Financial institutions offer merchant accounts, which lets businesses accept debit and credit cards as payments. You cannot directly access the money in a merchant account. It collects credit card transactions and deposits them into a business or personal account, typically within 1-2 business days.
Financial institutions will sometimes classify a merchant account as a high risk account — this means that this account is seen as at a high risk of accumulating financial loss. Merchants might be categorized as high risk because of their volume of transactions, credit history, the region they operate in, or the type of products or services they offer. For example, services like adult entertainment, pharmaceutical products, smoking and vaping may be considered high risk.
Before underwriting a merchant account, financial institutions must first approve the merchant for business banking and merchant services. It is critical that merchants know that their business is classified as a high risk merchant, because high risk accounts might face certain financial difficulties. For example, high risk accounts might not be able to find payment processors, face stricter regulations, or be saddled with higher fees.
In this article, you will learn:
Each payment processor sets unique standards that define the risk level of a merchant. However, there are some common criteria used by most financial institutions to determine high risk. Here are a few criteria and the typical level at which a merchant is considered risky.
CriterionWhen is a Merchant Considered High Risk?
Monthly sales volume
$20,000 or higher
Merchant accepts payments in multiple currencies
Merchant operates in regions with political instability, security risks, or high levels of fraud
A high rate of returns or poor credit history
High risk industries
In addition to the above common factors, there are several industries that are automatically considered high risk. A merchant operating in these industries is often automatically considered a high risk merchant by banks, payment processors, and card networks.
High risk industries include alcohol, ammunition and firearms, Cannabidiol (CBD) and Cannabis products, credit repair, direct marketing, adult entertainment, dating services, gambling, pharmacies and drug stores, multi-level marketing, recurring subscriptions, travel agencies, smoking and vaping, and more.
Chargebacks and penalties
High risk merchants can also get this status by accumulating excessive chargebacks and excessive fraudulent activity. In extreme cases, these merchants may be put in an industry blacklist like MATCH List or the Terminated Merchant File.
The majority of payment processors accept a chargeback threshold of 1% of the total transaction volume. Card network mitigation programs start taking effect once merchants exceed the 1% threshold.
When a merchant exceeds the 1% threshold for too long, a payment processor may terminate their account. Once this happens, the merchant may not be able to shake off the high risk status.
You may not be able to change the risks associated with an industrial sector, but you can control other factors that classify companies as high risk. Fraud and chargeback potential are the two important factors you can actively work on to reduce your risk.
Here are several actions you can take to reduce your risk:
A payment processor, also known as a payment service provider (PSP), is a third-party company that enables communication between card issuers and banks. PSPs help verify transactions between customers and merchants by sending payment requests to card associations, referring to the issuing bank. The bank authorizes or denies transfers from the customer to the merchant account.
Payment processors can provide services to both low-risk and high-risk companies. However, high-risk businesses are more likely to incur refunds or fraudulent transactions, which increase the cost of payment processing services, in the form of higher setup fees, ongoing processing fees, and termination fees.
High-risk companies may be required to have rolling reserves to protect themselves from excessive chargebacks. The size of the rolling reserve is calculated based on a 5-15% margin of total transaction volume. The reserves cannot be used for a period of time, typically no more than half a year.
Here are several aspects to consider before choosing an account:
BlueCheck’s industry-leading identity verification infrastructure enables high risk merchants to grow their business faster. Our high risk merchant payment processing solutions are custom tailored to the unique needs of our customers, including PACT Act and eCommerce compliant offerings.
Schedule a call with a BlueCheck specialist for a complimentary payment processing cost savings analysis.