High-risk credit processing is defined as merchant accounts that banks as well as businesses do not prefer to do deal with. It is a rather broad term that can indicate a poor credit on the merchant’s behalf or can be associated with various business segments for which banks and other financial institutions do not wish to participate in.
Prior to accepting credit card payments, a business is supposed to have a merchant account with an acquiring bank. Merchant accounts can be divided into two categories: high risk and low risk. A high-risk payment is only required if the business is suspected to be risky.It is important to remember that every individual sees the term “risk” in a different light for varied business types.
Companies or individuals with bad credit may be turned down by one institution, but may be welcomed by another. Typical reasons why financial institutions reject merchants is due to higher risk of potential scam charges.
The company on its own may have a low risk of fraud, but it could be because of the merchant’s inconsistent status with the social worth of an institution. Examples of high-risk credit card processing companies include adult websites, established legal gaming, prepaid telephone cards, telemarketing, dating services, travel businesses, high-risk websites offerings, and e-commerce businesses.
Problems with High-Risk Credit Card Processing
When a business is labeled as having “high risk”, the following disadvantages can be expected.
• Extra fees – Since processors assume that chargebacks are unavoidable for high-risk merchants; they charge extra fees in order to compensate for the high risk involved. If your business is labeled as high risk, you can expect to pay somewhere between 3.5% and 4.5%, whereas the regular processing fees lies between 1.5% and 2%.
• Extra chargeback fees – Similar to paying extra regular fees, all high-risk merchants are required to pay increased chargeback rates. In addition, any high-risk merchant who walks into an extra chargeback environment will have to pay even more.
• Income-stealing rolling reserves – A merchant account reserve is generally required by a high-risk payment processor. This reserve is used by the acquiring bank in times of emergencies in order to safeguard its assets. In the case of a chargeback filing against a company where the merchant fails to pay back the amount, the reserve will be utilized to cover any losses. A lot of high-risk merchants keep a rolling reserve, where part of the monthly sales are kept in reserve and then released gradually after a certain amount of time. Even though the funds present in the reserve are the merchant’s, they cannot be accessed after a certain time period has passed, which can result in serious cash flow issues.
If you have been deemed a high-risk merchant, then you need to find the right high-risk credit card processing company that will help you conduct safe transactions and offer the right solutions for your credit card processing.