What You Need to Know About High-risk Merchant Accounts
by Mashum Mollah Finance 26 November 2020
In 2020, almost all businesses have to accept credit and debit cards to ensure proper functioning. In addition, many others offer a host of options including multiple digital payment options through wallets like Google Pay or Amazon Pay.
The world is experiencing a change when it comes to digital payments. We are moving from a cash-only model to one where the benefits of digital payments can be enjoyed by the consumers as well as the merchants.
If you are a business, which accepts the above-mentioned forms of payments, you need a Merchant Account. However, the type of merchant account, which is given to you by the payment processor can be of two kinds-
- High-risk Merchant Accounts
- Low-risk Merchant Accounts
In this article, we speak to leading financial experts and ask them whether your business needs a high-risk merchant account or not. In addition, we look at some tips for businesses to zero in on the best ones for their business.
What is a High-risk Merchant Account?
Before we come to the definition of a High-Risk Merchant Account, let us first look at what does a simple Merchant Account Mean.
A Merchant Account is created by your payment processor to store all your credit card, debit card, and other digital payments made to your business by the consumers.
Once the payment processor deducts their commission, the remaining amount is transferred to a business or individual account, as the case may be.
Any business, which applies for opening a new Merchant Account is required to furnish details about their business and their own financial statements. This includes tax statements and other legalities associated with the business.
After the filing of the paperwork, the payment processor analyses whether the merchant account should be of a high-risk nature or a low-risk one.
What Determines the High-risk Nature of a Merchant Account?
By this stage, you might be wondering whether this classification is subjective, or does it have any objective basis. This is why in this section; we are going to clarify this question once and for all. If you have a business in the following niches-
- Experimental Drugs (CBDs)
- Dating and Adult Products
- Referral and Affiliate
You are looking at being classified as a high-risk business. In addition, E-commerce businesses are also classified as high-risk ones. This is because, in the above-mentioned businesses, the chances of things going wrong are far more frequent as compared to some other kinds of businesses.
The payment can be against the terms and conditions of the processor or the customer might be looking for refunds based on defective products. Any time there is a chance of a payment falling through or a refund being sought, the processor classifies the business as being high-risk.
You need to understand that payments from the processor to the bank’s account are credited within 48 hours. However, there are so many things, which can go wrong after 48 hours.
If a problem is raised, the business can simply go back on their word. This is why payment processors to protect their exposure charge monthly commissions and sometimes flat one-time fees from high-risk merchant accounts.
What are some Major Differences between High-risk and Low-risk Merchant Accounts?
In the last section, we helped businesses understand the terms, payment processors use to designate a business as a high-risk one. In this section, we are going to look at some of the major differences between high-risk merchant services and low-risk merchant services.
1. High-risk Merchant Account end up paying more than Low-risk ones-
If the risks are higher, the payment processor will always be looking to ensure protection from exposure. This means that in terms of the percentages of commission being charged, high-risk businesses end up paying more than low-risk ones. Some experts have pointed out that the percentages vary to a high of 2% in many cases. Cumulatively, this is a huge amount.
2. High-risk Businesses have Extended and Longer Contracts than Low-risk Businesses-
High-risk Merchant Accounts are favorable to payment processors because of more interests and commissions. This is why they want to ensure that a high-risk business does not look for solutions elsewhere. The longer the contract period, the better it is for the payment processors. Low-risk businesses are not required to sign longer minimum period contracts.
3. Termination of the Contract is tougher for High-risk Merchant Accounts-
There are two things you need to pay attention to when it comes to termination. One thing that such businesses need to be careful about is the earlier termination fine fee. If you are looking to end the contract before the expiry period, you will need to pay a fine. The second thing pertains to automatic contract renewal, which most payment processors insist upon.
4. High-risk Merchant Accounts are mandated to keep a Reserve-
If your business qualifies as high-risk, certain payment processors will ask you to keep a limited reserve on your merchant account at all times. You can simply understand this as a hedge, which is being demanded by the payment processing company to protect themselves in the event something goes wrong. You can think of it in terms of a hedge.
5. Higher Chances of Account Freezing for High-risk Merchant Accounts-
If the risks associated with your merchant account keep on rising, then the payment processor can freeze your merchant account. This will result in your business not being able to receive payments in credit or debit card from the consumers. You might also have to initiate legal proceedings against the company to free up the money, which was already present in your account.
The Final Word
Many businesses, which belong to the classification of high-risk often complain about the unequal terms being meted out to them. However, businesses also need to realize that payment processors need to guard themselves against risky operators.
The higher commissions and the more stringent nature of the contract are a testament to the dangerous nature of high-risk merchant accounts. If you would like to know more about high-risk merchant accounts, feel free to drop your questions in the comments section below.
We will request our financial and business advisors to answer as many of them as possible.