As a merchant advocate and industry-leading provider of managed-risk merchant services (often referred to as “high risk”), we’re often asked for guidance by merchants on how to successfully scale their businesses while maintaining durable processing and avoiding the issues with chargebacks, reserve increases, and terminations that are so frequent with other processors.
We recognize that every merchant is at a different place in their entrepreneurial journey, so this article will start with the basics and build from there. Whether you’re a new ecommerce business owner or an experienced pro, we’re here to provide the expertise you need.
What Are High-Risk Merchant Services?
Often, merchants find NMA because they’ve only just learned that the business they’re so excited to launch is seen as “high risk”, and traditional processors, nor their bank will approve them for credit card processing. So what makes a business “high risk?”
High-risk merchant services are services offered to businesses that meet specific criteria (unique to each credit card processor) that put them in a high-risk category. The payment processor might consider these businesses to be high risk due to a novel business strategy, a less well-known product, a perceived reputational risk associated with their products, less-than-great credit, or a high number of recent chargebacks.
However, being a ‘high-risk’ business isn’t as bad as it sounds, and it does not mean your business model is wrong or illegal. It means that your business represents an increased risk to the service provider and requires a slightly different service and increased monitoring to account for this.
All payment processors balance this risk in several ways. This can include:
- More detailed review in the underwriting process;
- Charging higher processing fees (the percentage of transactions kept by the processor); or
- Holding onto more of the business’s cash before depositing it (known as a “reserve”).
This is where the choice of service provider becomes very important – many processors will accept higher-risk merchants without doing proper due diligence in underwriting, but will simply charge high fees or suddenly increase reserves, threatening the business’ viability.
But even with these challenges, running a business in a so-called “high risk” vertical can still be very rewarding. These businesses have helped millions of entrepreneurs achieve the lifestyle of their dreams, and provide customers with innovative products and services. The key is to get started right by partnering with a team that understands your industry and has a proven track record of keeping merchant accounts up and running as businesses scale.
Table of Contents
- Which Businesses Need a High-Risk Merchant Account?
- How Does a High-Risk Merchant Account Work?
- How a High-Risk Merchant Account Impacts Your Business
- How to Choose and Apply for a High-Risk Payment Processor
- Why Join the National Merchants Association?
Which Businesses Need High-Risk Merchant Services?
The reasons processors classify businesses as high-risk fall into five categories, Many companies will fit into more than one of these.
Each credit card processor has its own method of assessing risk; however, if your business belongs in one or more of the below categories, you will likely be considered high risk:
Category 1: High-Risk Business Type
Certain business types, including affiliate marketing, psychics, electronic cigarettes, firearms, and travel businesses, are always considered high risk. The combination of product, business model, and target customer makes these riskier than other businesses regardless of other factors. If your business falls into one of these categories, you will likely be labeled high risk.
For example, a business in the CBD industry is considered high-risk for several reasons:
- The potential for fraudulent or illegal activity.
- The exposure to tight regulations that frequently change.
- The topic of CBD is still considered taboo.
Category 2: High-Risk Business Model
Many businesses are considered risky because of their business model. Processors may consider a business that uses these business models high risk even if their product is otherwise considered low-risk.
Aspects of a business model that increase risk include:
- Having primarily card-not-present (CNP) transactions – including eCommerce and mail or telephone orders. This is because there is a higher possibility of fraud or chargebacks (which could result in losses to the merchant or processor since the card brands will typically refund a cardholder’s money immediately for a fraudulent transaction). It’s much easier for a customer to dispute a charge when they weren’t there physically to insert their card and sign an invoice.
- Extended warranties or options to return – if your business offers extended warranties or extended options to return an item, this may increase the risk, as it makes chargebacks more likely.
- High average ticket sales – Making sales at very high price points increases risk.
- Offshore business – Businesses that sell in the US but have their headquarters overseas are considered a higher risk due to the increased risk of fraud. A business is also riskier if its home country’s banking regulations are considered softer than those in the US.
Category 3: High-Risk Product Type
Product categories where there are a higher ratio of dishonest businesses, products that carry reputational risk, or are subject to significant regulation are considered high-risk.
Other aspects that increase risk include:
- Subscription products – So-called “negative-option” billing, where customers are billed every month unless they specifically opt out, is a key convenience that many consumers are used to today. From digital streaming services to dog walking to pre-made meals, more products than ever are delivered using a subscription model. However, subscriptions can lead to chargebacks if, for example, a customer forgets they have subscribed to a service and contacts their credit card company thinking it’s a fraudulent charge.
- Reputational risk: Many payment processors are part of large banking conglomerates that are extremely media-shy and try to avoid negative press coverage at all costs. So they may not wish to be associated with products such as adult entertainment, drug paraphernalia, CBD, medical marijuana, tobacco, or firearms for example.
- Regulated products: If the government has put restrictions on the sale of a given product, such as firearms, CBD, alcohol or tobacco, that product is generally considered high-risk to a payments processor, as it can be easier for a merchant to misunderstand or fail to properly follow regulations, resulting in legal issues that could put them out of business, risking the processor’s profits.
- Potential scam – If a dissatisfied customer might think your product is a scam (even if it isn’t), this might increase the risk. For example, online courses on Forex trading or other investment strategies can be high-risk since a customer could lose money following those strategies and blame the merchant, resulting in chargebacks or fraud complaints.
- Long fulfillment times – If you do not fulfill orders for weeks or months after taking the order (for example, pre-orders, travel, or concert tickets), you are a higher risk due to an increased chance of chargebacks as a customer might change their mind about their purchase before receiving the product, or you might be unable to deliver the product due to changes outside your control. This issue has become a major center of attention during the COVID-19 crisis as massive numbers of flights, hotel reservations, sporting events and concerts have had to be delayed or cancelled, resulting in unprecedented numbers of chargebacks and huge disputes between large merchants and card brands. So if you’re in an industry that has these dynamics, you’ll definitely need to connect up with a merchant processor that understands your model.
Category 4: High-Risk Processing History / Customers
If your business regularly experiences chargebacks or fraud from your customers, it will be considered high-risk. Typically, a chargeback rate of more than 1% would put your business in this category. A high chargeback rate often reflects your customer base, rather than the business itself, and many companies have had to accept this as an unavoidable cost of business for their vertical. There is even a common occurrence oddly referred to as “friendly fraud”, in which consumers buy a product with the intention to keep it without paying, by charging back the purchase after the fact. For example they might contact their card issuer and claim they never received the product. This can seem like a smart way to get “free products” but it ends up seriously harming the merchant involved, who loses the money for the product, plus chargeback fees, and can even end up having their merchant account terminated due to friendly fraud if they’re working with a low-quality processor.
Online businesses, for example, are often categorized as high risk for this reason. In the US, almost 1 in 4 online stores have a chargeback rate above 1% due to CNP (card-not-present) fraud.
Category 5: High-Risk Owner
Processors aren’t just checking your business’s credit score and history – owners get checked, too. If you have a poor personal credit rating, don’t have much credit history, or are starting a new business, you are more likely to be placed in a high-risk category. If you have fraud or other illegal activity associated with you, you are also more likely to be placed in a high-risk category.
Businesses Typically Classified as High-Risk
At NMA, we accept businesses in the following high-risk verticals:
- Auction Houses
- Auto Transport Companies
- Bail Bondsmen
- Barter Associations
- Cellular Phones
- Coins/Stamps/Collectible Dealers
- Coupons/Certificates/Prepaid or Gift Cards
- Custom Golf Clubs
- Custom Made Products
- Dating Services
- Diet Programs
- Discount Buying Clubs
- Door to Door Sales
- Financial Aid/Counseling
- Financial Consultants
- Flea Markets/Kiosks
- Fortune Tellers
- Free or Low-Cost Purchase Incentives
- Fulfillment Centers
- Gambling Advice
- General Agents/Brokers
- Health and Sports Clubs Memberships
- Home Furnishings
- Home Shopping Clubs
- Home-Based Business
- How-To-Books, Newsletters, Subscriptions, etc.
- Inbound Telemarketing
- Insurance Agents/Brokers
- Internet/eCommerce Start-Ups
- Investment Programs/Opportunities/Seminars
- Magazine Subscriptions
- Mail/Telephone Order (MOTO)
- Miscellaneous Education
- Modeling Agencies
- Moving Companies
- Multi-level Marketing (MLM)
- Negative Renewal Options
- Outbound Telemarketing
- Pawnbrokers & Pawn Shops
- Payment Facilitators Third-Party
- Pyramid or MLM Distribution
- Real Estate
- Real Estate Agents/Brokers/Property Sales
- Shippers/Forwarding Brokers and Motor Freight Carriers
- Sports Forecasting or Odds Marketing
- Tanning Salons
- Telephone Prepaid Cards
- Ticket Brokers
- Timeshare & Advertising
- Tour Operators
- Used Car Dealers
- Vacation Rentals
- Vitamin/Herbal Sales
- Water Filters/Purifiers
- And More…
Is your business in one of these high-risk verticals? Contact NMA today to find out how we can help you.
How Does a High-Risk Merchant Account Work?
A high-risk merchant account is very much like any other merchant account. The merchant service provider (MSP) supplies all the hardware, software, and services that a business needs to accept debit and credit card payments. This enables them to receive that money from the card-issuing bank into their bank account while remaining PCI compliant.
The MSP is also responsible for paying chargebacks or fraud losses if the business cannot cover them. As high-risk businesses are more likely to see chargebacks and fraud, covering this risk is one reason a high-risk merchant account has higher fees than a low-risk account, and may require some reserves be left on deposit with the processor. With that said, these rules vary from one processor to another, and it’s important to ensure you’re working with a processor that really understands your business to ensure you are priced fairly, and that you don’t have unreasonable amounts of reserves withheld.
The provided hardware may include point-of-sale (POS) systems and mobile swipers that enable the business to take payments using multiple methods. These methods may include EMV (chip card technology) cards, digital wallets using near field communication (NFC), loyalty cards, and EBT (electronics benefits transfer) cards. These systems improve efficiency and make it easier for businesses to track sales analytics.
The software includes point-of-sale software or ecommerce software, and may also include inventory systems and customer management software. High-risk merchant accounts often come with chargeback prevention tools to help stop transactions at high risk of chargeback since these businesses are likely to see more of these. For example, NMA partners with Fraud Wrangler to provide industry-leading chargeback and fraud protection.
How a High-Risk Merchant Account Impacts Your Business
3 Benefits of High-Risk Merchant Services for Vendors
- Accept Credit Cards
The most significant benefit of high-risk merchant accounts is that they allow businesses who could not otherwise get a merchant account to accept credit card payments. Since this is an essential prerequisite to building and growing a business, most business owners are willing to accept the limitations of a high-risk account (see below) as a cost of doing business.
- Fewer Limitations
Merchant services companies that mostly do “low-risk” business often place unreasonable limitations on ecommerce vendors, such as very low monthly processing caps (limiting what you can earn each month). Specialized high-risk merchant account providers open up products, payment options, and capacities that may not otherwise be available, and can also enable you to transact internationally.
- Less Chargeback Stress
Businesses in high-risk categories will generally have higher chargeback rates than other businesses.This can lead to problems when working with a merchant services company that doesn’t know the vertical well. But higher chargebacks aren’t inherently a huge problem if the chargeback level is within range for that business type and if you’re working with a company who specializes in these verticals. Unlike other processors who often make it “easy” to get started but then shut down accounts rapidly if they fall outside their typical chargeback profile, NMA instead works directly with our merchants to help them mitigate chargeback issues before they threaten the viability of the account.
5 Drawbacks of High-Risk Merchant Services for Vendors
High-risk merchant accounts also have some drawbacks:
- Less Choice
Many merchant accounts are not available to high-risk businesses. For example, Stripe’s restricted business list includes adult content, gambling, financial services, bankruptcy lawyers, remote tech support, and many more. This lack of choice can sometimes lead entrepreneurs to choose a fly-by-night service provider that won’t be there for them in the future. With over 15 years in merchant services, NMA is here to support your business for the long term.
- Higher Fees
High-risk merchant accounts typically charge more for both account fees and processing charges. The increased cost helps balance the additional risk the card processor is taking on. This additional fee can vary substantially – it’s vital to ensure your provider understands your business and underwrites it carefully, rather than just tacking on big fees to make up for perceived risk. At NMA we do a detailed underwriting process with each merchant to ensure they are priced fairly.
- Longer Contracts
You are less likely to be offered a rolling monthly contract if you require a high-risk account. Instead, a processor may offer you a contract for 3+ years, or even more, and there may be an early termination fee. These fees are necessary to offset the additional risk and effort involved in setting up your account – but be sure you understand them before getting started.
Some of your money may be held in a reserve so that the card processor knows they have funds to cover all eventualities (such as a sudden rise in chargebacks). This might be a rolling reserve (the processor holds a percentage of revenue, typically 5-10%, for a specified period) or a capped reserve (the processor holds all funds up to a specified value for a specified period). Again these reserves are necessary to spread the risk between you and your processor – but be sure you understand them and that your business model is ready to absorb those reserves while still providing sufficient cash flow.
- Extra Due Diligence
High-risk merchant service providers may require additional documents and information before they are willing to offer you an account. If you are in a regulated vertical such as CBD, you can expect to have to provide more detail than in a typical retail or ecommerce scenario. NMA does a thorough underwriting process to ensure all our merchants are high-quality businesses, so that we can fully stand behind you as an NMA member and advocate for your success.
What Does This Mean For New Businesses?
These pros and cons have several ramifications for new businesses who may need a high-risk merchant account:
- Increased cost of business – Your credit card fees and processing charges are likely to be higher, reducing your profit margin. However, even with these higher costs, these verticals can often be very profitable and provide a great lifestyle for entrepreneurs.
- Cash flow variability – Your credit card processor will likely hold a reserve, which will reduce your cash flow at times, so you’ll need to ensure your business model can support this.
- Less flexibility – Because high-risk merchant services typically include a contract, it’s even more critical that you choose the right payment processor.
How to Choose and Apply for a High-Risk Payment Processor
Unlike with low-risk businesses where processing is more or less a commodity, in the high risk space your payment processor is truly a partner in your business that can greatly affect your success or failure. Business owners should dedicate time to thoroughly researching their options to find a solution that will support them in the long-term.
6 Questions to Ask When Choosing a High-Risk Payment Processor
Before choosing a high-risk payment processor, we recommend you ask the following questions:
- How Much Does It Cost?
The cost to your business goes beyond the accounting fees, processing charges, and equipment costs. Your objective should be to find a processor that will maintain your account and ensure as many of your transactions qualify as possible; the cost of slightly higher fees pales compared to the cost of lost business.
You may also want to ask:
- Will this processor be able to maintain your account to a high standard?
- Are there hidden fees in the small print?
- Are you paying for bundled services that you don’t need?
- Is This Account Ready to Scale With My Business?
Getting your processing up and running quickly is great. But what really matters is that your account will remain up and running as you scale. If you are in a business that involves paid digital advertising, affiliate relationships, or other traffic costs, then you need to be exceptionally diligent on this point. Many great ecommerce businesses have gone bust because they scaled up a marketing campaign only to have their account terminated for running too much revenue, and ended up stuck with an advertising or affiliate commission bill they couldn’t pay. Don’t make that mistake – NMA has helped thousands of entrepreneurs scale to massive success; partner with NMA and you’ll have an account that is ready to scale with you.
You may also want to ask:
- What will my processing cap be?
- How often do you re-evaluate caps?
- How do you manage reserve requirements when accounts scale up?
- What is your process for addressing volume as it approaches the cap? (You want a company that will contact with you and work with you to manage capacity – not just flag or terminate your account)
- What Hardware and Software Do They Provide?
The terminals, card scanners, and other equipment your processor provides will greatly impact the ease with which you take payments. What do they provide, and how do these options suit your business?
You may also want to ask:
- Is the provided software compatible with your accounting software or other software you use?
- Does the hardware come with a warranty?
- Is there a choice of equipment
- What level of tech support do they provide? Is there an additional cost?
- Is The Merchant Processor Committed to Your Business?
When you partner with a processor, you have the opportunity to build a partnership with a business that wants to help you grow and succeed. Is your processor committed to helping you grow? Or do they take a hands-off approach?
You may also want to ask:
- Is any training provided?
- How does the merchant services processor work to keep fees down?
- How Comprehensive Are Their Services?
A one-size-fits-all approach may not serve your business’s unique needs. How comprehensive are the processor’s services, and how can they be tailored to suit your business? Do they offer multiple membership levels?
You may also want to ask:
- Do they offer 24/7 support?
- Do they offer ongoing account reviews and maintenance?
- Do they provide eCommerce support?
- Do they offer ACH support?
- Are They Certified?
The ETA (Electronic Transactions Association) created the CPP (Certified Payment Professionals) program to recognize professionals with a high level of knowledge in the payments industry. You should expect your processor to employ individuals with this level of expertise.
Making Your Application
When you apply for high-risk merchant services, you should expect to receive a thorough review of your business and its transaction history. Each payment processor is different, and they review companies on a case-by-case approach, but the documents you need to provide are likely to include:
- Incorporation documents & Articles of Association
- Business and personal bank statements
- Identification (passport or driver’s license)
- Processing history for your business
- Website (ensure it is compliant with all necessary regulations)
Remember: once you receive a contract, always read it carefully and check the small print before committing your business.
Join the National Merchants Association And Partner With a Processor That Understands Your Business
The National Merchants Association (NMA) is a processor like no other. We are committed to advocating on behalf of our merchants to ensure you don’t pay unnecessary fees for accepting credit cards – even if you’re a high-risk business.
By becoming a member of NMA, you will save money on your merchant services program, receive personalized support and education resources, and partner with an organization that dedicates itself to your success and profitability. We Work For You™
Ready to get approved for an account? Click here to get started today.