A Brief Guide To High Risk Merchant Accounts

Merchant Account

For anyone that is unsure, this type of account is used by, what banks deem to be, risky businesses as a payment processing service. The reasons why a business may be deemed risky include having a long history of fraudulent activity, financial instability, a bad credit rating, and a high rate of charge backs.

As a result of being deemed high risk, these businesses are required to pay fees that are much higher than normal and be subject to a much greater level of scrutiny when attempting to obtain certain service due to the risk factors previously mentioned. 

Some merchant banks out there have rolling reserves in place (an amount of money to cover potential chargebacks) for the account of a high risk business. This is particularly true if the business has a demonstrable history of chargebacks and refunds. 

What businesses need a high risk merchant account?

When businesses apply for high risk merchant accounts they will be thoroughly assessed in order to determine how much risk they represent to the financial institute or bank that is providing them with their account. 

There are a number of different industries and sectors that financial institutions and banks deem to be high risk, including affiliate marketing, travel,charity, insurance, tourism, adult entertainment, and tattoo studios

For any business owners that operate within these industries and sectors and have been denied bank accounts previously, opting for a high risk merchant account is one way of being able to operate and do business.

Assessing businesses as high risk

Financial institutes and banks will look at a number of different things when assessing a business to determine whether or not it is high risk. Some of the factors that are taken into account include the following:

  • Income channel – this considers whether the business’ income comes in through the likes of pay on delivery or subscriptions. It also takes into account how long it takes from payment being received to goods or services being delivered. 
  • Creditworthiness – how creditworthy the owners and directors are is an important consideration, although poor creditworthiness can be offset when there are personal guarantees given.
  • Financial stability – how stable a business is financially is of significant importance.
  • Year of trading – the fewer years that a business has been trading for the more high risk it is deemed to be. Businesses that have been trading for a long time are likely to be seen as less risky.

The assessment of a business is done by using the following means:

  • Reputational risk – because financial institutions and banks rely greatly on the reputation that they have built up, they are wary about jeopardising this. This is why businesses doing unfavourable things are deemed high risk.
  • Regulatory risk – there exists some industries and sectors that are subject to a high amount of regulation which can be quickly and significantly changed. This level of unpredictability means that the businesses within these areas are unable to have stable business plans, thus making them more high risk. With more regulations comes more laws that can be potentially broken (either intentionally or unintentionally) which can lead to serious consequences. 
  • Credit risk – where a business operates within an industry where there is some sort of delay from when payment is made and when goods and services are delivered is considered to be of high risk. The reason for this is that a business can stop operating prior to being able to fulfil their orders and where this happens the acquirer takes over all responsibility. Examples of where this happens is with businesses in the dropshipping, tour operator, and airline carrier industries.

For any businesses that are deemed to be high risk then it is highly likely that traditional high street banks will not accept their application. Where this does happen than a high risk merchant account is very helpful and allows a business to operate. Another way that business owners can help their business perform to its best abilities is by employing a full service digital marketing agency like SERP.

What are the highest risk business industries and sectors?

These include the likes of VPNs, tourism and travel, holiday clubs and timeshares, tattoo studios, pyramid selling, PPI services and merchant accounts, online gambling and gaming, nutraceuticals, money transfer, watches and jewellery, investment schemes, insurance, gambling, file sharing, e wallets, direct sales, escort and dating services, debt management and credit repair, CBD oil, affiliate marketing, adult entertainment, alcohol, advertising services, charities, cryptocurrency, collection agencies and debt management, drug products, tickets and events, foreign exchange services, wellness and health products, hosting services, lender merchant services, bars and nightclubs, online auctions, payday loans, phone cards, downloadable software, web development, e cigarettes and tobacco, car parts and vehicle sales. 

Applying for a high risk merchant account

When a business applies for a high risk merchant account they are required to provide a number of different pieces of documentation / information. These include the following things:

  • History of processing, including chargebacks, number of overall transactions, processing volume etc. 
  • Where a business requires a license then they are required to provide their license number along with details of the organisation that it was provided by. 
  • Shareholder certificates.
  • An organisation chart of the business showing its structure.
  • The business director’s / owner’s identification.
  • A recent bank statement – this must show the name of the business along with their bank account details.
  • A certification of incorporation.

It is also important that the business’ website contains the following information and or incorporates the following things:

  • Use of HTTPS and secured via an SSL certificate
  • Product delivery information, including timings and methods
  • Contact information for support / customer service
  • Return / refund policy
  • The legal name of the business

The exact procedure of applying for a merchant account can and does differ from provider to provider, although the above list goes through what as an absolute minimum businesses will be asked for during their application. For instance some financial institutions and banks insist on performing a credit check where as some don’t.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.