The process of starting a business involves many complex aspects, some of which can be overwhelming. One crucial element that requires careful attention is how to receive payments from customers. To achieve this goal, businesses can open merchant accounts through banks or independent sales organizations (ISOs). ISOs are third-party companies that act as brokers, bringing prospective merchants to banks, payment processors, or large financial institutions. They also handle the details of the merchant’s payment processing needs and advocate on behalf of the merchant.
However, setting up a merchant account can be challenging for companies considered high-risk merchants. High-risk merchants are businesses that operate in specific industries, have a high failure rate, or have an average ticket amount above a certain threshold. For instance, businesses that sell firearms or e-cigarettes are considered high-risk industries. Many financial institutions also label legal firms, travel firms, and software industries as high-risk. Any business operating in an industry known for its volatility is also considered high-risk, particularly if they face a high risk of chargebacks, fraud, or a high return volume.
You may also be labeled as high-risk if you are a new merchant who hasn’t processed payments before or if you have a minimal history of processing transactions. Having a low credit score, a high average transaction rate, or a high volume of transactions can also lead to the classification of a high-risk merchant. Merchants that process an average transaction of $500 or more or process more than $20,000 in payments per month may be labeled high-risk. Selling to international customers who reside in countries at high risk of fraud or having a merchant account closed previously for any reason can also result in being labeled as high-risk.
Despite the difficulties, high-risk merchants can still obtain merchant accounts. However, they differ from regular accounts in various ways. High-risk merchants typically pay higher processing and chargeback fees and are subject to cash reserve requirements. Payment processors may withhold a percentage of a client’s processing volume for loss prevention. High-risk merchants may also be limited in processing transactions that exceed a predetermined dollar amount or cumulative volume each month. Additionally, they may be required to fulfill additional obligations, such as investing in a credit card of an NFC-capable terminal or a mobile payment solution.
To obtain a high-risk merchant account, businesses must follow specific practices. They should be transparent with merchant account providers and provide all relevant financial documents. Businesses should also be prepared to share a few years of tax returns and work on improving their credit score before applying. Demonstrating that you have the necessary resources for running your business and having between 25% and 50% of monthly card transactions in your bank account can help make the process of securing a merchant account easier.
When searching for a merchant account provider, businesses should research at least a few providers before selecting one. Ideally, their merchant account provider should have experience catering to others in their industry. They should verify the track record of the provider, have a direct conversation with them, and clearly understand all costs involved. It is also essential to identify situations in which the terms of the agreement can change and go through the contract carefully before signing.
In conclusion, finding a cost-effective and efficient high-risk merchant account requires careful consideration of various factors. Following the steps outlined above can help businesses select a provider with minimum hassle and maintain good relations with them in the long run. Finally, businesses should always remember to read and understand the terms and conditions of their merchant account provider carefully.