As much as merchant service providers would like to do everything in their power to get as many small business owners to sign a contract with them, there are those businesses that they label as high risk! While that might not necessarily mean that these banks and credit card processors will NOT do business with those companies, it does mean that there will be a special set of rules that apply to them.
You might not think that your company should be labeled as high risk, but what you need to know is that specific factors come into play which determines whether or not merchant service providers view you as a high-risk partner. Some of the most common reasons include:
The list goes on for quite a bit and is frankly somewhat subjective and varies with every merchant service provider. There are, however, some industries that are generally considered high risk. Industries such as:
Additionally, companies that have a higher risk factor when it comes to potentially fraudulent behavior such as online gambling platforms are automatically labeled as high-risk companies.
But as we have already mentioned, just because your business has been deemed a high-risk venture by credit card processing service providers does not mean that you are now doomed to forever take only cash! There are things that you can do to get high-risk credit card processing services despite all those issues. Here is what every merchant needs to know about high risk credit card processing:
What Exactly Is High Risk Credit Card Processing?
To understand high-risk credit card processing, you must first learn a bit about how the entire process works. For a small business owner to start accepting credit card payments at their facility, they must first go through what is known as an 'acquiring bank.' This is the financial institution that allows you to apply for a 'Merchant Account'.
The cost associated with applying for and getting approved for a merchant account varies dramatically from financial institution to financial institution. So do the fees, the process and the conditions under which a small business can qualify.
Now, the acquiring bank you choose will look at several factors when considering your applications. The most notable factors include:
Once they get a good feel for the kind of company you are and intend to run, they will append a given amount of processing fee for you to join their league of credit card processing customers. This fee is typically higher for businesses that are considered high risk for one reason or another. You should, however, know that most merchant service providers try to avoid doing business with companies that they have labeled as high risk because of that perceived risk.
You might be wondering: if you are willing to pay the higher fees that come with being labeled a high-risk business partner, then why won't every merchant service provider or acquiring bank want to do business with you? After all, it could only mean more money in their pockets, right?
The truth is that these service providers are thinking of something much bigger than the percentage you give them every month. They are thinking about: Chargebacks!
What Are Chargebacks and What Do They Have to Do with High-Risk Credit Card Processing?
Chargebacks are the bane of every business owner's existence. This is where a customer goes through with the purchase and pays using their credit card only to turn around, complain and ask for their money back.
This trigger a slew of potential loses and maybe even lawsuits depending on how badly the situation is handled. For banks to give the money back to the cardholder, they would have to charge your account, and someone has to bare those transaction fees.
While the fees might seem insignificant when you are just dealing with one customer, you need to look at the figures involved to get a clear picture of the kind of risk we are talking about:
Now, remember that these people use their credit cards at least once every day. If they were all to ask for a refund and trigger a chargeback at one point or another, the cumulative fees associated with processing that transaction could very well run into the billions. This is what acquiring banks and other merchant service providers try to avoid when dealing with high-risk business because these are the kind of businesses with the highest probability of accruing chargebacks.
Certain elements come into play; elements that make your business highly probable to accrue chargebacks. These include things like:
All these drive up the risk of chargebacks and as a result puts the acquiring banks or merchant service provider in the direct line of fire with potential losses running into the billions of dollars. Banks do not like that at all!!
Industries That Are Typically Considered High-Risk
As we have mentioned, several factors go into consideration when merchant service providers try to determine whether or not your business should be considered high-risk. We also mentioned that some factors are entirely subjective and vary from merchant to merchant. However, there are some industries that are considered high risk across the board. These include:
Apart from the fact that businesses operating in these industries need to be prepared to go through a tougher, more stringent vetting process, they also need to be prepared to pay a higher fee than their counterparts. But their troubles do not end there:
What Every High-Risk Merchant Should Expect
While it is true that most merchant service providers will still do business with you despite your high-risk rating, it is also true that you will need to jump through some hoops. As a small business owner who falls into the high-risk category, these are the things you should expect from the financial services industry:
This is the first thing that you will notice when you intend to have credit card processing as a high-risk business. The idea behind the higher fees is that every processor works under the assumption that your business will unavoidably accrue a larger than normal number of chargebacks.
The high fees they impose are to mitigate the potential losses that they will incur when dealing with you and your clients. You can expect to pay more than $300 for the setup fees, more than double the normal processing fees and a higher monthly rate than your counterparts using the same card processing company.
While most small business owners may think that they can put up with the higher fees and additional charges; you know, anything to be able to offer credit card payment options at their establishment, the truth of the matter is that unless you make a lot more in sales revenue, these fees could very well drive you under. Even without the chargebacks that will inevitably come around.
Increased Chargeback Fees
We know it sounds as though you cannot escape this word no matter where you look. Sadly, as a high-risk merchant, actually, even as a regular merchant, chargebacks are a reality that every business owner must face and accept. The difference is that with regular business owners, the frequency isn't as high as it is with high-risk merchants.
To mitigate against the losses that come about as a result of chargebacks, merchant service providers charge business owners a small fee for each individual chargeback instance processed. This fee is to go towards administrative costs that could be considerable depending on the number of chargebacks your business receives. The chargeback fees associated with high-risk merchants are nowhere near similar to those associated with non-high-risk merchants.
As a high-risk business owner, your chargeback processing fees will be higher from the start. They will continue to go higher the more chargebacks you get. In fact, at some point, if you get too many chargebacks to render the business a fool's errand, some merchant service providers will actually terminate your contract.
Merchant Account Reserves
Merchant account reserves are like little insurance accounts held by your acquiring bank. Typically, when a merchant service provider labels you as a high-risk client but decides to do business with you anyway, they will require some sort of insurance against the inevitable chargebacks that will come. They impose this insurance in the form of merchant account reserves.
They are like little savings accounts that are held in your name only you cannot access the money therein for at least 180 days at any given time. These accounts typically withhold about 5-10% of your monthly processed sales for six months. The money in there is technically still yours, but the merchant service provider can call on it whenever they need to cover chargebacks, and you do not have the funds in your main business account.
While this might sound like a prudent course of action for the sake of both parties, the truth is that there is a good chance you will be having cash flow issues if you do not have enough money in your primary account to cover the chargebacks.
Having a tidy sum in reserve that you cannot touch for 180 days only goes towards making your cash flow problems more dire and your frustration levels higher.
How Can You Find High-Risk Credit Card Processing?
There will be merchant service providers that will turn you down despite all these fees and merchant account reserve options that many impose on high-risk clients. If for some reason your local bank turns you down, there are other places that you can look. These include:
While some banks might actually provide high-risk credit card processing services, not many are quick to advertise that fact. The best course of action is for you to ask if the bank does offer the services and what it would take to be considered. Most banks will only offer you the service if you ask for it. They refrain from advertising such things to minimize their own level of risk.
If all else fails, you can always look overseas for your answer. There are financial institutions that are more than willing to underwrite these kinds of risk and will offer you credit card processing services. However, you are advised to be very wary of such entities as the same government regulations that make it difficult for your local banks to offer you the services as a high-risk merchant do NOT apply to these entities. This means that they mostly operate under their own autonomy and that is always a recipe for exploitation. Not every one of them is as reputable as you would like them to be.
Remember, no matter how desperate you might be to acquire high-risk credit card processing services, do not sell your soul to the lowest bidder. Always read each contract carefully before putting pen to paper!