In today’s increasingly cashless society, businesses must have the capability to process credit and debit card payments to serve their customers. However, many businesses in industries deemed as “high risk”, by banks and other entities offering credit card processing accounts, struggle to obtain service. By understanding why businesses are considered high risk and how accounts are issued, businesses may navigate the high risk merchant account market more easily and find better services.
What Are Merchant Accounts?
Merchant accounts are a type of bank account that businesses use to accept payments via debit or credit cards. Merchant accounts are established by agreement between an acceptor and a merchant acquiring bank for the purpose of settling credit or debit card transactions. Payment processing firms are also often party to these agreements.
Merchant accounts charge their clients a variety of fees, including transaction, periodic, or percentage-based fees. Some of these fees are charged by the bank or financial institution providing the merchant account, while others are interchange pass-through fees charged by the credit card networks.
These fees can vary based on the type and circumstances of transactions being performed. For example, transactions manually keyed in to a terminal typically have higher fees than those resulting from a card swipe. Fees related to e-commerce transactions are also typically higher than those charged for brick and mortar store purchases.
What Are High Risk Merchant Accounts?
Some of the fees charged by payment providers to businesses are based on risk of loss. The largest risk banks and providers face when providing merchant accounts is the possibility of chargebacks, which can leave them open to millions in potential losses. According to agreements with credit card companies, the merchant’s processing bank is 100% liable for all transactions that the business performs. The most common cause of chargebacks is fraudulent activity, such as the unauthorized use of a consumer’s debit or credit card to make purchases.
Businesses with a high perceived risk may not be able to obtain a standard merchant processing account from a financial institution. Instead, they may have to obtain a high risk merchant account. Merchant processors assign these accounts to businesses they view as having a higher risk of chargebacks. Business owners with poor personal credit may also have no other option but to get a high risk merchant account for their company.
Certain banks may also be reluctant to offer merchant accounts to businesses they feel have unsavory reputations, such as weapons, tobacco or adult entertainment companies, and may charge them a premium for their services.
Some examples of high risk businesses may include:
- Adult services/dating sites
- Attorney referral services
- Bail bonding services
- Check cashing services
- Consumer finance services
- Detective agencies
- E-cigarettes & vape
- E-commerce sites
- Furniture stores
- Gambling businesses
- Loan businesses
- Nutritional supplements
- Pawn shops
- Psychics & fortune tellers
- SEO & SEM services
- Travel businesses
- Used car lots
- Wholesale clubs
How Being Classified As “High Risk” Impacts Businesses
Businesses deemed as high risk will have limited options and have a more difficult time finding a merchant account than those deemed as low risk. Payment processors have the right to decline a merchant account application is they perceive the business as excessively high risk or fraudulent.
Some typically low risk businesses may be deemed as high risk if they have a high percentage of chargebacks. Merchant service providers monitor chargebacks and won’t hesitate to reclassify a business that they perceive as risky. And because of the elevated risk, these merchants can be severely impacted when their merchant service provider places a hold on their account, thus freezing their funds until a resolution has been determined. This could last for months with the possible end result being a full refund to all customers, even though the product or service has been fulfilled, causing major damages for the businesses. These situations commonly occur with merchants who are unfamiliar with the differences in merchant account types and opt for a more convenient option such as PayPal or Square.
In addition to having a more difficult time finding a merchant account, high risk businesses will pay higher fees and have more demanding terms than low risk businesses, once they find a merchant account provider willing to partner with them.
If your business has been deemed high risk by your merchant account provider(s), it is very important to find a merchant service provider who is able to support your business securely without the risk of being shut down. When looking for a provider, consider the following to find the best possible solution:
- Research their reputation. There are many merchant service providers offering credit card processing, but only a small percentage actually specialize in high risk industries and can get your business approved. Do your due diligence by finding a transparent company with positive reviews and information regarding their high risk payment options. You can save yourself continuous headaches by asking the right questions and asking for credible references.
- Review terms carefully. Business owners should carefully review agreements with their merchant account processor. They should obtain a firm understanding of any recurring, per-transaction, percentage, and other fees they will be charged. A careful review of terms will help ensure that you aren’t surprised by any hidden or unexpected fees.
- Inquire into status changes. Find out if the company offering a high risk account is amenable to reclassifying the account later if the business establishes a good record of few chargebacks. Getting reclassified as a low risk business can significantly reduce your fees.
- Sell your business. Make the case concerning why your business should be approved at a lower rate. Discuss your past business experience, good personal credit, strong business plan, or other reasons why the high risk label may not quite fit your company and why you should be considered for a lower rate. The worst the merchant account provider can do is say no, so it’s worth the effort.
Importance of Payment Processing
Credit and debit cards have quickly become the preferred method of performing transactions. According to a 2014 study by TSYS, about 43 percent of Americans said debit cards were their favored method of paying for in-store transactions, while 35 percent chose credit cards, and 9 percent indicated a preference for cash.
Credit and debit cards are also the preferred method for purchasing products and services online. In 2014, about 48 percent used credit cards, 30 percent used debit cards, and 12 percent used PayPal to make purchases from e-commerce sites.
The use of plastic for transactions has been on the rise for years. In 2003, just 43 percent of consumer and business payments were made with debit or credit cards, while in 2012 67 percent of payments were made with plastic, according to the Federal Reserve. The rise of the Internet and e-commerce is only helping to accelerate the transition away from cash.
The reason for the rise of plastic is simple – convenience. It’s much easier to pay for items by swiping or otherwise using a credit or debit card than it is to keep cash on hand to pay for transactions. When you consider the time spent traveling to ATMs to retrieve money, and the fees associated with withdrawing money from these machines, it’s little wonder why most people prefer to just use their credit or debit card.
The ability to take credit and debit card payments isn’t an option for businesses; it’s an absolute necessity. Businesses involved in industries classified as “high risk” by the payment processing industry – gun shops, adult entertainment facilities, debt collectors, pawn shops, and others – need and deserve the same access to payment processing accounts as the more traditional businesses.
Affordable High Risk Options
High risk businesses need a company who can support and understand the challenges they will face on a daily basis, all while being provided with affordable services. Leap Payments will partner with any law-abiding business, regardless of the products or services being sold. Leap Payments offers a number of services to its clients, including next-day funding, e-commerce solutions, EMV and Apple Pay terminals, quarterly rate reviews and more. Business owners in need of a merchant account, and who are struggling to find one, should contact Leap Payments today and talk to one of their knowledgeable and friendly customer service representatives.