High Risk Credit Card Processing and High Risk Merchant Account Rates

High risk credit card processing can be uncharted waters when it comes to obtaining a merchant account.

For many businesses, it’s already confusing enough to understand how credit card processing works. But the “high risk” credit card processing aspect definitely wrench into the equation. Dealing with a high risk merchant account can be complicated.

There are so many underlying factors to determine business is considered high risk in the eyes of credit card processors.

Credit card processing companies rarely giving you an explanation as to why you have high risk merchant account, and what that entails. Many business owners feel like they’ve been left the dark on how high risk credit card processing works.

How much should a high risk business be paying in credit card merchant fees? Why is my business classified as high risk? Should my business have a rolling reserve?

These are just a few of the questions you might be asking yourself, which is why we created this guide. Read on to learn more about high risk credit card processing, high risk merchant accounts, and find the answers to your questions on these topics.

What is High Risk Credit Card Processing?

High risk credit card processing allows businesses with a high risk merchant account to accept and process credit card payments. Compared to traditional credit card processing, high risk credit card processing involves more in-depth underwriting and has a stricter approval process.

Banks view certain types of businesses as a higher risk than others. As a result, they impose higher processing fees or keep a rolling reserve on the high risk merchant account.

Here’s a good analogy to explain how these works.

Let’s say you walk into a bank and want to get a loan for your business. The bank isn’t just going to hand you money without doing their homework first. Banks need to ensure that they’re going to get the money back, plus interest for their services. So they look at factors like your credit history and revenue to determine if you qualify for the loan, and what the loan terms will be.

The same situation applies when it comes to credit card processing.

When a business is trying to obtain a merchant account, regardless of the products or services sold, everything goes through an underwriting process. Banks need to evaluate the principal owner of the business and the type of business conducted, to evaluate the risk involved with approving your high risk merchant account.

Most large credit card processing companies won’t accept high risk merchant accounts, and will pawn them off to small subsidiaries or ISOs. This limits the options available for a businesses if their banks aren’t comfortable with approving them for a high risk merchant account.

Since it’s tough to get approved for a high risk merchant account, many high risk merchants  tend to go with the first credit card processing company that decides to accept them. This can lead to rate gauging, long-term contracts, lease agreements, rolling reserves, and liquidated damages—which are all things you want to avoid.

What is a High Risk Merchant Account?

A high risk merchant account is a specific type of merchant account that’s designed for businesses that pose a higher risk to the merchant account provider. This “high risk” designation can be due to the merchant’s industry, previous chargeback history, bad credit, fraud history, or high likelihood to default on payments.

It’s also possible for new businesses to be considered a high-risk to merchant account providers because they don’t have a proven history of low chargebacks and fraud prevention.

High risk merchant accounts are designed for businesses that do not meet the standard requirements of credit card processing, and need more attention when getting approved.

What’s a Good Rate For High Risk Credit Card Processing?

Anything below 4% is typically considered to be a good rate for high risk merchant accounts. But some high-risk merchant account providers can charge anywhere from 3.95% to 5% depending on the terms of the contract.

Ideally, a high-risk merchant should aim to get their rates lowered to less than 3.5% or even below 3%.

Beyond the basic per-transaction fees, high-risk merchants should look at the big picture when evaluating the total cost to accept card payments. For example, other monthly charges (like statement fees, equipment fees, PCI compliance fees, etc.) can really add up and increase your effective rate—which represents the true cost of how much you’re paying to accept credit cards. 

That’s why its always in your best interest to let a professional merchant consultant review your statements to determine if you’re actually getting a good rate or if there’s room for improvement.

High Risk Credit Card Processing Fees

High risk credit card processing is going to inevitably cost more than a low risk credit card processing merchant account because if the bank assumes more risk, they want to ensure they are compensated appropriately.

However, if you know how to lower your credit card processing fees, you can negotiate a fair credit card processing rate that will not hand tie your business.

Most credit card processing companies in the high risk field are going to charge you over 3.5%, have a three year contract term, an early termination fee or liquidated damages clause, and at times, a rolling reserve.

• Early Termination Fee – a credit card processing fee charged if you cancel your merchant account before the contract term is finished.
• Liquidated Damages – a credit card processing fee charged for the average amount of credit card merchant fees charged multiplied by the remaining amount of time (typically months) left on the term of the contract. It’s a way for high risk credit card processing companies to mitigate risk but they are not always enforceable.
• Rolling Reserve – a cash reserve that withholds a small percentage of all of a merchant’s gross sales in a non-interest bearing account for a predetermined amount of time before releasing the fund to a merchant.

This can rage anywhere from 5-20%.

When it comes to low risk merchant accounts, typically the reoccurring monthly fees are low or minimal, but that is not the case with a high risk credit card processing merchant account.

You can expect to pay on average ~$100 per month for a high risk merchant account, on top of a $500 credit card merchant fee to Visa and MasterCard, EACH, on top of potential sign up or start up credit card processing fees.

When it comes to the type of credit card processing pricing structure, the majority of high risk credit card processing companies will put you on what is called a Tiered or Bundled Plan. These are the worse pricing within the credit card processing industry.

They leverage this pricing structure instead of Interchange Plus Pricing, which happens to be the best pricing structure within the merchant service industry.

If your business if offered Interchange Plus Pricing, you are moving in the right direction.

High Risk Merchant Account Categories

A huge issue with high risk credit card processing is what determines if a business is high risk or not. Ultimately, this decision comes down to the acquiring banks and their evaluation process.

Every credit card processing company is different and every credit card processing company has different levels of risk that they are willing to take.

While the exact criteria is subjective, the following factors below will help you understand what credit card processing companies look at when deciding if a business falls into a high risk merchant account category.

Chargeback Ratio and Fraud Exposure

If the type of business you conduct has a history of high chargebacks compared to the amount of transactions you process every month, your business is most likely going to be considered a high risk merchant.

The threshold that credit card processing companies look at is if you are over 1% of chargebacks, your business will be considered a high risk merchant. You’ll also incur chargeback fees here.

This has nothing to do with a business owner personally, but strictly on your customer’s behavior and the product or service rendered.

Non US Business

If a business is located overseas or outside of the United States, and the majority of the products or goods sold take place within the United States, a credit card processing company can consider you high risk.

It comes down to the acquiring bank, but because of different regulations via each country there is more risk involved.

Products and Services Sold

If the product or service being sold is considered illegal, your business is high risk.

Online marijuana sales, pornography, illegal subscription drugs, and protection are some to name a few. These are all considered high risk industries in the eyes of payment processors and merchant account providers. More on this below.

Business Practices

There are companies out there that sell a product or service that is not what it appears to be. We call this a scam.

If a company is trying to open a merchant account to scam customers into paying for something that is not real or legitimate, your business will be considered high risk.

Credit Score

If the principal owner of a business has a credit score that resides below 400, a credit card processing company may consider your business high risk.

Just like with business or personal loans, if the underwriting team thinks you are a high risk and they will not receive the money back, they flag you as a high risk merchant account.

High Ticket Sales

A ticket sale is another term for a transaction amount. If your business accepts large size transaction amounts, exceeding $3000/ transaction, a credit card processing company may consider your business high risk.

The reason for this is the risk of that transaction turning into a chargeback, and the transaction size being higher than the norm, it results in further risk for the bank to accept.

High Risk Merchant Account Industries

Some common industries that fall into the high risk credit card processing category include:

• Online Gambling or Casinos
• Telemarketing of VOIP Services
• Pharmaceuticals
• Drug Stores
• Pornography
• Adult materials
• Escort Services
• Airline Tickets
• Online Ticket Agencies
• Crypto currency Trading
• Online Dating Services
• Psychics
• Magazine subscriptions
• Seminar Based Businesses
• MLM (Multi-Level Marketing)
• Tobacco Sales
• E Cigarettes
• CBD
• Marijuana Dispensaries
• Time-shares
• Computer Software
• IT Services
• Online Firearm Sales
• Weapon Sales
• Bail Bonds
• Debt Collection
• Credit Repair
• Third Party Services or Brokering Services
• Auction Sales
• Check Cashing
• Consulting Services
• International Merchants
• TMF Merchants (Terminated Merchant File List)
• Pawn Shops
• Vacation Rentals

If your business operates in one of these industries, there’s a good chance you’ll need to obtain a high risk merchant account. Then you’d need to find a processor that works with high risk businesses. PaymentCloud is just one of the many examples available on the market.

Final Thoughts on High Risk Merchant Accounts

High risk merchants can still accept credit cards. But if you fall into a high risk merchant account category, be prepared to for extra scrutiny during the underwriting process from a payment processor.

Not every payment provider will work with you, depending on your industry or circumstances. That’s ok. There are plenty of high risk payment processors out there that specialize in high risk accounts.

Be careful however, as these high risk credit card processing companies will charge you a higher markup costs, over the interchange rate, which could end up being even more expensive than Tiered pricing.

A general rule here is that if you are a high risk business, credit card processing companies are going to try and charge you double what they would a low risk account.

Yes, a high risk merchant should expect to pay a bit more on credit card processing than the average business. But that doesn’t mean you should be taken advantage of by a high risk merchant account provider.

Make sure to negotiate your terms thoroughly before signing the dotted line. If you’re already locked into a contract, contact our team here at Merchant Cost Consulting. We’ll review your high risk account and negotiate your rates directly with your processor.