A high risk merchant account is a merchant account or payment processing agreement that is tailored to fit a business which is deemed high risk or is operating in an industry that has been deemed as such. These merchants usually need to pay higher fees for merchant services, which can add to their cost of business, affecting profitability and ROI, especially for companies that were re-classified as a high risk industry, and were not prepared to deal with the costs of operating as a high risk merchant. Some companies specialize in working specifically with high risk merchants by offering competitive rates, faster payouts, and/or lower reserve rates, all of which are designed to attract companies which are having difficulty finding a place to do business.
Businesses in a variety of industries are labeled as ‘high risk’ due to the nature of their industry, the method in which they operate, or a variety of other factors. For instance, all adult businesses are considered to be high risk operations, as are travel agencies, auto rentals, collections agencies, legal offline and online gambling, bail bonds, and a variety of other online and offline businesses. Because working with, and processing payments for, these companies can carry higher risks for banks and financial institutions they are obliged to sign up for a high risk merchant account which has a different fee schedule than regular merchant accounts.
A merchant account is a bank account, but functions more like a line of credit which allows a company or individual (the merchant) to receive payments from credit and debit cards, used by the consumers. The bank that provides the merchant account is called the ‘acquiring bank’ and the bank that issued the consumer’s credit card is called the issuing bank. Another important component of the processing cycle are the gateway, which handles transferring the transaction information from the consumer to the merchant.
The acquiring bank may also offer a payment processing contract, or the merchant may need to open a high risk merchant account with a high risk payment processor who collects the funds and routes them to the account at the acquiring bank. In the case of a high risk merchant account, there are additional worries about the integrity of the funds, and the possibility that the bank may be financially responsible in the case of any problems. For this reason, high risk merchant accounts often have additional financial safeguards in place, such as delayed merchant settlements, in which the bank holds the funds for a slightly longer period to offset the risk of fraudulent transactions. Another method of risk management is the use of a ‘reserve account’ which is a special account at the acquiring bank where a portion (usually 10% or less) of the net settlement amount is held for a period usually between 30 and 180 days. This account may or may not be interest-bearing, and the monies from this account are returned to the merchant on the standard payout schedule, once the reserve time has passed.
Payments to a high risk merchant account are deemed to carry an increased risk of fraud, and an increased risk of chargeback, refund, or reversal. For example, someone may use a stolen or forged credit or debit card to make purchases, or a consumer might attempt to execute an advance-authorization transaction (like renting a car or reserving a hotel), using a debit card with insufficient funds. This increases the risk for the bank and the payment processor, as they will have to deal with the administrative fallout of dealing with the fraud. Ecommerce can also be a risk factor, because businesses do not actually see an imprint credit card; they take orders over the Internet, and this can up the risk of fraud considerably.
When a merchant applies for a merchant account with a bank, payment processor, or other merchant account provider, there are many factors to consider before settling on a particular merchant provider. It is often possible to negotiate lower rates, and one should always request multiple quotes before choosing which high risk merchant account provider to use for their processing needs.