High-risk businesses span numerous industries, but they all have one thing in common. Conventional financial institutions don’t want to work with them due to the financial risks involved.
In a bid to circumvent this challenge, they turn to high-risk merchant account providers who provide them with somewhat seamless financial transaction processing services. However, even this comes at a cost. In exchange for their services, high-risk merchants and regulatory bodies impose high fees and stringent regulations that make it challenging for high-risk merchants to do business.
In this article, we explore some of the major challenges of high-risk credit card processing. We’ve also thrown in a few solutions to help you overcome some of these challenges.
A high-risk business is any business that carries a high potential for financial loss and legal liability. This can be due to business-related problems, such as high chargeback rates, financial instability, bad credit, legal problems, or potential for fraud.
Businesses can also fall under the high-risk categorization due to the nature of the industry they operate in. For instance, businesses in the cannabis, firearms, and adult entertainment industries are widely considered high-risk due to the numerous regulations imposed on the industries.
These industries also carry a high potential for legal problems, prompting traditional financial institutions like banks to refrain from working with them to protect their reputation and safeguard against financial losses.
Like all merchant account providers, high-risk credit card processing companies have regulations that impact the businesses that rely on their services. Some of the most notable challenges for high-risk credit card processing include the following:
Credit card processing companies don’t offer a one-size-fits-all solution for high-risk businesses. Therefore, high-risk merchants must first evaluate many different payment processors before settling down on a suitable partner.
Unfortunately, this process isn’t quite straightforward, and businesses have to follow certain criteria to ensure they choose the right partner. Some of the most notable factors to consider when choosing a suitable payment gateway include:
High-risk credit card companies have different pricing models for merchant accounts. Some payment processors may require you to pay an account application fee, with most processors waiving this fee anyway. What’s most troubling are the fees that come after opening your account. These fees can include annual fees, refund fees, chargeback fees, PCI compliance fees, reserve fees, and early termination fees.
To safeguard your business interests as a high-risk merchant, it is advisable to choose an account provider with the most reasonable fees so they don’t affect your profit margins. While you’re at it, you should consider working with payment providers like SharkPay Crypto, who have incredibly low processing fees and don’t charge account application fees.
High-risk merchants mostly deal with digital transactions. These transactions are prone to fraud and data breaches, leading to financial losses, legal liability, and diminished customer confidence.
To minimize these security challenges, you should work with PCI-compliant merchant account providers who offer enhanced fraud protection services, including encryption, tokenization, fraud management tools, and hosted payment forms.
Integration with the POS, website, and applications of your business can help you process transactions seamlessly. Most merchant account providers’ integrated systems also feature accounting software that can automatically report any new sales and keep records, thus facilitating accurate record-keeping.
That said, you also have to ensure that your merchant account provider’s payment processing technology is compatible with your existing hardware and software.
Most high-risk businesses, especially those operating online, run 24/7. As such, they process transactions at different times and may require support, even at odd hours. Therefore, you want a payment processing account provider that can offer customer support services 24/7 to help you solve issues that may arise.
Every merchant account provider has a unique payment contract. These contracts stipulate contract length and termination requirements, processing fees, and whether or not you’re required to buy payment processing equipment like POS systems. They also indicate any required sales quotas, volume caps, minimum and maximum transaction amounts, and other limitations.
Reading these contracts can help you determine whether a merchant account provider is right for your business.
All merchants want to grow their businesses. For instance, you may have a brick-and-mortar store that you plan to expand into the online space and vice versa. Therefore, you need a merchant account provider that supports payment technologies that can help you scale your business.
In this regard, you need a payment processor that specializes in multiple payment channels, including online payment gateways, point-of-sale systems, virtual terminals, cryptocurrency, and mobile credit card processing. You also need a partner that supports all payment types, such as credit and debit cards, gift cards, Apple Pay, Google Pay, and e-check.
Despite the wide availability of high-risk merchant account providers, securing an account can be quite challenging for high-risk businesses. Because, like regular banks, high-risk merchant account providers also want to protect themselves from financial losses and legal liability.
Opening a high-risk merchant account follows a similar procedure to that of a regular low-risk account but with more underwriting. First, merchants have to choose a suitable payment processing account provider, then fill out an application form.
If they are considered too high-risk or don’t qualify for any number of reasons, including low credit scores and negative business history, high-risk merchants may get rejected at this stage. Some merchant account providers may also impose unsuitable fees and regulations that may not be reasonable for small high-risk businesses.
As a high-risk merchant, you already expect to pay high processing fees, but by how much? If a significant portion of your sales goes into processing your transactions, that might negatively affect your profit margins. Therefore, you need a credit card processing provider that strikes a balance between reliability and affordability, especially if you run a small business.
Some credit card payment service providers support selected payment processing features. For instance, some payment processors support POS payment processing, while others only support credit card payments. This means that you may have to use multiple account providers to process payments. Eventually, this racks up your processing costs and increases the complexities of running a business.
On the bright side, numerous merchant account providers offer multichannel, integrated payment platforms that enable you to consolidate all your payment processing needs under one platform, reducing complexities and costs.
Rolling reserves are a basic requirement for most high-risk businesses. They serve as a safety net that allows merchant account providers to protect themselves from financial losses arising from chargebacks. These reserves are typically refunded to your bank account once the period stipulated in your credit card processing provider’s contract elapses.
While they’re not necessarily a bad thing, rolling reserves can significantly limit the amount of money a business has in hand. In most cases, rolling reserves account for 5% to 10% of your monthly sales revenue. Credit card processing companies can hold these funds for six-month or one-year periods, thus affecting your financial reserves.
In 2021 alone, chargebacks and fraud cost merchants $20 billion in losses. Some of these chargebacks result from fraudulent schemes from unscrupulous customers. What’s worse is there is no sure way to protect your business from chargebacks and fraud, especially if you run an online subscription-based business.
On the bright side, most high-risk merchant account providers offer fraud filtering and chargeback protection services that help flag and fight illegitimate chargebacks.
There’s no shortage of the issues you may experience as a high-risk merchant looking to process credit card payments. However, with a little due diligence, you can limit and even overcome most of these challenges. Here are a few tips for avoiding challenges for high-risk credit card processing.
Before choosing a merchant account provider, you first need to understand what you’re paying for. Some high-risk credit card processing providers have hidden fees and may charge for services not initially disclosed in your contract.
To avoid this, you need to consider the payment processing provider’s pricing model. For instance, payment processors who work on a tier-based system charge different fees for varied transactions, which may end up costing you more. Therefore, it is advisable to go for a payment processing provider that works on a flat-rate pricing model. This way, you’re not plagued by the uncertainties of pricing models and hidden processing fees.
Paying exorbitant processing fees can affect your profit margins and make it hard to keep up with the competition. While there are mandatory fees like interchange and transaction fees, payment processing providers often include additional processing fees like setup fees, PCI compliance fees, account maintenance fees, and statement fees.
While some of these may be necessary (like PCI compliance), others may not add value to your business, thus necessitating the need to choose a payment processing provider that offers flat-rate payments.
PCI compliance secures your credit card processing information and protects your business against fraud. In addition to PCI compliance, you should also work on providing clear, accurate descriptions of your products and services and respond to customer queries promptly to prevent chargebacks. This way, you’ll improve customer satisfaction and mitigate financial losses.
High-risk businesses face numerous challenges, both in running their business and facilitating credit card processing for payments. Fortunately, most of these challenges can be prevented by choosing the right partner and managing your customer interactions and modes of service delivery.
