High risk merchant account services for business. These days, accepting credit cards for customer purchases is practically a requirement for businesses. Especially pertaining to online businesses and their Internet sales transactions. Sometimes though, the application and approval process to get set up to take credit cards can be a real headache. Particularly when it comes to high-risk merchant account services.
Businesses with products or services that are classified as high risk by banks or credit card processors almost always have a more difficult time being approved for merchant accounts than merchants selling traditional products or services. But why?
The reason is simple. Higher risk. Obviously, a merchant account enables a business to allow its customers to pay for products or services using debit and credit cards.
The risk with credit card processing lies in the potential for fraudulent transactions and more commonly, disputes or chargebacks by customers for credit card purchases. If there is a problem with the transaction, such as a customer dispute, there is a risk that the business won’t receive funds from the sale.
More often than not, card issuing banks side with the customer in a dispute. A full-blown dispute leads to a chargeback. When a chargeback happens, not only does a business forfeit funds from the transaction, but also receives a negative mark against them.
A chargeback ratio as low as 2% is considered high, and may lead to the termination of the merchant’s account. That’s right, having just 2 credit card chargebacks in 100 transactions can land a merchant on the dreaded list known as the “terminated merchant file” (TMF) and prevent that business from ever taking credit cards again.
When credit card processors provide these merchant account services to businesses, they also assume a portion of risk. If bad transactions happen, there’s also a chance that the processor that provided the merchant services to that business will be financially liable. And, processors can also face penalties by the credit card associations for high chargeback rates of their business customers when their respective customers dispute charges.
High Risk Merchants
Specific industries or niches historically have higher rates of chargebacks. These industries or niches are automatically grouped into a category known as high risk. In order to offset the risk, high-risk merchants are charged higher credit card processing rates than standard low-risk merchants.
While business owners or principals with bad credit can be a factor in determining whether or not a merchant is classified as high risk, typically it’s the business practices and business type that earn them the title.
It’s not hard to understand that businesses will be perceived as risky if they have questionable marketing or sales tactics with the aim of misleading customers into making purchases. This is sometimes the case with investment programs and multi-level-marketing (MLM) companies that promise large financial returns.
Also, businesses that sell products or services that are borderline illegal are perceived as having higher risk. This is the case with businesses like Internet gambling or gaming operations, nutritional supplements and online pharmaceuticals retailers.
And, businesses that offer non-tangible goods or services simply have higher chargebacks. No matter how thorough the description of terms of service in a contract or proposal, there’s always a chance that the customer will feel they have not received what they paid for. Customers are usually very quick to dispute these charges with their issuing bank rather than work with the merchant on an agreeable settlement.
High Risk Industries & Business Types
Each year with the introduction of new products and services, new high-risk niches continue to pop up. The e-cigarette revolution in recent history has led to the growth of the vaporizer industry. Retailers are now not only selling vaporizor devices, known as vape pens, but also the not yet regulated chemical vapes for these devices.
Common businesses with riskier profiles are listed below. This list is by no means complete but includes sample of industries…
- 1-800 phone chat services
- Adult products & services
- Brokering services
- Calling cards
- Call center
- Casino or gambling
- Cannabidiol (CBD) oil
- Collection agencies
- Credit repair services
- E-cigarette & vaporizer (vapes) retailers
- E-books & software
- Escort services
- Financial planning
- Firearms dealers (FFL)
- Life coaching
- Magazine & subscription services
- Marketing services
- Multi-level marketing (MLM)
- Nutraceuticals & pharmaceuticals
- Tech support services
- Ticket brokers
- Travel agencies
- Vitamins & dietary supplements
… as well as many others.
High Risk Merchant Account Rates & Other Info
Depending on the processor and the individual business, rates for high risk merchant accounts for domestic (U.S. based) businesses can be as low as 4% to 6% and as high as 7% to 9%.
Offshore businesses, such as India tech support services, are even riskier and are usually charged a reserve between 10% and 15% in addition to the rate. It may seem absurd to hand over as much as 1/5 of the sale to the credit card processor to handle the transaction, but it may be the only option for these offshore businesses.
New businesses in high-risk niches or industries looking to establish merchant services will be immediately compared to similar high-risk businesses and will pay higher rates at first.
Being vigilant against chargebacks is important in keeping rates as low as possible, as it demonstrates that a merchant is selling a good product or service and is truly interested in ensuring customer satisfaction.
The good news is that higher rates don’t have to be permanent. After demonstrating a credit card processing history with little or no chargebacks, businesses will have more leverage in negotiating lower rates in the future.
Chargeback prevention services are available for businesses that may experience high rates of chargebacks. These chargeback protection services are valuable tools, as they can help a merchant to settle a dispute before it escalates to a chargeback. Chargeback protection services are not free, but can be well worth the monthly fee for some merchants.
When do businesses get paid? There’s no question that business owners want their money from sales right away. With credit card transactions, it’s just not possible. Although rates are higher for riskier accounts, the settlement periods for domestic (U.S. based) businesses can be the same as low risk. This means that funds from sales can be as soon as next business day, which is certainly a benefit.
However, settlement periods for offshore accounts tend to take longer. Businesses may not receive funds from credit card sales for several business days after the transaction. Definitely not ideal, but merchants have no say in the matter.
High Risk Merchant Services Approvals
For most business types, getting approved for a high-risk merchant account is not a difficult as it used to be. There are now plenty of providers in the United States that are willing to work with risky businesses. But as stated above, it can be a headache.
High risk businesses face more scrutiny in the application process and approvals can take several days or even weeks. Credit card processing companies will likely ask for many “support documents” during this approval process.
Before signing a contract with a merchant account services provider, high risk business owners should have a thorough understanding of the rates and fees. Comparing services quotes from different processors is rarely apples to apples. What is seemingly the lowest rate can be deceiving once other fees are accounted for.
At The Transaction Group, we have been assisting businesses with their credit card processing needs since 2004. We have much experience in helping businesses of all risk levels in getting set up to take credit cards, and have established relationships with domestic banks and processors that specialize in high-risk merchant accounts.
And, we have offshore banking partners that are able to provide payment processing solutions to even the riskiest of businesses.
If you have questions about accepting credit cards at your business, we’d be happy to help. Call us at 888-383-8056 to speak with one of our highly trained high risk merchant account services specialists.