High Risk Merchant Accounts
Not all merchants can simply walk into a bank on Main Street and be approved 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 can find that the application process for merchant services more difficult since most payment processors are unable to accept higher risk merchants. Businesses that find themselves in this situation will need to seek out the services of a specialized payment processor that is able to provide high risk merchant accounts to their specific industry.
Payment processors have normally dealt with local merchants, whether they are a small retail store or a restaurant in town, these types of businesses are what most banks and merchant services companies generally specialize in partnering with. Other merchants have started businesses that fall into a higher risk category due to their strict regulations by either federal or local governments, requiring licensing and or other registrations to demonstrate their ability to operate within the law. Payment processors and financial institutions that cater to these types of businesses will have guidelines in place to ensure that merchants are compliant and do not violate any of the terms as fines can be stiff for any types of infraction.
Most businesses today accept credit cards, whether it is in addition to cash or the only means of payment accepted, the need for credit card processing services is of utmost importance to keep up with consumer trends. High risk businesses rely heavily on their ability to accept payments from debit and credit cards since most high risk merchant accounts sell highly specialized products or services and operate strictly online. These types of online payments, known as a Card Not Present (CNP), are generally perceived as being a higher risk sale than swiped transactions due to the threat of fraud and chargebacks that are rampant throughout the e commerce industry today.
Working with a high risk payment processor will help businesses gain access to the proper financial channels that will work with the merchant to help limit any fraud or chargebacks while allowing their business model to remain unchanged. Partnering with a payment processor that is able to provide high risk merchant accounts can help a business struggling to find merchant services with a merchant account designed for their needs. 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 High Risk Merchant Account?
For a business to establish payment processing services, the merchant will be required to set up a type of bank account designed to accept debit card and credit card transactions. These types of merchant accounts are established by a merchant acquiring bank and provide access to the various credit card networks along with maintaining security compliance within their networks. Not every bank is a registered as a merchant acquirer and the banks that have this distinction do not necessarily accept the same types of merchants. Finding the right acquirer is important for a high risk merchant.
The merchant acquiring banks that operate today offer their payment card services through an independent sales organization or payment processor that is contracted to work through them. These sales organizations and payment processors focus on the sales and marketing of the merchant services directly to the businesses while providing technical support and customer services through an ongoing basis. In some instances the merchant acquiring bank will also act as their own sales organization, soliciting new merchants and maintaining the merchant accounts afterwards.
High risk merchant accounts can be used to accept payments in more than one way if the merchant decides to accept customer payments in more than one type of sales environment. If a merchant is planning on accepting swiped transactions in addition to online sales, the same merchant account can be used for those retail sales with the proper credit card machines. The entire authorization process is identical for both online e commerce and retail sales once the transaction in captured and received at the payment processor.
The types of businesses approved for merchant accounts can vary between the different merchant acquiring banks but the merchant account themselves will operate the same. Higher risk merchant accounts will need the services of a high risk payment processor and high risk merchant acquirer to have the proper underwriting and account maintenance protocols in order. These high risk partners are different than other merchant services companies because they are willing and able to take on the extra risk that is associated with these types of high risk businesses.
When merchant accounts were first rolled out the primary way that transactions were authorized was through telephone, requiring the merchant to call and confirm the account and receive approvals. This process was soon replaced with the use of desktop imprinters that required the customer to provide their payment card and the merchant was to create a carbon copy to be sent to their bank for funding. By the 1980's the need for copying customer cards was replaced by credit card machines that used an automated authorization process to verify card transactions.
The birth of the internet and the eventual idea of moving business online created a whole new avenue of growth beginning in the 1990's for existing merchants and carved out a whole new category of businesses that would shape our future. The demand for secure e commerce solutions lead to the invention of the payment gateway, an online application that would securely link a merchant's website to their merchant account for online authorizations of sales along with multiple back office and other payment processing services.
High risk merchant accounts have also spun off other complimenting segments of the payment processing industry to accommodate the needs of other high risk businesses. One type of payment processing service that has become increasingly popular with high risk businesses are aggregated merchant accounts. Merchants that have experienced a hard time establishing merchant services can work with a payment aggregator and place their business into a merchant account with other higher risk businesses with the idea that spreading the risk between multiple merchants is the best solution for working with high risk merchants.
All types of merchant account services, whether high risk merchant accounts or a local business' merchant account will have fees involved with processing transactions. The costs of the fees and the types of fees are charged can vary between every payment processor and the types of merchant accounts they offer. Most high risk merchant accounts will charge a discount fee which is a percentage of the authorized sale price along with a fixed transaction fee for every transaction regardless if its approved or denied. High risk businesses will usually have higher fees for their merchant account services than other types of merchant accounts and aggregated merchant account services will generally cost more than a merchant account provided by an acquirer.
Before a high risk merchant decided on a payment processing solution, its best to understand all of the fees and costs associated with establishing the merchant services. With countless payment processors and merchant account solutions available on the market, high risk businesses have many options to choose from when shopping for merchant services.
The History of High Risk Credit Card Processing
The first widespread use of retail credit in the United States began in the 1920's when businesses began extending lines of credit to consumers who could not afford to make larger purchases at once, but rather extend the payments over time. While the short term effects succeeded in creating an economic boom, the long term repercussions left a majority of Americans with substantial debt and an economic downturn that lasted for more than a decade until the 1940's.
While Americans were being introduced to making purchases with credit, the oil companies in the derived the idea of creating networks of partner gas stations of the same and competing brands. Members were issued credit cards that could be used at these stations to properly credit the customers accounts for future payments towards their balances. By the 1950's, this idea of creating a credit network was put into use in the restaurant industry with the introduction of the Diner's Club card that was followed by American Express and Bank of America.
As the credit card processing industry evolved through the 1980's, the idea of capitalizing on the growing popularity of the internet as a potential platform for personal enjoyment. In the early 1990's some of the largest web-pages and user groups were centered around pornography and the adult industry, allowing for the exchange of thousands of pictures and text among users. By 1995, web entrepreneurs had figured out a way to capitalize on this rapidly growing business and profit from its users.
In 1994, one of the first e commerce stores netmarket.com was launched with a secure data encryption and subsequently completed what is widely recognized as the first secure online retail transaction in August of that year. Around the same time in 1994, one of the first online payment gateway applications named CyberCash was launched, allowing customers to operate an online wallet to pay with credit cards and providing merchants with payment gateway software to accept payments online. The emergence of e commerce had taken hold with consumers and business forevermore would never be same again.
The new technology of online payments along with the popularity of pornography merged to create one of the first adult membership websites in 1995. The Starnet Communications network based in Vancouver, Canada entered the online adult industry with some of the first online pay websites such as Sizzle.com, Chisel.com and Redlight.com, Starnet quickly entered the adult scene and captured a large segment of the new adult subscribers. Another pioneer of the online adult pay site industry was adult star Danni Ashe with her website, Danni.com which also launched in 1995 to much success. While Danni continued building her adult empire, the Starnet group continued growing, went public and quickly branched off into other industries.
By 1996, the island nation of Antigua had passed their Free Trade & Processing Act that opened the door for individuals to apply for and be granted licenses to operate an online casino. As gaming software was developed, online casinos such as the German website InterTops.com and Starnet Communications WorldCasino.net and Antigua-based WSEX.com began popping up allover the internet, quickly growing to an estimated $830million/year industry by 1998. As gaming entered the 21st century, the popularity of online poker rooms took hold and created another niche for gamblers looking for live action in addition to sports or arcade games.
Since the 1990's the growth of the high risk merchant account industry has taken off as new types of businesses have emerged and been categorized as high risk. The different payment card associations will still work with many of the high risk industries including adult and gambling, though their rules, regulations and fees for operation can cost merchants more money with mandatory annual business registrations and other attorney fees that can be required for merchant account approval.
How High Risk Credit Card Processing Works
The payment processing transaction begins once a credit card or debit card is tapped, swiped, dipped or keyed into a credit card machine. For a credit card to be authorized requires a few different organizations to handle the payment request before the customer can make a purchase. A typical retail transaction involves:
Card Association: The financial backbone to the payment card networks that is owned and operated by Visa, MasterCard, American Express and Discover. Payment card transactions are handled through the network, linking the merchant acquiring bank to the customer issuing banks. The networks of Visa and MasterCard are a open loop network that allows various vendors to issue cards or sell merchant services. The networks of American Express and Discover are closed and subsequently those companies manage all aspects of transactions.
Merchant Acquiring Bank: Also known as the acquirer, the merchant acquiring bank is connected between the payment processor and the card association. The acquirer handles the issuing of most merchant accounts after the payment processor has accepted the application, overseeing the quality of transactions being processed. The acquirer maintains the relationship with the card association for sending transactions, receiving response and managing the overall security of their merchants. In some instances the merchant acquiring bank does operate their own payment processing arm to directly solicit merchants.
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 consumer, including the initial application process and ongoing support of their account. 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, managing every aspect from account application to monthly statements.
Payment Processor: The role of the payment processor is to handle the transactions between the merchant and the merchant acquiring bank. Cardholder account information is received by the merchant through the credit card machine and passed through the payment processor to the acquiring bank. Payment processors also provide the merchants with the ability to refund, void and batch transactions along with providing monthly statements and on going customer support during the life of the account.
The the point when the customer wants to make a purchase, the credit or debit card of the consumer is entered into the credit card machine to initiate the authorization. Card account information that is stored on the payment card is received by the credit card terminal and encrypted for transmission to the merchant acquirer. The card account information is stored in the embedded chip (EMV) and also on the black magnetic strip located on the back of the card. EMV chips were devised as a more secure method to prevent fraud from card present transactions by requiring a dynamic authentication code to be created by the embedded chip on every transaction where the card is presented to a merchant.
When the card account information is safely received, the encrypted account file is sent via the payment processor to the merchant acquirer for entry into the payment card association network. At the card association, the account file is unpackaged and read to determine the card issuing bank of the consumer and the transaction in its entirety is sent over for review.
Once the transaction request reaches the card issuer, a response is required by the merchant and the customer. A series of fraud checks along with account verification checks are performed and a determination of approval or denial of the authorization request is reached and that information sent back to the card network. From the card network, the merchant acquirer is contacted with the issuer's response and that information is passed along to the credit card terminal at the merchant location.
How Online High Risk Credit Card Processing works
When accepting payments online the authorization process is identical to to a swiped transaction once the card account information has been entered at the merchant acquirer. The difference between a retail storefront transaction and an e commerce transaction is the card-not-present (CNP) nature of the transaction, deeming these transactions as potentially more likely fraudulent and requiring different security measures. To handle these requirements payment processors require e commerce merchants use a payment gateway.
Payment Gateway: The software used by online merchants to send transactions is a payment gateway. The gateway is a secure online application that provides fully compliant financial encryption of customer data for transmitting credit card transactions between computers and servers. Payment gateways provide the web service that connects the merchant's e commerce store to most of the compatible payment processors and the various credit card companies.
Payment gateway programs are usually built and managed by 3rd party companies that are experienced in the financial security industry and able to build a PCI-Compliant (Payment Card Industry) program to work between merchant acquirers and the payment card associations. Payment gateway integration into a shopping cart is generally seamless, only alerting customers by using a HTTPS URL. Having a fully PCI-Compliant shopping cart will allow the merchant's website to confidently send payment card authorizations from their e commerce store to the payment card association without the risk of fraud or theft.
Operating as a fully electronic version of a credit card machine, the payment gateway captures the customer payment card information in a similar method as a credit card terminal. This information is received after being sent from the customer's web browser to the shopping cart in an encrypted file by the web browser. Once the information has been securely captured by the merchant's website, the payment gateway will take that file, encrypt it once again and send the customer transaction files, including card information and transaction information through the payment processor to the merchant acquirer.
The decision made by the customer's card issuing bank will be sent back to the customer location through the same channels that received the initial transaction and many of the same channels that handle retail sales. These responses to the online sales will be received on the merchant' end by the payment gateway and presented to the consumer in the shopping cart complete with a transaction ID for an approved sale or a response code for transactions that have been declined.
Secured financial information that is sent and received through the payment gateway will usually be handled through the use of XML files, containing all the necessary information about the customer's payment card and the transaction. Files are transferred through an SSL (secure socket layer) from the payment gateway to the payment processor or merchant acquirer for entry into at the card association. One of the most common and secure methods for sending financial files through an SSL is by using the ISO 8583, one of the standard financial interchange message platforms to ensure the maximum levels of security during the vulnerable transmission process.
One of the biggest differences between transactions originating from in a retail location and online transactions is the frequency of fraud. Transactions that occur online do not utilize the EMV technology that has been rolled out to most credit and debit cards today making care present fraud nearly impossible. E commerce merchants do not have it as easy, instead they are forced to rely on address verification (AVS) protocols along with other security functions provided by the card issuers to help combat fraud and lower their losses. Until a better method of verifying online consumers exists, online merchants will have to remain vigilant when processing online sales.
Who uses a High Risk Merchant Account?
Merchants in high risk industries have had the need to accept credit card and debit payments from almost day one in their respected industries. Since most high risk industries operate online, the ability to accept payment cards has been first and foremost for nearly every high risk merchant looking to start their business.
Finding a credit card processor that can accept higher risk industries can prove to be challenging at times, but once merchants are able to find a payment processor it can be extremely profitable. Some of the most common types of high risk industries that use high risk credit card processing include:
- Adult Merchant Accounts
- Alcohol Merchant Accounts
- Firearm Merchant Accounts
- Tobacco Merchant Accounts
- CBD Merchant Accounts
- Debt Repayment Merchant Accounts
How does pricing work for High Risk Merchant Accounts?
Determining the costs of a merchant account is not an exact science by any means and can lead to significant confusion for merchants when deciding who to partner with. Payment processors and sales organizations have a variety of different cost structures that they can offer to merchants with a wide variety in rates and other fees. Understanding the differences in pricing models can help merchants distinguish between types of accounts and determine what solution is the most cost effective.
The most common types of billing models that are used today include tiered pricing, interchange plus pricing, flat fee pricing and monthly memberships with a predetermined fee. The use of tiered pricing is one of the oldest methods to bill merchants but as merchant services became increasingly competitive, payment processors and sales organizations developed other types of billing models to attract new business. New and improved billing methods have continually been rolled out to businesses, while some have provided significant cost savings others have been more costly to merchants and require merchants to pay close attention to the terms of the agreements and determine if their business will benefit from the offer.
The tiered pricing model was one of the first systems used for billing merchants, providing merchants with anywhere from 3 to 6 different rates for credit cards and debit cards to be charged. These different rates, called tiers, will ultimately decide the cost of the transaction based on where the card qualifies. Factors that affect the qualifying tier can include the type of card, how the card was accepted and when the transaction was finalized. While this method of billing can provide reasonable fees for merchants, determining the cost of a transaction can be very difficult and eventually lead to payment processors offering other pricing plans.
One of the most frequently used pricing models offered by payment processors today is called interchange plus pricing or cost plus pricing. This pricing model predetermines a set fee by the payment processor for their services and adds those costs to the true interchange cost of the consumer credit cards or debit card as charged by the Visa, MasterCard, American Express or Discover. This type of pricing structure is favorable to merchants due to its simplicity in understanding the fees and the elimination of any expensive downgrades experienced from the tiered pricing models.
With the expansion of the internet and new financial solutions, alternative billing have made their way into mainstream payment processing services and being used by millions of merchants today. Most of these alternative solutions operate on a flat fee schedule, charging customers the same discount fees and processing fees for every transaction. Discount fees for these services are usually around 3% regardless if the card used is a debit or credit card. Other billing models that have recently emerged include monthly membership programs that charge one fee for all of the months transactions. While these models are different from traditional billing methods, the costs involved can be substantially more than those traditional ways when calculating excess debit fees, overage fees and interchange fees that are not accounted for.
Most merchant accounts will have additional costs that can be charged based on the number of occurrences. These types of fees include transaction fees, chargeback fees and retrieval fees that will be charged when those services are used. Some merchant accounts will also charge fixed fees for maintenance on the account, compliance fees that can be yearly, quarterly or monthly and possibly registration fees required for some high risk businesses that are charged yearly.
Merchants that are familiar with their merchant account can find some additional junk fees or costs that can be lowered or removed by the payment processor. High risk merchants will always have fees associated with their payment card processing services, but taking the time to fully understand the terms of their high risk merchant account can help find places where the costs can be trimmed. High risk merchant accounts will generally have higher fees than traditional business merchant accounts, but in some cases asking the payment processor about a fee and trying to get it removed can positively effect the overall costs paid by the business.
Why Businesses need High Risk Merchant Accounts
Some businesses are unable to establish merchant services with local payment processors, whether its due to the industry, the history of the business or the financial background of the merchant, these companies need to seek alternative payment processing services. Many times these businesses will find a solution through a niche payment processor able to work with merchants that have one or more of these problems when applying for merchant services.
High Risk Industry
Most of the sin industries including adult, tobacco, firearms and gaming are classified as high risk due to the potential legalities surround the business models. Many of these merchants are required to install website safeguards for online transactions and pay annual registration fees to the card associations for accessing their networks. Most payment processors are not willing to take on businesses that could potentially violate costly State and/or Federal regulations and laws and hold them to the strict guidelines set forth by the payment card associations. Merchants that fall into these categories will usually need to seek out a high risk payment processing solution to properly establish merchant services.
Excessive Chargebacks and Returns
Some businesses might operate in an industry that is medium to low risk but due to their sales methods or the services they provide, chargebacks and/or returns might be an issue. Most payment processors are not willing to work with merchants that exceed certain thresholds for chargebacks or returns so partnering with a high risk merchant account provider is necessary to continue processing payments. Many high risk payment processors are able to absorb higher than normal chargeback or return ratios based on their underwriting guidelines which provides a quality solution for merchants experiencing these problems.
Low Credit Score
In some instances, the business itself might be perfectly capable of qualifying for general merchant services, but the owner might have personal problems that will prevent most payment processors from approving their application. Owners that are in this situation will many times have to seek out the services of a high risk payment processor that can either approve the account as is or extend payment processing services with special circumstances. Many times these high risk merchant accounts will be set up with higher than normal fees or potentially with a reserve requiring a portion of sales to be held as a safeguard, options not always available from general merchant services providers.
Merchants that have ended up on the Terminated Merchant File (TMF) have a history with the payment card associations and left on terms not allowing them to return without problems. These merchants or businesses might have had excessive chargebacks resulting from fraud, theft or other circumstances outside of their control. Other merchants or businesses might owe money to their previous payment processor or the card association for fees, violations or other costs associated with a prior merchant services and were placed on the TMF. These merchants might need the services of a high risk payment processor who is able to work with them and set up future merchant accounts.
Businesses utilizing the services of a high risk payment processor will usually have a reason or two for needing to partner with a niche services provider instead of a local merchant services company. Businesses can also benefit from working with a high risk merchant services processor since many of these businesses can start over and fix the problems that occurred during previous payment processing partnerships.
What is Needed for a High Risk Merchant Account?
Businesses looking to set up high risk merchant accounts will need to send in many of the same documents and fill out similar forms that general merchants are required to provide. Some merchants might be required to provide additional documentation or 3rd party assessments to obtain their merchant account when applying for high risk merchant services. The most commonly required documents include:
- Completed Merchant Account Application
- Business Owner's Social Security Number
- Copy of Owner's Drivers License or Passport
- Voided Check from Business Checking Account
- Last 3-6 Months Bank Statements (for merchants currently processing)
- Last 3-6 Months Payment Processing Statements (for merchants currently processing)
Underwriters and account managers at the payment processors and acquiring banks need to have a full understanding of the merchant and their business prior to rendering a decision to the merchant account application. High risk businesses will normally require more documents to complete underwriting than a general retail company resulting in an increasingly intensive review process that can extend the underwriting period. The importance of providing a completed application will result in faster review times and the possibility of a more streamline approval, missing information or incomplete sections might raise concerns among underwriters.
Identification sent in by all owners with the merchant account application will be used by the bank and payment processors underwriters to perform a KYC (Know Your Client) check on the members. A credit check will be performed on each of the owners to ensure that they have an acceptable credit score.. As with all high risk businesses, both the merchants along with the companies will be checked against the MATCH list maintained by the card associations for any outstanding problems with the applicants. Any references on the MATCH list might create cause for concern which might result in higher rates, lower processing volumes, reserves held on sales or even application rejection.
The processing history of a business is an essential part of the supporting documents for merchants that are currently accepting payment cards, providing the underwriters a full picture of the business' inner workings. Most underwriters will require a minimum of the last 3 months of processing statements while larger accounts can be required to provide the last 6 months of processing history. When the underwriters can review the processing statements an idea to the quality of transactions can be seen and the strength of the business' sales can be verified.
In some industries of high risk the merchants might be required to provide additional supporting documents, such as legal letters stating the legality of their business operations or additional form filled out and signed from the processor or acquirer. This information is generally needed to approve businesses operating in highly regulated industries with strictly state and/or federal regulations. If these documents are needed the merchant services sales organization will inform the merchant during the application process as to all the required documents to speed up the application process.
How to choose a High Risk Merchant Account provider
Finding a merchant services provider that can provide the essential services with reasonable fees can save the merchant time and money in the future. Many high risk service providers claim to accept niche industries but in reality they are not able to work with them due to their payment processor's or merchant acquirer's regulations and guidelines. Making sure that the payment processor currently handles transactions for similar businesses can alleviate any questions as to their ability to accept a high risk industry.
Merchants will also want to review the rates available for processing transactions to compare against other merchant services companies. Understanding all the costs and fees charged by the payment processor, acquiring bank and card associations can help merchants become a more informed shopper and potentially save money when deciding to contract. Merchants should also pay attention to any types of annual registration fees or other costs assessed from the payment processor, merchant acquiring bank or card associations that could otherwise be avoided by using another merchant services provider.
The functionality of the payment gateway can be another important determining factor for a merchant shopping around for high risk payment processing services. Working with a payment processor whose payment gateway is compatible with a merchant's website can save a significant amount to time and money when starting up. Having a payment gateway that also provides a robust set of functions while providing reliability to both merchants and customers will take some of the headaches out of running an online business.
Start accepting high risk credit cards today!
The high risk professionals at Allied Payments are available to help merchants quickly apply for a high risk merchant account. Our team is experienced in helping merchants from many of the most difficult industries to find reasonable and secure merchant service for their businesses. Contact our offices for more information on getting starting accepting high risk payments.