processors. Certain industries with high rates of chargebacks or fraud, as well as businesses with irregular sales volumes, are often placed in this category.
Being labeled a high-risk business doesn’t mean that the business is bad. It’s simply a classification that is applied to businesses that meet certain criteria, as discussed below.
Working with a high-risk merchant account provider offers a pathway for businesses that are unable to get a standard merchant account to take credit card payments from their customers.
What makes a business high-risk?
A business can be deemed high-risk for any number of reasons, including high rates of chargebacks or fraud, irregular sales volumes, or operating in industries that may cause reputational damage to the merchant provider.
High-risk businesses pose a greater financial liability to merchant providers because they are responsible for covering the cost of chargebacks. Additionally, providers face significant fines from card networks like Visa and Mastercard if their merchants accumulate an excessive number of these disputes.
Here are some of the most common reasons why a business may receive the high-risk classification:
Industry type
The industry in which the business operates is the most significant factor impacting its risk.
Merchant providers deem industries with complex regulations, increased fraud, high chargeback rates, or that provide (what some might consider to be) morally sensitive goods and services as high-risk.
Your processing history
Your payment processing history is a direct reflection of the financial risk you present to a provider, with your chargeback history being the most critical factor.
If your past records show a high chargeback ratio, it signals to processors that they have a greater chance of losing money on your account through customer disputes and potential fines from card networks.
Consequently, a history of excessive chargebacks will almost always lead to a high-risk classification to offset this anticipated liability.
Business model
Your business model is a key factor in determining your risk level because certain models are inherently more prone to customer disputes and chargebacks.
For instance, subscription billing and free trials often lead to higher chargeback rates when customers forget to cancel or don't recognize a recurring charge on their statement.
This elevated likelihood of disputes makes processors view these business models as a greater financial liability, often resulting in a high-risk classification.
High-ticket transactions
High-ticket transactions come with a higher risk of fraud and chargebacks. This increased risk, plus the fact that chargeback values can be considerably higher than other chargebacks, makes these types of businesses particularly risky to merchant service providers.
International sales
Businesses that sell internationally are subject to greater financial, legal, and logistical complexities than businesses that operate domestically.
Delivery delays, fraud risk, and cultural misunderstandings all make these types of businesses more risky for merchant account providers.
Owner’s credit history
Merchant account providers often analyze the business owner’s personal credit history, especially if the business is newly established and hasn’t yet demonstrated financial viability.
Owners with a poor personal credit record may indicate poor financial management practices and make it difficult for them to obtain loans and other financing, which increases the chance of failure.
Common high-risk industries
These are a few of the most common types of high-risk industries:
CBD
CBD products are mostly legal in the U.S., but the legality of these products also comes with some complexities. In some states, such as Idaho and South Dakota, CBD products remain illegal. In other states, only those over a certain age or with a medical prescription can purchase CBD products.
Due to this ill-defined legal framework and higher potential for chargebacks, standard merchant providers will often deem CBD businesses as high-risk.
Learn more about payment processing for CBD businesses here.
Online gaming or iGaming
Online gaming providers, including online casinos and sports betting companies, must navigate complex regulations while facing significant levels of fraud and chargebacks.
These combined challenges ultimately place them in the high-risk category for payment processing.
Learn more about payment processing for igaming businesses here.
Travel agencies
Travel agencies are at greater risk of chargebacks and fraud due to the high value of the services they provide.
Additionally, since travel plans are made well in advance, there’s a longer-than-usual timeframe between purchase and delivery, which increases the chance that the customer will cancel the trip and request a chargeback.
Subscription services
Businesses providing subscription services often struggle to get standard merchant accounts because they experience high volumes of chargebacks and cancellations.
This frequently occurs when customers forget about an upcoming renewal and then dispute the charge once it appears on their statement.
Learn more about payment processing for subscription businesses here.
Credit repair
The credit repair industry is heavily regulated, with many companies operating in a legal gray area that makes them unstable.
As a result, merchant providers classify these businesses as high-risk because they will be liable for all refunds and chargebacks if a company is shut down by regulators.
Adult entertainment
Adult businesses are considered high-risk primarily due to the significant reputational risk they pose to banks and payment processors, who may not want to be associated with the industry.
Furthermore, they consistently experience high rates of chargebacks, often from customers disputing transactions for reasons of discretion, which creates a substantial financial liability.
Learn more about payment processing for adult businesses here.
Firearms
Firearm businesses are considered high-risk due to a combination of strict, ever-changing federal and state regulations, and the significant reputational risk that many banks fear by being associated with them.
Additionally, the high average cost of firearms increases the financial liability from potential chargebacks and fraud, making processors more cautious.
Learn more about payment processing for firearm businesses here.
The challenges and opportunities of being a high-risk business
Running any business is inherently challenging, demanding resilience and smart solutions to overcome constant hurdles. Yet, it is in navigating these very difficulties that entrepreneurs discover their greatest opportunities for growth and innovation.
Challenges
Let’s take a closer look at some of the challenges that high-risk businesses commonly face.
Finding a processor
For many high-risk businesses, simply finding a merchant account provider that will work with them is a challenge. Many of the most widely used merchant service providers, such as PayPal and Stripe, don’t make their services available to high-risk businesses.
Even if a business finds a merchant account provider that is willing to work with them, the business may need to provide significant documentation and undergo a rigorous application process before it’s accepted.
Higher processing fees and rates
High-risk businesses can pay anywhere from 3.5% to 12.5% per transaction in fees, which is higher than non-high-risk businesses.
Some high-risk merchant account providers also charge other fees that can eat into the businesses’ profits, including additional monthly fees and gateway charges.
Stricter contract terms
High-risk merchant accounts are often subject to stricter contract terms, sometimes being locked into long-term contracts.
High-risk businesses are also typically liable to pay early termination fees if they exit the contract early, or in some cases, may be forced to pay a penalty that equals the total amount of the monthly fees for the rest of the contract period.
More stringent contract terms, such as low chargeback thresholds and implementing fraud prevention technology, are also common.
Rolling reserve requirements
In many cases, high-risk merchant account providers implement rolling reserve policies. This is the practice of withholding a percentage of the businesses’ gross sales for a set period of time as a safeguard against any chargebacks or refunds during that period.
Usually, the rolling reserve is between 5% - 15% of gross sales, but it can be higher for riskier businesses.
This measure helps to protect the merchant account provider against the chargeback fees for which they are ultimately responsible. The funds held in the rolling reserve, which do not gain interest, are released at the end of a set period, which can be anywhere from 30 to 180 days.
Opportunities
Being a high-risk business does present its challenges, but it also comes with some advantages too.
Let’s take a look at some of the opportunities for high-risk businesses.
High-risk processors are available
While it’s less straightforward than opening a standard merchant account, high-risk merchant accounts offer riskier businesses significant opportunities to level up their operations.
In an age where accepting credit card payments is essential, some businesses are unfortunately labeled "high-risk." Specialized high-risk merchant account providers are the solution that allows these companies to operate, radically expanding their reach to a much wider range of consumers.
Robust fraud protection and chargeback management tools
High-risk merchant service providers often offer tools, software, and support to help businesses mitigate the risk.
Whereas a standard merchant account provider may freeze or terminate a business’s account, a good high-risk merchant account provider can become a trusted partner that plays an instrumental role in your success.
Tools such as transaction monitoring, filters that prevent customers from making multiple payment attempts, and early chargeback warnings help to reduce chargebacks and boost your financial standing.
How high-risk merchant accounts differ from other merchant accounts
Both high-risk and standard merchant accounts allow businesses to accept credit card payments, but how they function, the application process, and associated fees differ significantly.
Let’s take a look at some of the key differences between high-risk merchant accounts and standard merchant accounts.
Application process and approval times
Obtaining a standard merchant account is usually straightforward. In most cases, the application process involves submitting routine business paperwork, such as your business registration and a credit check. Once submitted, it’ll usually take one to seven days for the application to be approved, with the business able to accept credit card payments a few days after that.
Due to the additional work the merchant provider must undertake before approval, applying for a high-risk merchant account is a lengthier and more time-consuming process.
Businesses need to submit additional documentation that can include business plans, financial statements, and the personal credit history of the owner. The provider will also conduct a detailed analysis of the industry and goods/services of the high-risk business before making a decision.
Approval time can range from five days to several weeks.
Payment processing fees
Payment processing fees are calculated differently for high-risk businesses, and often, high-risk businesses pay more.
The fee for a standard merchant account is generally between 1.5% - 3.5% of the total transaction cost.
For high-risk merchant accounts, the fee can be between 3.5% - 12%.
The payment processing fee is dependent on a variety of factors, including the businesses’ risk level and the location of the transaction (with international transactions attracting a higher percentage).
Cash reserve requirements
High-risk merchant account providers often have cash reserve requirements. This is when a portion of the company’s sales, usually between 5% - 15%, is withheld for a set period before they are released to the business.
This system is designed to protect the high-risk merchant provider in case of future chargebacks or business failure.
Standard merchant accounts don’t have cash reserve requirements.
Chargeback fees
Both low-risk and high-risk businesses are subject to chargeback fees, which are monetary penalties imposed when a chargeback is initiated and deemed to be valid.
For standard merchant accounts, this fee is typically between $15 - $50 per chargeback.
For high-risk merchant account holders, the fee is usually higher, around $50 - $100.
Volume
Volume monitoring and restrictions can apply to both low-risk and high-risk businesses, but high-risk businesses are subject to greater monitoring and restrictions.
Low-risk merchant account holders typically won’t face restrictions except in exceptional circumstances, such as when there’s an unusual spike in transactions or value amount. Even in that case, the merchant account provider will typically reach out to the business before placing any restrictions.
High-risk businesses are usually subject to monthly processing caps (for example, $100,000) and single-transaction caps (for example, max $5,000 per transaction).
It’s possible to go beyond these limits, but you’ll likely need to seek approval from the merchant account provider in advance
How to qualify for a high-risk merchant account
- Understand your business’s risk factors
- Identify a high-risk merchant account provider with experience in your industry
- Gather necessary documentation, including your financial statements, chargeback history, business license, and IDs of the owner and any partners
- Apply for a high-risk merchant account with honesty and transparency to ensure a smooth application
- Once approved, assess the terms and conditions
- Start accepting payments
Choosing the best high-risk payment processing provider
Ultimately, the high-risk payment processing provider you work with will do more than allow you to accept payments.
They should also function as a valuable partner that helps to minimize chargebacks, so take the time to identify the high-risk merchant provider that’s reputable, trustworthy, and right for your business.
What to look for:
- Experience working with high-risk businesses
- Transaction fees that are in line with, or better than, industry standards
- Transparency regarding rolling reserves, fees, and contract terms
- Chargeback management software and tools
- Excellent customer service and support
Best practices for managing your high-risk merchant account
Securing a high-risk merchant account is a critical first step, but actively managing it is essential for keeping your payment processing stable and secure.
Implementing a set of best practices will not only help you prevent chargebacks and reduce fees, but will also ensure you maintain a healthy, long-term relationship with your provider.
Maintain a low chargeback ratio
Working to maintain a low chargeback ratio is essential for keeping your high-risk merchant account in good standing and avoiding additional fees.
Businesses can keep their chargeback ratio low by offering excellent customer service and allowing customers to easily get refunds. Implementing fraud detection software and chargeback alerts are also useful preventative measures.
Communicate with your merchant provider
Communicating with your provider about any changes in your business will help avoid your account being frozen or terminated due to a spike in sales or changes to your business model. It can also help build trust between your business and the provider.
PCI compliance
Adhering to PCI compliance is about more than managing your high-risk merchant account: it’s a legal requirement. Violating PCI (Payment Card Industry) compliance measures can have serious consequences, including hefty fines and the closure of your merchant account.
Monitor your statements
Monitoring your statements for unexpected fees or issues allows you to take a proactive approach to handling any discrepancies. This demonstrates to your merchant account provider that you are diligent and take your financial standing seriously.
Frequently asked questions (FAQ)
What are the typical fees for a high-risk merchant account?
Transaction fees for high-risk merchant accounts range from 3.5% - 12.5% per transaction. Some merchant account providers also charge setup fees and monthly maintenance fees.
Can I get a high-risk merchant account with bad credit?
Yes, you can get a high-risk merchant account with bad credit. Applicants with bad credit may be subject to more thorough application requirements, higher transaction fees, and stricter contract terms, such as longer rolling reserves.
How long does it take to get approved for a high-risk merchant account?
The process of getting approved for a high-risk merchant account typically takes between three and 14 days, depending on the complexity of the application. Businesses can speed up the application process by providing all of the requested documents and working with a reputable high-risk merchant service provider.
What is a rolling reserve, and will I need one?
A rolling reserve refers to the percentage of sales that is withheld by the high-risk merchant account provider for a set period of time, typically between 30 and 180 days. Virtually all businesses that apply for a high-risk merchant account will be subject to a rolling reserve, though less risky businesses may be granted a reduced rolling reserve period.
What happens if my chargeback ratio gets too high?
Most high-risk merchant providers put measures in place to reduce chargebacks. If your chargeback ratio exceeds the threshold, the provider may increase your chargeback fees, lengthen the rolling reserve period, or suspend your account.
