High Risk Merchant Account
Not all merchants can simply walk into a bank on Main Street and receive approval for a merchant account. Some businesses are classified as high risk due to their products, services or other extenuating circumstances surrounding the merchant. These businesses find the approval process for high risk merchant account services more difficult than other types of merchant services.
Most payment processors will not accept higher risk merchants due to their underwriting guidelines. This forces these merchants into seeking out a specialized payment processor able to provide credit card processing services to high risk businesses.
Working with a high risk payment processing service can help businesses access the proper financial channels to help limit fraud or chargebacks. A payment processor specializing in high-risk merchant account services is able to work with many of the problems faced by these industries. Creating a long term solution for accepting credit cards is essential for any high risk business looking to succeed in their industry.
What is a Merchant Account?
Merchant accounts can accept payments in multiple ways depending on the sales environment of the business. Merchant can use the same merchant account to accept retail and online transactions with certain credit card systems. The entire authorization process is identical for both online e-commerce and retail sales once starting the transaction.
The types of businesses approved for merchant services can vary between the different merchant acquiring banks. Merchants with businesses that require high risk credit card processing need specific underwriting and account maintenance protocols to avoid future merchant account problems. These high risk partners are different than other merchant services companies because they are willing to take on the extra risk associated with that company.
Merchant accounts have also created complimenting segments of the payment processing industry to accommodate the needs of other high risk businesses. One type of payment processing service that is becoming increasingly popular with high risk businesses has been aggregated merchant accounts. Merchants that have experienced a hard time establishing merchant services have generally had more success with a payment aggregator.
Aggregated merchant accounts work by combining higher risk businesses, the processor is able to spread the risk between multiple merchants and reduce their exposure. If one merchant experiences a spike in chargebacks, the overall number in the account can still be minimal. Merchants operating a business with their own account would run the risk of account termination. But regardless of the type of business or account, all credit card processing services operate in a similar fashion.
Merchant Account Fees
All types of merchant services, whether a merchant account or a local business' merchant account have fees associated with processing transactions. These types of fees and their costs can vary between every payment processor. Most high risk credit card processors will charge a discount fee along with a fixed fee for every transaction. Even though some flat fee services do exist, they tend to be some of the costliest.
Most merchant accounts charge transaction fees regardless if the sale is approved or declined. The discount fees are based on a percentage of the sale price and are only billed for approved transactions. High risk businesses will usually have higher fees than lower risk merchant services, while the aggregated accounts are generally the most expensive.
Before a merchant decides on a credit card processing solution, its best to fully understand the terms. With multiple fees and a variety of costs associated with establishing the merchant services, a misunderstanding can be costly. With countless merchant account solutions available on the market, businesses have many options for merchant services.
How Does High Risk Credit Card Processing Work
Credit card transactions involve a number of different organizations working together to process the customer's request and deliver payment to the merchant. Through an intricate and complex series of software and different applications, transactions can be securely processed globally.
The main organizations handling credit card authorizations include:
The financial backbone to the payment card networks that are owned and operated by Visa, MasterCard, American Express, and Discover. These networks handle the payment card transactions, linking the merchant acquiring banks to the customer issuing banks. The networks of Visa and MasterCard are a Terminated Merchant File network and allow various vendors to issue cards or sell merchant services. The networks of American Express and Discover operate as closed-loop and subsequently, allowing those companies to manage all aspects of the process.
Merchant Acquiring Bank:
Also known as the acquirer is the organization that makes the connection between the payment processor and the card association. The acquirer handles the issuing of most merchant accounts and oversees the management of the account. The acquirer sends transactions and receives the responses from the Card Network. Acquirers also manage the overall security of their merchants through PCI Compliance. In some instances, the merchant acquiring bank operates as their own payment processing arm to directly solicit merchants.
The role of the payment processor is to handle the transactions between the merchant and the merchant acquiring bank. Using a high risk payment gateway, customer data is securely passed through the payment processor. Payment processors provide merchants with their payment gateway, monthly statements, and customer service. It is generally the payment processor that decides what businesses they want to provide merchant account services.
Card Issuing Bank:
Supplier of the credit cards to the consumers, the card-issuing bank manages the consumer's credit or debit accounts. The card issuer maintains the customer's information on file and handles all customer service for the cardholder. Some of the most common card issuers today are Capital One, Citi, and Chase. The card companies of American Express and Discover handle their customers directly as part of their closed network system.
Once the payment gateway receives the card authorization information, the data goes through encryption and is sent to the payment processor. From the merchant acquiring bank, the customer authorization file is entered into the payment card association's network. At the card association, the account file is unpackaged and read to determine the name of the customer's card issuing bank. Once that information is determined, the authorization request is sent to the card issuer for their review.
Once the authorization request reaches the card issuer, the customer's account undergoes a series of checks. Various fraud checks along with account verification are run and a determination is reached for the authorization request. After reaching a decision, the response code passes back through the network to the acquirer and processor. The approval or denial response arrives at the customer location, whether at the merchant storefront or website.
What is Considered a High Risk Business?
Similar to other industries, merchants in high risk businesses need a way to accept payments from their customers. Since most high risk industries operate online, accepting debt and credit cards is essential for their business' survival.
Finding a proper credit card processor to accept higher risk industries can prove to be challenging at times. Once merchants are able to find a payment processor, it can be an extremely profitable partnership.
Common High Risk Merchant Account Industries include:
- Adult Merchant Account Services
- Alcohol Merchant Account Services
- Continuity Merchant Account Services
- Firearms Merchant Account Services
- Tobacco Merchant Account Services
- e Cigarette Merchant Account Services
- Smoke Shop Merchant Account Services
- Hookah Merchant Account Services
- CBD Merchant Account Services
- Travel Merchant Account Services
- Tech Support Merchant Account Services
- Pharmacy Merchant Account Services
- Nutraceutical Merchant Account Services
- Kratom Merchant Account Services
- Sarms Merchant Account Services
- Peptides Merchant Account Services
- Drug Paraphernalia Merchant Account Services
Why High-Risk Merchant Account Services are needed
Some businesses are unable to establish merchant services with local payment processors. This can be due to the industry, the history of the business, or the financial background of the merchant. Companies that fall into any of these categories usually need to seek alternative payment processing services. Many of these businesses will find a solution through a niche payment processor able to provide specialized merchant account services.
High Risk Industry
Most of the "sin" industries including adult, tobacco, firearms, and gaming are classified as high risk. This is primarily due to the potential legalities surround the nature of their products or business models. This includes requiring merchants to install website safeguards or other security measures for online transactions. Other high risk industries have requirements to pay annual registration fees to the card associations for accessing their networks.
Excessive Chargebacks and Returns
Some businesses might operate in an industry that is medium to low risk but experience high chargebacks. High chargebacks and/or returns can be an issue for merchants depending on how they operate their business. Many merchant account providers are not able to absorb the high chargeback ratios usually seen with merchant account businesses.
Low Credit Score
In some instances, the business might be perfectly capable of qualifying for general merchant services, but the owner's personal problems are preventing it. Most payment processors have a minimum credit score needed to approve an application. Many times this will require a merchant account provider with the ability to accept these clients. These accounts will generally have higher than normal fees and could potentially have a reserve placed on sales. These types of arrangements are not always available from general merchant services providers.
Merchants that have ended up on the Terminated Merchant File (TMF) have a negative history with the payment card associations. Many times this the termination of the previous relationship does not allow the business to establish new merchant services. These problems might have stemmed from violations, excessive chargebacks or funds owed to a payment processor or the card association.
Businesses needing merchant account services for their TMF will need to seek out an appropriate payment processor. TMF businesses benefit by partnering with a high risk credit card processor to work towards a second chance. This gives many merchants the opportunity to fix problems from previous processing partnerships and work towards a low-risk merchant account.
How do you get approved for a Merchant Account?
Opening a merchant services account can require a number of documents to help the bank and their underwriters determine both the business and the applicant. Understanding that financial services, especially services that could potentially involve international transactions, need to be scrutinized to verify their legality. The risk of money laundering or even funding terrorism has been the driving factor that underwriters for banks and other financial institutions remain vigilant too. In addition to reducing legal liabilities, payment processors also need to protect their interests by knowing the financial histories of both the merchant and business. Proper underwriting will help the financial institutions reduce their losses by properly reviewing applications.
Most Common Requirements
- Completed Application
- Color Copy of Government ID
- Copy of Voided Business Check
- Previous Processing Statements
- Previous Bank Statements
- Reserve Acknowledgement (varies)
- Application or Set up Fee (varies)
The need for a complete application might seem like a strange requirement. Why wouldn't this be done? Many times, merchants are in a rush or have filled out so many applications that they start skipping over parts. Though the applications can be submitted on a partial basis, underwriters will not continue with the application until all pertinent information is provided. For merchants in a rush to set up their credit card processing, this will only delay the approval process. Prior to submitting an application package, merchants along with the sales organizations they are working with, need to review and verify that the applications are complete with all the correct information.
Open a Merchant Account Today!
The payment processing professionals at Allied Payments are available to help merchants quickly apply for high risk merchant account services. Our team of professionals will help any merchant, even if you are just wondering what is a high risk merchant account. We have the experience to help merchants from the most difficult industries to find reasonable and secure high risk merchant services. Contact our offices for more information on getting starting accepting high risk payments.