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High-Risk vs. Low-Risk Merchant Account Services: What’s The Difference?

Let’s start with: What´s the difference between a low and high risk business?

No matter the industry, every business carries a certain level of risk. Some have higher risks, and others are inherently lower, but every business is inherently risky (something you’ll quickly learn when starting your own).

Some industries, however, are actually riskier than others, and that matters a lot when you’re starting out, as being categorized as a higher-risk establishment can have significant implications for a business owner.

One of the biggest differences between being classified as high-risk is your accessibility to payment processing services. Many processors nowadays shy away from working with such businesses for various reasons (which we’ll explore in just a bit—sit tight!).

While this may seem like a minor inconvenience, establishing a cooperative partnership with a proficient payment service provider can actually make or break your business. So, it’s a big deal and something you can’t overlook when establishing your accounts and payment procedures.

But how do you know where on the risk scale your business falls? And if it does belong to the high-risk side, what’s next? Here’s what you need to know.

What is a High-Risk Merchant Account?

In simple terms, a high-risk merchant account is a specialized bank account designed to process transactions that are higher in risk.

This account’s sole purpose is to hold and release funds in a way that ensures security. It’s provided by your acquiring bank, and the fees for their services are typically deducted from your funds before they are sent to your primary bank account.

Great. Solved. Right? Not so fast. Now, you’re probably wondering, “Okay, so if my business is considered high-risk, I need a dedicated bank account. How do I go about obtaining one, though?”

Application Process

The classification of “high-risk vs. low-risk” will ultimately affect the application process, as it’s different for applying for a high-risk merchant account (as opposed to a general merchant account you might get from a basic platform like Stripe, PayPal, or Venmo).

The high-risk application process usually takes longer than it would if you were a low-risk merchant, and it includes a lot more documentation, back-and-forth emailing, and legal checks. These extensive measures serve to ensure you’re in compliance with the regulatory requirements, first and foremost.

Fees

While the fees ultimately depend on the processor you partner with, the standard costs for high-risk payment services are significantly higher than for any low-risk processing service.

This is due to the fact that businesses higher in risk simply require closer observation and, in all terms, more attention than low-risk enterprises.

Not only that but more often than not, businesses operating in high-risk trades also require extensive risk management and measures to alleviate those at hand, like chargeback alerts and transaction monitoring. 

A bank building with some credit cards around it and dollar signs

What is a Low-Risk Merchant Account?

A low-risk merchant account is a bank account made for businesses with a low to medium risk level.

In the context of merchant services, low to medium-risk business:

  • Don’t have recurring payments,
  • Are eCommerce stores with their own storage or a local warehouse
  • Operate in industries that naturally present fewer financial risks than others.

The account functions in the same way: it holds your funds, deducts acquiring and processing fees, and then settles the money into your main bank account. 

Application Process

The process of getting a merchant account for your low-risk business is what makes a difference here. Typically, every acquirer who offers high-risk payment services does so for lower risk as well. Even if their main area of expertise is high-risk, they usually balance it out by working with low-risk establishments, too.

The process itself is a lot faster, too—all you need to do is sign up and send in your legal work to prove your business is legitimate and adheres to the standard regulations.

Fees

As with high-risk merchant accounts, the fees are determined by your processor. The general costs for low-risk processing services, however, are remarkably lower.

Along with overall cut prices, merchant accounts for less riskier businesses don’t include annual fees or rolling reserves. The payout terms offered for these merchants are often notably better.

It’s also worth noting that the card scheme fees for low-risk businesses on consumer debit and credit cards (in the EU and EEA) are set at 0.2%-0.3%. On B2B transactions, however, the fees can scale up.

💡 Tempted to skip the hassle and just sign up for a low-risk or “regular” merchant account? If your business is actually classified as high-risk, you might be able to qualify for one, but you risk having it closed at a moment’s notice or facing other financial or legal issues down the road. Instead, opt for high-quality high-risk merchant services from the start.

Are You a High-Risk Merchant?

We know that the whole risky and not-so-risky classification of businesses is a very foggy gray area. It’s difficult to figure out if your business falls under the high-risk or medium-risk category, and sadly, there isn’t a one-size-fits-all guide to follow here

While determining a business’s riskiness is a very case-by-case thing, there are some factors that absolutely make a business high-risk. Typically, if a business operates in one of the following industries, then in most cases, it’s considered inherently riskier:

  • Adult

  • Gambling

  • CBD/Cannabis

  • Crypto

  • Tobacco/Vape/E-cig

  • Travel

What makes it confusing, though, is that even if you belong to a certain sector, there are other factors that can make your business more or less riskier than another similar company (meaning that if you and a friend both run dating sites, theirs could be riskier than yours and lead to increased fees and restrictions).

Processors who deal with such merchants usually have their own set of questions and features that help them determine the risk level of their clients.

  • Chargeback Ratio: This is typically the biggest indicator of gray riskiness. It’s quite simple: If your business model includes recurring payments, for example, you’re naturally more prone to chargebacks. 

  • Financial Stability: This is the second biggest one on the list since financial history plays a bigger role in how a processor views your business than you might think. Take loans as an example. If you were to go to a bank and ask to borrow money, you’d need to show your past financial status to prove that you’re a responsible borrower. The same goes for merchant accounts. 

  • Industry: As mentioned before, your industry can categorize your risk level in the most black-and-white sense, but it’s usually not the only metric you’ll get measured by.

  • Average Ticket Size: The average ticket size influences your business’s riskiness as well. Valued goods, hence higher tickets, can make a business more attractive to fraudsters and put you at a greater risk of subsequent financial losses. 

  • Fraud Risks: Finally, the more potential fraud risks your business comes with, the higher the risk level. 

A woman standing in front of a scale that ranks industries from low to medium to high

Examples of Businesses That Commonly Need High-Risk Merchant Accounts

As mentioned, simply belonging to a certain industry won’t determine whether you need a dedicated high-risk merchant account.

If you recognize one of the following features, though, you may need a high-risk bank account.

  • Recurring Payments: People tend to forget about their subscription-based purchases and are more likely to issue a chargeback.

  • High-Value Tickets: The higher the value the higher the chance of fraud.

  • Start-ups: Since start-ups don’t have a way to showcase how they’ve handled their finances in the past, they’re simply riskier. This is due to the uncertainty of the merchants’ abilities to manage a business under different circumstances, like a drop in demand, for example.

  • Highly Regulated Products or Services: Highly regulated products like CBD or some tobacco products make it harder to ensure a company is in compliance with the changing regulations, hence, the potential legal threats are at higher stakes. The same goes for services like adult entertainment, purely because of the “controversial” nature it carries.

  • Dropshipping: eCommerce stores with their own storage or a local distributor are considered lower risk than a merchant who resells goods through a foreign warehouse.

Startups have no financial or operational track record, which makes them higher-risk in the eyes of most acquirers. It's the same as general banking in that if you want to borrow money and you have no financial history to show, they'll want to see more information to ensure you're a responsible borrower. In this case, as a startup, you'll need to provide business plans, cash flow forecasts, and a lot of financing information, etc. You should be prepared to provide more detailed information in general.

Dennis Pedersen FastoPayments

Can You Reduce Your Risk as a Merchant?

Yes! There are a few steps you can take as a merchant to reduce your risks. However, the only way you can actually assess the risks at hand is by looking at the whole picture.

That means you can choose a less risky industry to operate in, but if your customers aren’t happy with the service, you’ll still be prone to chargebacks, which will take you back to square one. 

That doesn’t mean you shouldn’t do everything on your end to alleviate all kinds of risks, though. Our payment experts suggest pinpointing the main sources of concern of your industry as a whole. Then, detect how much those main risks affect your specific business.

Once you have an outline of the basics, get into the nitty-gritty. This means taking extra precautions to alleviate your establishment’s riskiness, such as using fraud detection tools and chargeback alerts

Additionally, of course, it’s key to keep in mind the main elements that make a business risky, like subscription-based models, the age of an enterprise, being on the MATCH list as a merchant, and so on. 

Subscription model businesses are at higher risks for chargebacks because people forget they're subscribed and want to dispute the charge. If you offer subscription-based products or services, we recommend clearly stating your payment policies on your website, in your invoices, and across all other customer touch points to ensure customers know what to expect. This can help prevent chargebacks before they occur.

Dennis Pedersen FastoPayments

How to Get a Merchant Account as a High-Risk Business

By now, are you thinking, “I know my business belongs under the high-risk category now. What’s next?”

It’s time to apply for your dedicated high-risk merchant account! We’ve highlighted some key elements to keep in mind before submitting your application below.

Longer Application Process

The process of obtaining a high-risk merchant account usually takes longer than getting a standard merchant account. That’s because acquiring banks need to be 100% sure of your business’s legality and compliance before approving your account.

Although low-risk businesses must comply with the regulations, high-risk accounts require extensive checks and much more communication between the service provider and the merchant. Hence, the process is longer. 

It’s also worth mentioning that at this stage of the procedure, the merchant plays a big part in how long the approval takes. The faster you are to respond to the acquirer’s questions and feedback, the faster they’ll be able to conduct the needed checks and have you approved. 

Higher Payment Processing Fees

As mentioned earlier, the fees for high-risk payment services are notably higher than for low-risk merchants. There are also some additional costs for the extra security measures that are required by most acquirers.

This, however, doesn’t mean you’ll have to break the bank to get your high-risk business going. It’s the opposite actually, as there are many processors on the market nowadays offering cost-effective solutions.

But it’s key to remember that if the proposed price sounds too good to be true, it probably is, and you’ll likely face some hidden fees down the line.

So, communicate with your chosen provider and make sure you understand what you’ll be paying for (before signing on any dotted line or setting up any payment systems). 

Upfront Reserve

Upfront reserves aren’t a standard cost for high-risk merchant accounts. Some processors, however, may require a set amount of money before you start processing with them.

Think of it as a security deposit that your processor keeps in case of financial losses caused by fraud or chargebacks, both of which are common for high-risk businesses.

Rolling Reserve

Rolling reserve is another added cost that wouldn’t be on your pricing proposal if you were a low-risk merchant.

This fee is usually a percentage fee per month that your processor keeps for a set amount of time to cover any financial losses that may come from chargebacks. The funds are kept for 180 days at the most because a customer has 120 days from the day of purchase to initiate a chargeback.

Some money in the air looks like savings around a credit card

Higher Chargeback Fees

If you’re not careful, expect to pay higher chargeback fees. Keeping your chargeback rate at a healthy level as a high-risk merchant can ultimately make or break your business, especially since the costs are higher, and you risk having your account closed completely or getting MATCHed. 

Credit Card Processing Volume Caps

These caps might be a new concept to merchants with a background in low-risk business operations. However, as mentioned earlier, monthly volumes can also determine a business’s risk level.

This means that an establishment can only be as risky as its monthly revenue is. These volume caps are limits set by acquirers to manage the risks at hand. So, if your bank has set your cap at 30k a month, for instance, you won’t be able to cross that mark because you’d then be at a new (higher) risk level. 

Get High-Risk Merchant Services with FastoPayments

Interested in a hassle-free, high-quality high-risk merchant account? We’ll walk you through the process. Get a free, no-obligation quote for a high-risk merchant account here. We’ll review your business information and get back to you ASAP.

What makes ours the best high-risk merchant account solutions?

FastoPayments ensures your transactions are secure and simplified. Enjoy real-time monitoring, fraud prevention tools, and chargeback dispute assistance for domestic and international payment transactions.
There are years of industry experience behind our high-risk merchant guides and tips...