High-Risk Merchant Processing

Looking at the Pros & Cons of High-Risk Acquirers for eCommerce

You may have heard certain merchants or processors described as “high-risk” before. Or, you may fall into that category yourself, and are wondering why your business would be considered high-risk, and if there is anything you can do about it.

Let’s examine the nature of high-risk processing—why it exists, and what you can do about it.

What is High-Risk Processing?

Every merchant will need to secure an account with an acquiring bank to accept payment cards. However, the cost and conditions of that account can vary based on several factors:

• The industry or vertical in which the business operates.
• Whether the business is primarily card-present or card-not-present.
• The business’s history with loss and fraud vulnerability.

Based on these conditions, the merchant in question may not be eligible for a standard merchant account. They could be forced to secure a high-risk merchant account instead. Chargebacks—and the threat of chargebacks associated with a business—are at the root of this issue.

For example, if a business experiences chargebacks beyond the card networks’ defined monthly thresholds, the merchant will need to seek out a high-risk processor. Merchants operating in verticals historically associated with chargebacks like digital goods, online gaming, and dating sites, may be required to do the same based on the nature of their business model.

The idea is to insulate the acquirer from excessive loss resulting from the merchant’s behavior.

When an issuing bank files a chargeback on a cardholder’s behalf, that money is forcibly taken from the acquirer, who can then recoup the funds from the merchant involved. If the merchant did not have the funds available to cover their chargebacks, though, the acquirer would be left holding the bill. High-risk accounts place additional demands and restrictions on merchants to ensure that this scenario does not happen.

Reasons to Avoid High-Risk Processing

For most businesses, high-risk processing is a negative label, and is something to avoid at all costs. There are some good reasons to back up that belief:

Higher Processing Costs

High-risk merchants will pay significantly higher fees to their acquirer for the right to process cards. This includes a higher initial setup fee, as well as regular monthly fees that can be double those for a standard merchant account. Add to this the chance of facing a chargeback review, which might cost as much as $25,000.

Remember: the reason that these higher fees are imposed in the first place is because the merchant is expected to produce more revenue-draining chargebacks. Add those to the costly fees, and it can easily put a merchant out of business.

Mandatory Reserves

High-risk merchants will be required to have a merchant account reserve in addition to their existing merchant account. This is a non-interest-bearing savings account with the acquirer, and functions essentially as the bank’s chargeback insurance, guaranteeing that they aren’t left to cover the cost of any chargebacks.

The money in the reserve—usually between 5-10% of total monthly sales—still belongs to the merchant. They won’t be able to access that money for 180 days after the sale, though, which can result in serious cashflow problems.

Higher Chargeback Fees

Not only do high-risk merchants pay more to protect the bank from chargebacks; the merchant pays a higher price for each chargeback as well.

Chargebacks fees are a non-refundable penalty assessed by acquirers for each chargeback, and which are meant to cover the cost of administration fees and other overhead. High-risk merchants will typically pay much more for each chargeback compared to businesses with a standard merchant account.

High-Risk Processing is Not the End of the World

The issues mentioned above would be enough to make just about anyone want to avoid high-risk merchant processing at any cost. However, it’s not as terrible as it seems.

There are certain advantages that high-risk merchant accounts offer compared to standard processing agreements:

Broader Global Access

Standard processing accounts will often impose limitations on merchants that can prevent them from reaching into new markets or sales channels. For example, some acquirers will only offer low-risk agreements to merchants who deal in a single currency or who conduct more brick-and-mortar business than eCommerce. Many won’t provide such accounts to merchants operating in developing global markets (anywhere outside the US, Canada, Europe, Australia, and Japan).

A high-risk account could offer much greater leeway in expanding into markets like China, which is now the world’s largest eCommerce market.

Greater Earning Potential

With high-risk processing, so comes the opportunity for high-reward sales. Low-risk merchants will often have certain limitations placed on their accounts—at least at first—that restrict them from high-value transactions, recurring payments, and certain product categories.

Obviously, processors do this to insulate themselves against the heightened risks associated with these transactions. A high-risk processor, though, has protection mechanisms built into their processing agreement. They don’t need additional guarantees from the merchant, so the merchant is free to engage in new or less-proven business models.

The same goes for high-risk, high-reward products. As mentioned before, products like online gaming and telemarketing are considered more chargeback-prone, so are not eligible for low-risk processing. A high-risk processor would have no problem handling these products.

Less Danger from Chargebacks

One of the greatest threats associated with chargebacks is the prospect of business interruption. If a merchant’s chargeback-to-transaction ratio approaches 1% of total transactions, their acquirer may freeze their account—no new sales go in, and any money in the account is inaccessible. This creates instant cashflow issues, and can quickly destroy the business.

It’s very rare, though, for a high-risk processor to take such drastic action. While the business will pay higher fees, they will be in far less danger of shutting down should they have one bad month of excessive chargebacks.

Education is the Solution

We’ve examined the pros and cons of high-risk processing, but remember: it’s possible for most merchants to enjoy the best of both worlds. The only way to achieve this, though, is through reduced chargeback instances.

We at PDSCC work tirelessly to advocate for industry cooperation and a more dynamic payments ecosystem through education and information sharing. Click below to learn more about our mission and our educational method.

Interested in learning more about High-Risk Merchant Processing?

Contact the Payment Dispute Standards & Compliance Council today to learn how to get involved.