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What is a High Risk Merchant?

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:

How Do Payment Processors Determine How Risky a Merchant Is?

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

Currencies

Merchant accepts payments in multiple currencies

Regions

Merchant operates in regions with political instability, security risks, or high levels of fraud

Business history

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.

How to Reduce Your Merchant Risk

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:

Reduce chargebacks by shipping all orders on time—customers who don't receive their order on time often refuse to pay. To avoid this, ship on time and track each order. In addition, prove the trustworthiness of your business, through channels like positive customer reviews, participation in the Better Business Bureau, achieving certifications or industry awards.
Do not make unfulfillable promises—businesses often try to attain customers by promising excellent service. However, a business that cannot deliver should not make false promises. Avoid competing with giants like Amazon, and focus on delivering specific goods of a known quality quickly, and notifying customers of delays or other issues as possible.
Monitor and prevent fraud—the Internet is filled with fraud and scams. To ensure secure payments, you need to carefully monitor your online transactions. If a billing address and shipping address do not match, you should receive an alert and start investigating. You should also request confirmation before completing an order. To verify authorization on cards, always ask for a valid billing address and the full credit card number. Add more security measures to prevent credit card fraud, which can affect your merchant risk rating.

What is a High-Risk Payment Processor?

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.

9 Points to Consider When Selecting a High-Risk Merchant Account

Here are several aspects to consider before choosing an account:

Fees and Limitations—you should validate that the credit card processing fees of the PSP are justified. Make sure the limitations placed by the payment processor are not too strict and cannot harm your business in the long run. Also, understand that credit card processing fees often vary depending on the size of your business.
Chargeback protection and fraud prevention—payment processors must provide technologies that protect merchant accounts from fraudulent transactions and chargebacks. Payment processors are also required to comply with standards like PCI DSS, PSD2, and GDPR.
Multiple MID accounts—prefer a payment processor that supports multiple merchant identification numbers (MIDs). This lets you balance the load across your accounts to avoid transaction restrictions, and also avoid a crisis situation if one of your accounts is frozen or shut down by the bank.
Payment gateways—ideally, the payment processor should have its own secure payment gateway.
Responsive support—merchants require quick response when issues occur. Make sure you choose a service that can support your business in a timely manner.
Flexibility and customization—you may need to support multiple payment types. Look for a service that lets you customize every element of the payment form. Ensure that you have choice and flexibility with regards to the payment processor’s conditions, rates, and features.
Transparent pricing—look for detailed information about the fees charged by the payment processor, and ensure the service does not come with any hidden or extra costs.
Technology—payment processors should provide you with the technology needed to integrate with other tools in your ecosystem. At a minimum, this means APIs and secure payment gateways.
Expertise—payment processors are a critical part of a merchant’s operation. It is highly important to choose a processor with adequate expertise with high risk merchants, to ensure it can safeguard the financial transactions of the business.

High Risk Merchant Payment Processing with BlueCheck

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.