High Risk

What Is a High-Risk Merchant Account & How Does It Work?

Read Time: 10 min

A high-risk merchant account is a type of business bank account set up by a payment processor that allows merchants to accept credit and debit cards for their business, even though they have been labeled as a high-risk business by a previous processor or payment service provider. The funds collected from transactions (less processing fees) are transferred directly to the merchant’s business checking account at the merchant’s bank within 24-48 hours on average.

Many merchant services providers avoid offering merchant accounts and other payment processing services to businesses that are known to be high-risk. Unfortunately, this leaves high-risk business owners without many processing options, significantly reducing their ability to generate revenue and expand their operations. However, high-risk providers help businesses access the processing support they need through financial institutions that have more relaxed guidelines.

Understanding the payment processing landscape is essential if your business is in the high-risk category. And that’s why we’re here! In this guide, we explore high-risk merchant accounts—their advantages, associated fees, and how to find the most suitable provider.

How High-Risk Merchant Accounts Work

Many merchant services providers issue strict restrictions on industries and products, leaving businesses exposed to frozen funds, account suspensions, and even termination. The latter of which can even land you on the MATCH list—an electronic database of high-risk merchants managed by Mastercard—further complicating the already-difficult task of finding a payment processor. However, a merchant services provider with expertise in servicing high-risk industries can issue accounts so merchants can effectively run their business without the fear of termination.

A high-risk merchant account is specifically designed to support payment processing for high-risk businesses. Each payment processor has specific criteria known as a credit policy, which dictates what types of business industries they are allowed to support. The main reason these credit policies differ is due to the processor’s ability to conduct thorough underwriting, due diligence, and as well as support from their sponsor bank. The processors that have more underwriting capabilities are able to take on greater risk and in turn are allowed to board more industry types that carry the high-risk classification.

As with standard merchant accounts, high-risk merchant accounts can be linked to payment gateways, virtual terminals, and other payment technology platforms. Regardless of why a high-risk business is considered such—be it its industry, operations, or processing history—these merchants can now access the powerful payment processing capabilities they’ve long been denied, simply by obtaining a high-risk merchant account.

High-Risk vs. Low-Risk Merchant Accounts

As mentioned, standard (or low-risk) and high-risk credit card processing offer similar services—both facilitate payment processing for a business. However, high-risk merchant accounts may come with slightly higher fees, underwriting processes, and reserve requirements or other financial assurances to mitigate risk. On the bright side, high-risk accounts typically offer the most advanced security features available and impose far fewer restrictions regarding business operations.

Reasons Your Business May Be Deemed High-Risk

There are various factors involved in a high-risk business being categorized as such. Below, let’s explore some of the reasons your business might receive this classification:

  • Excessive chargebacks and/or refunds
  • Fraud-prone industry
  • High-risk transactions
  • Lack of business history
  • Reputational risk
  • Poor credit score
  • Process recurring payments

Business Types Considered High-Risk

Unfortunately, various sectors are considered high-risk industries, making it challenging for merchants operating within these industries to find a merchant account provider willing to process their high-risk transactions. Some examples of industries with high-risk merchant category codes include:

  • Adult
  • Bail Bonds
  • CBD
  • Subscription
  • Firearms
  • Gambling
  • Insurance
  • Tech Support
  • Tobacco & Vape

Pros and Cons of High-Risk Payment Processing

If your business requires high-risk payment processing, you may be wondering if there are any specific upsides or downsides. Spoiler: There are. Below, we explore the pros and cons of high-risk payment processing below!

The Pros

  • Advanced Security Measures: High-risk payment processors utilize the most advanced security measures to prevent fraud and chargebacks.
  • Higher Chargeback Thresholds: High-risk payment processors understand their clientele has a greater chance of receiving chargebacks, so they often allow for higher chargeback rates.
  • Reduced Risk of Account Termination: Many payment solution providers are known for suddenly banning industries or merchants, at which point these businesses are left without payment processing capabilities. As high-risk payment processing providers specialize in servicing risky industries, you’re unlikely to suffer sudden account terminations.
  • Freedom to Sell High-Risk Products: If you sell high-risk products, you probably don’t want a merchant account provider breathing down your neck about your business activities. Fortunately, high-risk providers allow more freedom and leniency regarding your business’s operations.
  • Tailor-Made Solutions and Support: These providers offer tailor-made solutions, making it simpler to customize your payment operations.

The Cons

  • Longer Approval Timeframes: Providers partnering with high-risk businesses may have a higher risk appetite, but they still need to reduce their exposure to significant liabilities. Therefore, the underwriting process for payment processing services often takes longer.
  • Higher Fees: As high-risk businesses are more prone to losses, providers may charge more to process their transactions to account for the increased financial exposure.
  • Reserves: A high-risk provider may issue a merchant account with the stipulation that the business owner must also fund a reserve account. In this event, the merchant is responsible for funding a reserve account, where this money is kept aside to cover losses. This can be challenging if you own a business with small margins or minimal cash flow.

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Higher Risk May Mean Higher Fees

All businesses pay various fees to process transactions, but fees associated with high-risk merchant accounts can be higher. As a high-risk merchant, your business will incur additional costs to help mitigate your risk. Some fees remain constant, regardless of your business’s risk profile, while others will vary depending on your risk level. Below, let’s explore both fixed fees and fees that fluctuate due to risk level:

Fixed Fees

The following fees remain constant, regardless of your risk profile:

  • Refund Fees: Costs associated with refunding customers for returned items typically remain constant, as this is not a chargeback.
  • Security Fees: Fees for security and fraud prevention tools will usually remain constant regardless of your risk profile. Even low-risk merchants require these tools!
  • Termination Fees: If you sign a long-term processing contract, your business may be charged a termination fee if you decide to cancel your processing agreement before the end of the contract.
  • PCI Compliance Fees: Many payment processors make merchants bear the costs associated with maintaining PCI compliance. As all merchants must remain PCI compliant, regardless of risk level, many merchant account providers charge the same fees across the board.

Fluctuating Fees

The following fees increase as your risk level increases:

  • Chargeback Fees: Chargeback fees may increase if your business experiences excessive chargebacks or if your business operates in a high-risk industry.
  • Transaction Rates: Processors usually charge higher transaction fees to businesses with a higher risk level.
  • Monthly Fees: In some cases, high-risk merchants must pay high monthly service charges to help account providers mitigate risk.
  • Rolling Reserve Requirements: As your risk increases, the amount your business must retain in a rolling reserve will increase. Merchant account providers require additional cash assurances in case your business faces excessive chargeback costs.

What Should You Do if You’re High Risk and Need Processing?

If your business is high-risk, it will struggle to attain merchant services from traditional financial institutions, such as banks or credit unions. While some high-risk companies turn to payment service providers (PSPs)—such as PayPal, Square, and Stripe—to process high-risk transactions, this avenue is not advisable. PSPs, while they offer auto approvals, often cancel business accounts without warning due to a myriad of reasons.

Working with a high-risk merchant service provider will help you avoid nasty surprises and protect your business from fraud. They will not shut your business down due to product offering, transaction amounts, or exceeding risk thresholds. As high-risk payment processors understand the risks associated with your industry, they will work closely with you to prevent chargebacks and other potential problems.

Start by applying for a high-risk merchant account as soon as possible. As the underwriting process takes longer when you’re a high-risk business, it’s critical to start applying immediately to avoid delaying your access to payment processing!

How to Find the Best High-Risk Merchant Account Provider

If you want to unlock low rates, dependable processing services, and excellent customer support, you need to find the best high-risk merchant account provider for your specific business.

With so many payment processors offering services to US businesses, selecting a provider suitable for your needs can be challenging. Let’s explore some tips for narrowing down a shortlist of top payment processing candidates:

Check the provider’s website and online reputation

Your first port of call should always be the payment processor’s website. With so much competition in the industry, processors are increasingly transparent about their services, pricing, restrictions, and more. Check if a payment processor is willing to work with high-risk industries or has any restrictions on specific sectors.

Next, it’s time to find out what other merchants think of the payment processor you’re assessing. The Better Business Bureau (BBB) and Consumer Affairs are excellent sources of customer feedback—these consumer watchdog groups host reviews and report information regarding official complaints.

Read the terms and conditions and the application carefully

Always inspect the terms and conditions and application carefully—don’t assume all relevant information is provided in the marketing material. Below, let’s explore some factors you should consider when reading the terms and conditions and application:

  • Processing fees
  • Chargeback fees
  • Chargeback thresholds
  • Contract length
  • Early termination fee
  • Hardware restrictions
  • Excluded industries
  • Excluded activities or payment types
  • Any other potential restrictions on your payment processing abilities

If you have any questions about a processor’s rates, terms, or restrictions, reach out to its team directly. Always ask for clarification in writing, as it will provide clear evidence about a processor’s commitments if any disputes arise in the future.

How PaymentCloud Can Help

If your business is ready to set up a high-risk merchant account, start now by reaching out to PaymentCloud! We specialize in connecting high-risk merchants with merchant services, including merchant accounts, payment gateways, and virtual terminals. If you want a dependable high-risk solution with unique experience supporting businesses just like yours, we’re just a click away.

High-Risk Business Wanted:
At PaymentCloud, we support risk takers.

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Can I get instantly approved for a high-risk merchant account?

Unfortunately, instant approval for high-risk merchant accounts is not available. As with all merchant accounts, including low-risk merchant accounts, the provider must perform due diligence to prevent fraud, unnecessary risk, and other potential issues. In most cases, it will take a few weeks for underwriting to occur.

How do payment service providers like Square, Stripe, or PayPal deal with high-risk merchants?

Square, Stripe, and PayPal are popular choices with high-risk merchants as they don’t have the same underwriting process as merchant accounts, meaning they’re easier to access for risky industries. However, while setting up an account with a payment service provider is simple, many downsides are associated with bypassing merchant accounts.

First, payment service providers typically charge flat rates; while this is a less confusing pricing model, it’s often much more expensive than the pricing available from traditional merchant accounts. Secondly, PayPal, Square, and Stripe all have reputations for closing accounts without warning—and not providing much customer support when issues occur. As you don’t have a dedicated merchant account when you use this type of payment provider, you can’t expect the same support.

Lastly, many popular high-risk industries—such as the adult industry and vaping industry—are entirely banned from PayPal and other similar payment service providers (PSPs). While you might be able to sign up for an account, don’t be surprised if a PSP suspends your processing rights upon finding out the nature of your business.

Will I need a high-risk payment gateway?

If you operate in a high-risk industry, you will likely need some form of a high-risk payment gateway to accept credit card payments online. However, payment gateways don’t classify themselves as high-risk, even if they work with high-risk providers. This is because the merchant account provider is the party assuming much of the risk, not the payment gateway provider.

However, choosing a payment gateway provider with built-in tools, such as two-factor authentication and other security measures, will help you avoid scams if you operate in a high-risk industry. As two of the most popular providers, Authorize.net and NMI offer payment gateways that seamlessly integrate with high-risk merchant accounts from third parties.

Is there such a thing as a high-risk virtual terminal?

Yes. Your business can attach a virtual terminal to a high-risk merchant account, making it a high-risk virtual terminal. Virtual terminals are necessary for processing card-not-present (CNP) transactions, including payments taken over the phone, through email, and by way of mail orders. While virtual terminals provide extra payment flexibility for businesses, they also carry increased risks.

For this reason, if you operate in a high-risk industry, it’s always critical to have extra authentication measures to confirm the cardholder is the individual completing the transaction. Not doing so may leave your business exposed to chargebacks and other payment issues!

Can I get a high-risk merchant account if I use an eCommerce platform like WooCommerce or Shopify?

Yes. Fortunately, many popular eCommerce platforms—including WooCommerce, Shopify, and BigCommerce—allow for high-risk merchant account integration. While you may not be able to take advantage of in-house payment services (such as Shopify Payments) you should be able to integrate a third-party payment gateway with the platform. However, some products are entirely banned from Shopify, WooCommerce, and other eCommerce platforms, so make sure you abide by each provider’s terms and conditions.

Will I need a high-risk merchant account if I have bad credit?

Unfortunately, a bad personal or business credit score may prevent access to low-risk merchant accounts. Merchant services providers may view your financial position as untenable with their risk approach and choose to deny your application. However, bad credit merchant accounts are available to individuals and businesses with poor credit, so you can still access payment processing without an excellent credit file.

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