What Is a High-risk Merchant Account?

Businesses that are characterized as “high-risk” will need a high-risk merchant account to accept debit and credit card payments. A high-risk business is one that has a greater likelihood of chargebacks or fraud (and certain other characteristics as well).

However, there is no central authority or framework in the payments industry that determines the risk factors associated with a business. Instead, every bank and every payment processor has its own set of standards.

Some payment solution providers may state upfront that they don’t serve certain industries. Others will typically seek detailed information about a business to ascertain risk—depending on which their application may be accepted or rejected. Ultimately, it all boils down to a payment processor’s internal criteria and outlook towards risk management.

What Factors Determine If a Merchant Is High-risk?

Businesses from certain industries that innately carry higher risks may be automatically flagged as high-risk businesses. Here are a few examples of high-risk industries:

  • CBD (Cannabidiol), e-cigarettes, and vape
  • Stun guns and tasers
  • Credit repair
  • Multilevel Marketing (MLM)
  • Adult products/services
  • Pawnshops
  • Supplements and nutraceuticals
  • Tech support
  • Search Engine Optimization (SEO) services

Besides this, there are many other factors that could result in labeling a business as “high-risk”:

  • Some processors could label you as “high-risk” if you are a new entrant and have never processed payments before.
  • Poor credit records or low credit scores for defaulting on loans, etc., are other significant factors. If a processor has previously put you on the MATCH list, that could increase your risk perception as well.
  • The same goes for businesses that have controversial product lines or operate on a slippery legal slope.
  • Businesses that are overly dependent on international sales may also have high-risk scores. This is because of the relatively unpredictable economic dynamics abroad.
  • Industries that are highly regulated by legislation or governments are also labeled “high-risk.”

How Do High-risk Accounts Differ from Regular Accounts for Payment Processors?

Being labeled as a high-risk business can seem to be quite daunting. A processor may simply decline your application. Alternatively, however, a payment processor might choose to offset your inherent business risk by enforcing some measures.

There are several ways in which a payment processing company may mitigate its risk. These are also the prime differentiators between high-risk and regular merchant accounts.

Longer application process

If you’re applying for a high-risk merchant account, a merchant services provider may ask for very detailed information to analyze your risk profile or study past patterns of your finances. Typically payment processing companies will check your business’ processing history, partnerships, and even your personal credit history (to watch out for bad credit, etc.).

Higher payment processing fees

For standard small businesses, payment processing fees may be 0.3% above the rate of interchange. However, for a high-risk merchant account, this could go up to 1.5% plus the interchange rate. While interchange fees may vary from company to company, in general, higher risk will incur higher fees.

Cash reserve requirements

Some payment solution providers might even hedge a certain amount of cash for a business. They may maintain the thresholds of this reserve in a number of ways:

  • Rolling reserve. A high-risk payment processor sets aside a proportion of every transaction that you process (which you’ll receive later). This could be as high as 10%. For instance, if you have a six-month rolling agreement, you receive the balance from January in July.
  • Capped reserve. The processor holds a certain proportion of each transaction until the cash reserve reaches a predetermined level. At this point, the per-transaction contributions will stop but the reserve will remain.
  • Upfront reserve. A high-risk payment processor receives a set amount from the merchant upfront. Sometimes, the processor may even withhold all transactions until the merchant pays the said amount.
Higher chargeback fees

When businesses need to process refunds, they must also pay chargeback fees to their payment processor. For businesses that have a high chargeback ratio, these charges may be higher to offset risks of excessive chargebacks. These rates may vary anywhere between $20 to $100 each. Businesses with high chargeback ratios such as clothing brands could therefore feel the heat.

Volume caps in credit card processing

Some credit card processors may simply bar you from processing any more transactions if your sales volume exceeds a certain limit. Processors presume that risks may be compounded when dealing with high volumes.

Additional requirements

Depending upon the type of business, some processors may have other requirements when providing services to high-risk merchants. If you sell age-restricted goods, the processor may ask you to use tools that ensure you aren’t selling to underage customers. They may not approve your processing account till you fulfill all the criteria.

Does WPay Cater to High-risk Businesses?

High-risk merchants are going to have a limited number of providers they can work with and WPay may not be one of them. 

The biggest advantage of signing up with WPay is that a merchant will go through an underwriting process upfront—before they get their merchant account. This process flags risk factors early on and saves you precious time (and costs). We’ll let you know upfront in case we can’t serve you and perhaps even recommend a processor that can serve you better.

However, it’s important to note that there are other providers whose process for flagging risks early on, isn’t as effective. Square, for example, lets merchants process payments right away — in minutes or days. That’s because they don’t go through an underwriting process like that of WPay.

So they may approve a merchant initially, but suddenly flag them as high-risk and close their account or hold their funds. Merchants that might not be aware of this policy could be in for a surprise. Square can cut you off at their discretion at any time.

Final Words

As is clear from the above discussion, some businesses carry inherent risk factors. The definition of “high risk” varies from one merchant and one processor to the next. More importantly, there are several payment processors whose entry point is easy but merchants run the risk of being cut off at any time.

By choosing a processor like WPay, you can rest assured that there won’t be any unfavorable surprises later on.