Most people are familiar with the idea of a merchant account, but what is a high risk merchant account? And who needs one? Well, these days, nearly every business needs the ability to process credit cards as more and more consumers go “paperless.” To do this, a business needs to set up a merchant account through a bank or merchant-services provider. Most businesses with a reasonable credit history that handle their transactions at a physical location qualify for low-risk merchant accounts because banks feel they can trust the business. Often, this is because the business operates locally and the bank has greater control over how the business is run.
Many online businesses, as well as businesses in certain industries, can only qualify for high-risk merchant accounts. What classifies a high-risk merchant account is a complicated algorithm that may be difficult for new business owners especially those with good credit to understand.
What Is A High Risk Merchant Account?
Where a business is based is one of the determining factors banks use to decide whether a business may be classified as high risk. Those that only operate locally and have ties to the community as well as a physical storefront are usually low risk. High-risk companies are those that operate online or require extensive traveling.
Merchant accounts for these businesses are typically high risk because even though these businesses may be reputable, have good credit histories and solid revenue streams, they have fewer assets and ties to any geographic location. The reason these businesses are classified as high risk is that the bank wants assurances that the company can pay its debts. These merchant accounts are high risk because the bank or merchant service has little hope of recouping any debts if the company disappears or declares bankruptcy.
An interesting type of business that usually can only qualify for high-risk merchant accounts are those that deal in large numbers of sales and transactions involving large amounts of money. While the business may be very successful, it is also more subject to conspiracy, fraudulent credit card processing, corruption and embezzlement. Even though the business does not seem to be a credit risk, the merchant-account provider still takes these factors into account.
The other issue to be considered is the background of the business and the business owner. Inconsistent credit histories, owner bankruptcy or merchants that have been blacklisted due to one of its previously held merchant accounts all make the businesses credit history suspect, and as such, it will typically only be offered high-risk merchant accounts.
The type of business must also be taken into account when determining the risk it poses to the merchant service or bank. Businesses that have high rates of failure in their industry will often be labeled high risk. Internet service providers, web-hosting services, online dating services, online auction sites, online casinos, adult entertainment both online and off, telemarketing, travel, and companies that sell products of a dubious legality are almost always labeled high risk based mostly on their industry profiles. Businesses in these categories are evaluated on a case-by-case basis when they apply for merchant accounts, and they might not necessarily be given high-risk status.
“Who needs a high-risk merchant account?” In short, the factors that decide what type of merchant account a business will be offered are: the location of the business, whether it is online only, its credit and credit card processing history, its size and the type of industry it does business in. These factors contribute to the risk score, and no business will necessarily receive a high-risk status based on a single factor, but rather on a combination of all of the above.