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What’s the difference between a high-risk and low-risk merchant account?

8 min read
Erik Deckers

When you start a new business, you're going to have to start accepting credit cards. And when you do it, you're going to be classified one of two ways: a high-risk or low-risk merchant account. But what’s the difference between a high-risk and low-risk merchant account?

Being labeled a high-risk merchant account means the credit card processors (also called merchant service providers or payment service providers) think you are at a high risk of receiving a lot of chargebacks and refund requests on your credit card transactions.

And if you're a low-risk merchant account, it means you're at a lower risk of being hit with chargebacks.

There is no middle ground. You can't just be a plain vanilla merchant account.

But — and this is important — being labeled high-risk is not necessarily a bad thing. In fact, there are a few advantages to being a high-risk merchant, and we'll discuss those in a minute.

In this post, we'll discuss a few topics, including:

  • What are merchant accounts?
  • What types of businesses are labeled high-risk and low-risk.
  • The benefits of being either high-risk or low-risk.
  • Can a high-risk merchant account still accept credit cards?
  • Should you use an alternative payment method?

Let's get started.

What are merchant accounts?

Merchant accounts are the proper name for credit card processing accounts.

If you want to process credit cards and debit cards at your business, you need a merchant account.

There are two basic types:

  • An in-person point-of-sale (POS) processing machine, like you would find at a coffee shop, retail store or restaurant.
  • A card-not-present (CNP) transaction, which you would do online or over the phone.

You sign up for a merchant account through a merchant service provider. And, depending on your merchant account status, your service provider may be your bank or they may be an independent credit card processor. Those independent providers will work with a number of different banks to actually process your customers' payments.

Passenger using a credit card processing machine in a yellow taxi cab

Some banks will only handle certain kinds of merchants (businesses) and refuse to handle others. It can be a question of the bank's own comfort level with the kinds of businesses they want to be known for handling.

For example, gambling, CBD and adult entertainment are problematic for a lot of banks, and they won't handle merchants in those industries. That makes them high-risk merchant accounts.

Be aware, however, that banks may charge you more than the independent merchant service provider. This really is an area where it pays to shop around and find a merchant service provider that doesn't have a lot of hidden fees.

Also, there are no other special designations for certain kinds of businesses. There's no secret account that your bank will give you because you're their favorite customer. You're either high-risk or low-risk.

What are the differences between high-risk merchant accounts and low-risk merchant accounts?

There are a few reasons merchant accounts get labeled as high-risk. For one thing, the age of the business is a factor.

New businesses are almost always labeled as high-risk just because of their age.

That designation can change as time goes by, but only if you don't meet any of the other factors below.

Another reason merchant accounts are considered high-risk is that their industry historically has a high number of chargebacks. For example, subscription services get hit with chargebacks because people sign up for the free trial, and they have to secure the trial with their credit card. They totally plan to cancel the trial the day before the first payment kicks in, but they forget. When they realize they've been charged, rather than cancel the subscription and take the hit for their own error, they ask the merchant to issue a chargeback to their bank to have the money credited to their account.

Other merchants are labeled as high-risk because they have a high sales volume, or they sell high-dollar items, such as high-end electronics, luxury items and even cars.

And, as we mentioned, some merchants have the type of business that banks worry will sully their reputation, such as gambling, CBD and adult entertainment.

A high-risk merchant account usually has these characteristics:

  • They accept multiple currencies (i.e., customers are in more than one country).
  • Their average credit card transaction is more than $500.
  • Their average monthly sales volume is more than $20,000.
  • They sell to countries associated with high levels of fraud (anywhere that's not the United States, Canada, Western Europe, Japan or Australia).
  • The business owner has a bad credit history.
  • They offer recurring or subscription payments.
  • They sell things like high-risk software, digital, tickets or seasonal items.

High-risk merchants usually pay more in credit card fees as well, which means you should reflect that in your pricing.

But on the plus side, if you are a high-risk merchant, you can sell all around the world, you can sell high-value items, and you can sell more than $2.4 million in credit card revenue.

Lauren Joyner

So, you see, being a high-risk merchant isn’t all that bad. The more successful you get, the more likely you could be a high-risk merchant anyway.

On the other hand, low-risk merchants don't have to deal with any of these issues, which is what makes them low-risk. But if the merchant were to start experiencing a higher-than-normal number of chargebacks, for example, or started recording a lot more transactions each month, they may get relabeled by their payment service provider and get dropped. In that case, the merchant will need to find a new payment service provider to work with.

A low-risk merchant account, among other things, usually has these characteristics:

  • They accept only one type of currency.
  • Their payment page is hosted by the payment service provider.
  • The average credit card sale is less than $500.
  • The average monthly sales volume is less than $20,000.
  • The business usually sells low-risk items, such as clothing, shoes or office equipment.
  • The business is located in a country that is considered low-risk (United States, Canada, Western Europe, Japan and Australia).
  • They have very few returns and chargebacks.

Basically, if you're not at risk of fraud, if you accept one currency, and you don't make too much money, you'll be a low-risk merchant.

What kinds of companies have high-risk merchant accounts?

Here are a few examples of high-risk merchants. It's not complete, but if you're on this list, you're going to be tagged as high-risk.

  • Adult entertainment and products
  • Attorneys
  • CBD
  • Cryptocurrency, FOREX and currency trading
  • Debt collection
  • Ecommerce and other CNP transactions (especially for high-dollar products like electronics)
  • Fantasy sports
  • Gambling and gaming
  • Gun dealers
  • Health and beauty
  • Hotels and lodging
  • High-price/high-dollar items
  • Medical practices
  • MLM and network marketing
  • Nutraceuticals
  • Online dating
  • Pharmaceuticals
  • Restaurants, especially those that deliver
  • Retail stores
  • Subscriptions, such as monthly and annual memberships
  • Travel providers
  • Vape merchants

Note: Just because your business type didn't appear on this list doesn't mean you're not high-risk. Your payment service provider will make that designation for you.

Just be aware — if one provider labels you as high-risk, they're all going to reach the same conclusion. If you were on the bubble because of past finances or the age of your business, you might find someone to bump you to low-risk. But no bank will ever label a gambling website or nutraceuticals dealer as low-risk.

What about alternative payment providers?

Person using credit card with their mobile phone

There are plenty of alternative payment service providers such as GoDaddy Payments, Venmo and PayPal. Some small businesses like using these payment providers because they don't want to deal with equipment fees. Or they don't do enough in sales to justify renting the processing equipment. Or they do informal transactions, like the high school kid who mows your lawn, farmers market merchants or — in my own case — my bass guitar teacher who lives 1,200 miles away.

The problem is that some of these alternative providers will withhold extra fees from your payments as a way to protect themselves from chargebacks.

That's because if you're hit with a chargeback, the money comes out of your bank account immediately. And since these alternative providers don't have access to your bank account, they just hold on to your money on the front end instead.

And since some chargebacks can happen as late as six months after the initial transaction, they hold your money for an extended amount of time.

To avoid the problem, payment providers like Square withhold as much as 30% of a company's monthly credit card revenue, which can be as much as several thousand dollars per month. The funds are withheld for as long as 120 days, and they're released month by month on a rolling basis. So July's revenue will be released in November, August's in December and so on.

So you might think you're avoiding the high-risk/low-risk merchant account issue, but to Square and the others, every account is a high-risk account and gets treated accordingly.

Next steps

When you're ready to open up a merchant account, speak to a few merchant service providers to find the one best suited for your particular business and the customers you serve. If you're not sure which kind of merchant account you'll have, get an assessment from your bank or the merchant service provider you've chosen. Look for ones that don't have a lot of hidden fees and low percentage fees for processing your transactions. Find one you can trust that has a lot of experience dealing with your kind of business.

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