Businesses of all sizes and industries are increasingly turning to online payment processing to meet the needs of their customers. Whether you run an e-commerce store, a subscription-based service, or any other online business, having a merchant account is essential. However, not all merchant accounts are created equal. They can be classified as either low risk or high risk, depending on various factors that impact the associated risks and requirements. In this comprehensive guide, we will delve into the differences between low risk and high risk merchant accounts, shedding light on what they entail and how they can affect your business.
What are Merchant Accounts?
Before we dive into the specifics of low risk and high risk merchant accounts, let’s first understand what merchant accounts are. A merchant account is essentially a business account that enables you to accept credit and debit card payments from your customers. It serves as a secure gateway that facilitates the processing of these payments, ensuring that funds are transferred from the customer’s account to your business account. Merchant accounts are typically obtained through banks or payment service providers (PSPs) who act as intermediaries in the payment process. They allow businesses to accept card payments both in-person through point-of-sale (POS) systems and online through e-commerce platforms or payment gateways.
Low Risk Merchant Accounts
A low risk merchant account is associated with businesses operating in industries that have a lower likelihood of chargebacks, fraud, or other risks. These industries often include retail, professional services, software development, and many more. Low risk merchants are perceived as more stable, with lower transaction volumes and fewer compliance concerns. Obtaining a low risk merchant account comes with several advantages, including:
Lower Transaction Fees
One of the key benefits of being classified as a low risk merchant is the ability to enjoy lower transaction fees and processing rates. Low risk businesses are considered to have a lower risk profile, which enables payment processors to offer more competitive pricing. This can be particularly beneficial for businesses with smaller profit margins or high transaction volumes, allowing them to maximize their revenue.
Simplified Underwriting Process
Acquiring a low risk merchant account is generally more straightforward compared to high risk accounts. Payment processors typically have less stringent underwriting requirements for low risk merchants, making the application and approval process faster and more efficient. This means that businesses can start accepting payments more quickly and effortlessly, without the need for extensive documentation or credit checks.
Limited Rolling Reserves
Unlike high risk merchant accounts, low risk accounts usually face minimal or no rolling reserves. Rolling reserves are a predetermined percentage of a merchant’s sales that is held by the payment processor for a specific period, typically three to six months. They serve as a form of security against potential chargebacks or other risks. However, low risk merchants, due to their lower risk profile, are often exempted from this requirement, allowing them to have immediate access to their funds.
Wide Range of Processing Options
Another advantage of having a low risk merchant account is the availability of a wider range of payment processors and service options. Low risk businesses have greater flexibility in choosing their payment processing partners, with access to both traditional and specialized providers. This allows merchants to select the most suitable solution for their specific needs, whether it’s a comprehensive payment gateway, an integrated POS system, or a combination of different payment channels.
High Risk Merchant Accounts
On the other end of the spectrum, high risk merchant accounts are associated with businesses operating in industries that have a higher likelihood of chargebacks, fraud, legal restrictions, or other factors that may pose risks to financial institutions and payment processors. These industries typically include online gambling, adult entertainment, pharmaceuticals, travel services, and telemarketing, among others. High risk merchants face unique challenges due to factors such as regulatory scrutiny, customer disputes, high transaction volumes, and reputational risks. Here are some key characteristics of high risk merchant accounts:
Higher Transaction Fees
Due to the elevated risks involved, high risk merchant accounts usually attract higher transaction fees and processing rates. Payment processors charge higher fees to compensate for the additional liabilities and safeguards they implement to mitigate the risks associated with high risk businesses. These fees can vary depending on the specific industry and the individual merchant’s risk profile.
Stricter Underwriting Requirements
Acquiring a high risk merchant account can be more challenging compared to low risk accounts. Payment processors conduct thorough underwriting assessments to evaluate the level of risk associated with each business. Factors such as the industry, financial stability, creditworthiness of the business owner, and chargeback ratios are carefully analyzed. These stricter underwriting requirements are in place to protect payment processors from potential losses and ensure the overall stability of the payment ecosystem.
To further mitigate potential losses from chargebacks or other risks, payment processors often impose rolling reserves on high risk merchants. A rolling reserve is a percentage of the merchant’s sales that is held by the processor for a specified period, typically three to six months. It acts as a form of collateral or insurance against potential financial liabilities. The funds held in the rolling reserve are gradually released to the merchant over time, providing an added layer of protection for the payment processor.
Limited Processing Options
Some traditional payment processors may be hesitant to provide services to high risk businesses due to the perceived risks involved. As a result, merchants in high risk industries often rely on specialized high risk payment processors that cater specifically to their needs. These specialized providers have a deeper understanding of the unique challenges and requirements of high risk businesses, offering tailored solutions to ensure smooth and secure payment processing.
Can a High Risk Merchant Become a Low Risk Merchant?
While the classification of low risk or high risk is primarily based on the inherent risks associated with a specific industry or business, there are certain measures that high risk merchants can take to potentially reduce their risk profile. It’s important to note that not all factors contributing to a high risk classification can be changed, such as the industry itself or the way customers use the products or services. However, there are steps that merchants can take to lower their risk profile:
Reduce Chargebacks with Strong Fraud Prevention Tactics
One of the primary concerns for high risk merchants is the potential for chargebacks, which can result in financial losses and reputational damage. Implementing robust fraud prevention tactics can help reduce the risk of chargebacks. Utilizing advanced fraud detection tools, employing secure payment gateways, and implementing stringent verification processes can all contribute to minimizing fraudulent transactions and chargebacks.
Focus on Generating Stable Revenue Streams
High risk businesses often have irregular or sporadic revenue streams, which can contribute to their classification as high risk. By focusing on generating stable revenue streams instead of relying on occasional large transactions, businesses can demonstrate a more consistent financial track record. This can help improve their risk profile and potentially lead to a reclassification as a low risk merchant.
Demonstrate Financial Stability and Creditworthiness
Financial stability is an important factor in determining the risk level of a merchant. High risk merchants can work towards improving their financial stability by maintaining healthy cash flow, reducing outstanding debts, and ensuring timely payments to suppliers and creditors. Additionally, improving personal credit scores can also have a positive impact on the overall risk assessment for the business.
Implement Industry Best Practices
Adhering to industry best practices and compliance standards can help high risk merchants demonstrate their commitment to operating ethically and responsibly. This includes maintaining accurate records, providing transparent pricing and terms, and complying with relevant regulations and guidelines. By showcasing a strong commitment to compliance, high risk merchants can enhance their reputation and potentially mitigate some of the perceived risks associated with their industry.
The distinction between low risk and high risk merchant accounts is significant. While low risk merchants enjoy lower transaction fees, simplified underwriting processes, and a wider range of processing options, high risk merchants face higher fees, stricter underwriting requirements, and limited processing options. However, it’s important to note that the classification of low risk or high risk is not necessarily permanent. High risk merchants can take proactive steps to reduce their risk profile and potentially transition to a low risk classification over time. By implementing strong fraud prevention tactics, focusing on stable revenue streams, demonstrating financial stability and creditworthiness, and adhering to industry best practices, high risk merchants can improve their chances of obtaining a low risk merchant account and enjoy the associated benefits.
For more information on Payment Processing for your business, reach ATXPAY. They understand that every business is unique and that risk profiles can vary. We strive to provide tailored payment solutions and work with merchants across a wide range of industries, including those typically considered high risk. Our experienced team is here to support you in navigating the complexities of payment processing and finding the best solution for your business. Contact us today to learn more about how we can help you achieve your payment processing goals.
For a 30 min “FREE” one on one consultation on how ALTTRIX and ATXPAY can help your business with payment processing with competitive transaction fees and compliance, reach
out to them at their website. Their support team is on stand by to help with setting up an appointment,
Peter “Jonathan” Wilcheck
View Tech News
Contributing Editor – Payment Processing SME
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