What Most Businesses Don't Understand About "High-Risk" Processing

In the world of credit card processing, there are two types of companies: low-risk and high-risk. While finding the right processing company can be a nuisance for any merchant, those that operate businesses that fall into the high-risk category may find that their path has a few more obstacles than their low-risk counterparts.Too often, merchants in high-risk industries aren't knowledgeable about the barriers they face with processing companies. Because each processor can set their own standards for high-risk clients, finding the right one can be a challenge. A simple google search isn't going to cut it. Not all high-risk processors are the same, so business owners shouldn't just accept the first processor that agrees to process payments for them. Here are a few tips that can help business owners determine which high-risk processor will work best for them:

What is high-risk processing with high risk payment processors?

High-risk processing is the processing of payments for businesses in a high-risk industry. A high-risk industry is one that is more prone to fraud or chargebacks than others. As a result, high-risk companies usually face more obstacles to receive their money. It’s not uncommon for purchases to be flagged or funds to be held to reduce the chances of a chargeback. A few examples of a high-risk company are:

• Pharmaceuticals
• Adult entertainment
• Gambling
• Firearms
• Multi-level-marketing companies
• Credit repair services

Compared to a low-risk industry, high-risk industries often involve regulated material, a history of fraud, and high average ticket sales. A company may also be placed into the high-risk category if a merchant has a bad credit score. However, whether or not your company is placed in the high-risk category, depends on which processing company you choose.

Definition of High-Risk Merchant Accounts

A high-risk merchant account is a specialized type of merchant account tailored for businesses that are considered to be at a higher risk of chargebacks, fraud, and other financial issues. These accounts are essential for companies operating in high-risk industries such as adult entertainment, online gaming, and e-commerce. Unlike low-risk merchant accounts, high-risk merchant accounts come with higher costs and more stringent application requirements. Businesses in these categories often face higher transaction fees, monthly fees, and setup fees. Additionally, they may need to meet higher credit score thresholds and provide more comprehensive documentation during the application process. Understanding these differences is crucial for high-risk merchants to navigate the complexities of payment processing effectively.

Business Types Considered High-Risk

Several types of businesses are typically classified as high-risk and may require a high-risk merchant account. These include:

• Adult Entertainment Businesses: Due to the nature of their content, these businesses face higher scrutiny and chargeback rates.
• Online Gaming Businesses: The online gaming industry is prone to fraud and chargebacks, making it a high-risk category.
• E-commerce Businesses: Especially those selling high-ticket items, e-commerce businesses often deal with higher chargeback rates.
• Businesses with High Chargeback Rates: Any business with a history of frequent chargebacks will be deemed high-risk.
• Financially Unstable Businesses: Companies with a history of financial instability or poor credit scores fall into this category.
• High-Risk Products or Services: Businesses dealing with products or services that are considered high-risk, such as firearms or pharmaceuticals, also require high-risk merchant accounts.

Understanding which category your business falls into can help you better prepare for the challenges of high-risk payment processing.

What does high risk merchant accounts mean for your company?

If you’ve just learned your company falls into the high-risk category, you probably have a lot of questions. Most notably, how much is this going to cost me? The payment processing industry is already a minefield of hidden fees and tricky pricing structures. Even low-risk companies need to be on their toes as to not get charged extra costs they either didn’t know existed or they weren’t aware were negotiable. However, high-risk companies have even less bargaining power. Obtaining a business bank account can be particularly difficult due to the associated risks perceived by banks and processors. To start, high-risk companies can expect a longer contract with early termination fees. Low-risk processors are moving towards monthly contracts more and more, but if you fall in the high-risk category, you can expect at least a three-year deal with an automatic renewal clause. High-risk companies will also have higher recurring and account fees on top of chargeback fees. Most likely, processors will also offer high-risk companies a tiered pricing plan versus an interchange-plus pricing plan that is known to cost companies less in the long run. An expense that’s unique to high-risk companies is a rolling reserve. A rolling reserve is a sum set aside from a transaction to cover unexpected setbacks like chargebacks, which can seriously affect cash flow. High-risk merchants can also expect to pay a higher percentage markup and a higher per-transaction charge. This may seem unfair but it’s important to remember that there is a reason a company is placed in the high-risk category. A large portion of a processors job is to protect clients from fraud so the processor is not only minimizing a companies risk at harm but taking on additional risks of their own.

Understanding High-Risk Payment Processing Fees

High-risk payment processing fees are generally higher than those for low-risk businesses. This is because high-risk businesses are more susceptible to chargebacks and fraud, and payment processors need to mitigate this risk by charging higher fees. These fees can include:

• Higher Transaction Fees: Each transaction may incur a higher fee compared to low-risk businesses.
• Higher Monthly Fees: Monthly account maintenance fees are typically elevated.
• Higher Setup Fees: Initial setup costs for high-risk merchant accounts can be significantly higher.
• Higher Chargeback Fees: Fees for handling chargebacks are usually more substantial.
• Reserve Requirements: Processors may require a reserve fund to cover potential chargebacks and other financial risks.

By understanding these fees, high-risk businesses can better manage their finances and choose the right payment processor.

Managing Chargebacks with High-Risk Accounts

Managing chargebacks is a critical aspect of maintaining a high-risk merchant account. Chargebacks occur when a customer disputes a transaction and requests a refund. To effectively manage chargebacks, businesses can:

• Implement a Comprehensive Chargeback Prevention Strategy: Develop policies and procedures to minimize the risk of chargebacks.
• Use Chargeback Alerts and Representation Services: These services can help you respond to chargebacks promptly and effectively.
• Monitor Transactions and Detect Suspicious Activity: Regularly review transactions to identify and address potential fraud.
• Communicate with Customers to Resolve Disputes: Proactive communication can often resolve issues before they escalate to chargebacks.
• Keep Detailed Records of All Transactions and Customer Communications: Accurate records are essential for disputing chargebacks.
• Stay on Top of Compliance: Ensure your business complies with local and international laws and regulations to avoid unnecessary chargebacks.

By implementing these strategies, high-risk businesses can better manage chargebacks and maintain a healthy merchant account.

By understanding the definition of high-risk merchant accounts, the types of businesses that are considered high-risk, the fees associated with high-risk payment processing, and how to manage chargebacks, businesses can better navigate the world of high-risk merchant accounts and find the right payment processing solution for their needs.

How can I pay less?

As a high-risk company, you’ll just have to accept some fees (like chargeback fees). Utilizing high-risk payment processors that specialize in serving high-risk industries is crucial, as they understand the unique challenges and risks involved. But there are certain steps a merchant can take to lower their processing costs.

1. Be aware of pricing structures for credit card payments.

As mentioned above, processors will try to stick you with a tiered pricing structure. For businesses in high-risk industries, having a high-risk payment gateway is essential to accept credit card payments securely. This will almost definitely end up costing you more. Be sure to ask about other pricing plans and see if you can’t negotiate an interchange-plus pricing structure.

2. Negotiate contract lengths.

Watch out for early termination fees and automatic renewal clauses. High-risk companies may not be able to score a month-to-month deal but that doesn't mean they have to be stuck with a processor indefinitely.

3. Plan ahead

Incorporating the costs and obstacles of high-risk processing into your business plan is a good way to be prepared and to ensure your company won’t take major losses simply for accepting credit cards. High-risk merchants face unique challenges in accepting credit card payments, including stricter requirements and higher fees, making secure payment processing crucial to mitigate risks associated with fraud and chargebacks. Your high-risk business should not be relying on immediate deposits to stay afloat. Be prepared for held funds and chargebacks to be a regular occurrence by creating your own internal rolling reserve.

4. Do your homework.

This step is important for both high-risk and low-risk companies. Host Merchant Services is a viable option for high-risk merchants, offering the ability to process payments through various methods for businesses with significant monthly sales. There are several different processors on the market and they all have their good and bad points. Beware of those that are looking to take advantage of your high-risk status. It’s important to find a processor that specializes in high-risk industries. These processors will understand your industry and be more willing to work with you. At SwipeSum, we help our clients through this process. We’ll do all the research to find companies the best processor at the best price. The payment processing industry presents obstacles no matter what kind of industry they’re working with, but for high-risk companies, the obstacles are a bit higher. The best line of defense is to be knowledgeable about what your company’s needs are and what different processing companies are offering. High-risk companies can still have a good working relationship with their processor, even with the extra hoops they have to jump through.