Carving out success as a high risk merchant can seem very daunting. The term “high-risk” itself carries negative connotations. How the online card payments industry determines high risk is, however, a much broader and shifting process than people assume. You may be surprised to find your business labelled high-risk simply because of its youth, geographic market or high volume of online transactions.
Don't miss our explanation in layman's terms - what is a high risk merchant account and why is it "risky"?
One thing’s for sure; high risk merchants are charged more for credit card transactions or are more likely to have their application declined without special explanation.
But succeeding as a high-risk merchant is possible; here are 9 solid tips to help you succeed:
Yes, this one might sound obvious. But the rise of e-commerce, m-commerce and online business is swelling the list of high risk business types and factors. No-one wants to find out that they’re considered high-risk at the underwriter’s interview. While exact criteria for what’s high-risk vary from provider to provider, these factors are usually considered:
Noticeable chargeback or fraud rateIf your business type is known for a high rate of either chargebacks or even fraud, you’ll most likely be deemed high-risk, too. This judgement isn’t personal; it’s usually based on your customers’ habitual behaviours.
Risky Products or servicesThis factor is most obviously associated with high-risk businesses. Selling diet pills or products with exaggerated promises are the glaring examples, but there are many others.
Long lead timeHaving the fulfilment of service or product delivery set too far in future, long after the provider has already settled the money to your bank account.
Misleading your clientsLack of clear presentation on charge amounts and terms, especially in recurring transactions.
Not a real businessUsing shell companies and selling mostly internationally is becoming risky. Recent compliance regulations in Europe put pressure on acquirers and providers by stricter controls on your actual place of business. In addition, cross-regional sales are becoming limited, prohibited, or come with additional surcharges because providers face huge fines.
High transaction amountsIf your business routinely accepts uncommonly high-cost purchases via credit card, you could be flagged as high-risk simply because a single chargeback could already mean a large dip on your balance.
Bad credit and financialsThis factor focuses on your business finances. If, for whatever reason, you have a low credit rating and insufficient financial backing, some processors are more likely to lump you in the high-risk category.
Your new payment processor will certainly ask for previous history, including your company financial statements, explanation why your previous accounts got terminated. They will want to review your sales practices, if you have a history of chargebacks or high refunds.
- A persistently high or rising chargeback ratio
- Often switching or attempting to switch processors
- Bad credit, low or no credit rating
- Financial insecurity, or main source of earnings coming from elsewhere
- Sharing an account with another merchant
- If have you been blacklisted on the MATCH list or Terminated Merchant File (TMF)
When a high-risk merchant has his account closed, a high chargeback ratio is usually at fault. Most payment processing companies only accept merchants with a chargeback ratio less than 1%. Keep your chargeback ratio low by:
a) Making your refund policy clear on the receipt and direct customers to contact you directly if they are unsatisfied. A clear refund policy will also stand to you in case of invalid disputes.
b) Look for red flags that indicate fraud. Ask for information that a hacker or thief is unlikely to have, such as the card CVV obviously, but more importantly the 3D Secure code. Verify that the shipping address matches the card issuer’s provided contact information.
c) Use a chargeback alert system to warn you of chargebacks. This gives you some time to issue a full refund before the chargeback is initiated.
d) Send follow-up emails or a phone call after sales to confirm a customer is happy.
READ MORE: How to prevent chargebacks
A rolling reserve is one way the payment provider protects itself from potential fraud, uncollected fees, high chargebacks, or other incidents where they may lose money. Based on the terms of your merchant agreement, the payment provider will withhold a percentage of your daily revenue for a specified term, and then gradually release the funds. Typical reserve is set at 10% for 180 days.
High risk businesses often have multiple merchant accounts to allow greater flexibility. Not only can you use spread risk by rotating MIDs (Merchant Accounts) to keep within monthly limits, there’s a backup in case an account gets shut down.
Activating multiple MIDs through one provider, if they are connected to more acquiring banks, will save you time and energy. You maintain a single point of contact, build a stronger relationship and get a better overall customer experience.
There are many choices for high-risk merchants today, but not all are equal. Make sure you choose the right processor by selecting a company that answers your questions within 24h and providers full transparency on all fees. And, very importantly, read the contract through in detail. Make sure your payment provider is based in a reputable country on a well-established acquiring bank, with a gateway which has PCI Level 1 compliance. Ask your provider about additional security layers such as 3D Secure and anti-fraud tools.
High risk merchants are always associated with higher chargeback levels. To stay away from closure or the fraud and Visa / MasterCard penalties, try to find a Payment Services Provider (PSP) with a pro-active chargeback prevention service.
If you absolutely can’t avoid high chargeback rates, then ask your Payment provider if they can tolerate higher percentages (2-4%), by placing you on a shared MID or a Payment Facilitator MID. Otherwise, you risk being terminated as a merchant once your chargeback rate exceeds the 1-2% level.
That said, don’t be too picky when you choose your new provider. As a high-risk merchant, your options may be limited. All going well, you can renegotiate your reserves, rates, and other terms with your processor in a few months when a degree of trust has been built.
If you need help obtaining a new account or have any other enquiry, do not hesitate to Get in touch with MerchantScout’s team of experts today.