Differences Between High Risk and Low Risk Account Merchants

Wednesday, November 27th, 2019

Running a business today requires you to give your customers the convenient option of paying with debit and or a credit card. If you are an eCommerce business owner, this can be the only way you can get paid. If you are just starting out, you can certainly begin processing payments by using a payment service provider (PSP) such as Paypal or Square. However, once your business starts to grow, you will want to progress to a full-service merchant account.

Ideally, merchant account providers would treat all businesses equally, however, the reality is that this is simply not the case. Larger businesses that produce high volumes enjoy lower processing rates and generous contract terms. Businesses are also judged by the level of financial risk they pose to their credit card processor.

All merchant service providers will make the determination of whether or not your business falls into the high-risk merchant category.

So what constitutes a high-risk merchant?  Here are some of the characteristics:

• Your industry has a high chargeback ratio
• You handle a substantially high rate of fraud
• Your business is new and doesn’t have a good reputation
• Your company doesn’t have financial stability
• As a merchant, you have poor credit
• The majority of your customers buy beforehand and the product or service is consumed shortly after that.
• You accept multiple currencies
• Average monthly sales volume is more than $20,000
• An average credit transaction is more than $500
• You offer recurrent or subscription payments

If you are categorized as a high-risk merchant, the processor can either refuse to offer you a merchant account, or you will be approved but under considerably higher rates and fees. Other processors offer crippling terms that no business owner would want to lock themselves into. In addition, there will be slower payouts and holds will most likely occur.

On the contrary, merchant service providers could categorize you as a low-risk merchant if you possess the following:

• You accept only one type of currency
• Your company makes less than $20,000 per month
• Your average credit card transaction is less than $500
• You have zero to very low chargeback ratio
• You are in a very low-risk industry
• You are incorporated in what is considered a low-risk state
• You use 3D Secure to prevent fraud
• You sell low-risk products (e.g. books, stationery, clothing or household goods)

As a low-risk merchant you will benefit from lower rates and more reasonable terms.

Conclusion

High risk and low-risk merchant accounts are different in how they are treated by the merchant account provider. They are categorized this way to determine the degree of financial risk for the provider.

It’s important for you as the business owner to take the time to research merchant service providers thoroughly based on your category. However, don’t make quick assumptions about where your business might fall.  Some merchant service providers make certain exceptions on certain categories. The best thing to do is simply ask the provider to clarify any questions or doubts.

Although it is relatively easy to open a merchant service account, it is also easy to make erroneous decisions that can cost you thousands of dollars. Look at their features, pricing schedules, and contract terms to determine your business needs.