It's normal for almost every business to have a chargeback. However, if the number of chargebacks increases past a certain percentage, the company is automatically labeled as 'high-risk.'
High-risk credit card processing and merchant account services are the perfect payment processing solution for businesses with a high rate of chargebacks.
Below is a comprehensive guide on the advantages and disadvantages of high-risk merchant accounts.
What Is a High-Risk Merchant Account?
A high-risk merchant account provides payment processing services for businesses with many chargebacks, which could sometimes be fraudulent.
Typically, the threat to payment processors in terms of being fined by the credit card network increases as the number of chargebacks a business gets increases. Due to this reason, many payment processors don't accept companies that have been deemed 'high-risk.' This is where high-risk credit card processing and merchant account service providers come in.
So, when is a business considered high-risk? Usually, a company's payment processing history, specifically its chargeback history, determines whether or not it is deemed high-risk.
Some characteristics that may cause a business to be labeled as high-risk include frequent chargebacks within a specific period, credit card transactions amounting to $500 or more, and monthly sales of over $20,000.
Among the types of businesses that are more likely to be considered 'high-risk' include gambling, online dating, travel (airlines and vacation planners), and E-commerce, to name a few.
That said, here are the advantages and disadvantages of high-risk merchant accounts.
Advantages of High-Risk Merchant Accounts
Again, high-risk credit card processing and merchant account service providers provide the perfect payment processing solution for businesses deemed to be high-risk. Here are some of the advantages of a high-risk merchant account.
Increased Payment Opportunities
Typically, conventional payment processing service providers only allow merchants/businesses to accept certain types of payments made by credit cards. However, high-risk merchant account service providers offer extra options, such as recurring payments.
High-risk merchant account service providers also accommodate higher sales volumes for companies launching new products or services or having a special sales promotion.
Unrestricted Payment Opportunities
Usually, normal/low-risk merchant account services only allow businesses to accept payments from certain countries. However, high-risk merchant account service providers enable companies to accept payments from across the globe, providing them an opportunity to grow internationally.
High-risk merchant account service providers have offered several opportunities for businesses to increase their profits. Since they allow companies to accept card payments worldwide, companies can rake in more sales, increasing their profits.
High-risk merchant account service providers also accommodate higher sales volumes. This enables companies to launch their products or services and have special sales promotions comfortably, which increases their profits.
Acceptance of Different Currencies
Since high-risk merchant account service providers allow businesses to accept credit and debit card payments worldwide, companies can accept payments in different currencies.
When a business opens a high-risk merchant account, they automatically get high-chargeback protection. This means that the company's account won't be terminated because of the high number of chargebacks it gets.
The bad thing about chargebacks is that not all of them are genuine. Fortunately, most high-risk merchant account service providers have implemented top-notch security protocols that detect fraudsters quickly, reducing the risk of chargeback fraud.
This protection doesn't only apply to businesses. High-risk merchant account service providers also have security protocols that protect a business's customers' credit and debit card details. This assures their clients that their confidential information is safe, which gives the company a good reputation.
Disadvantages of High-Risk Merchant Accounts
As expected, high-risk merchant accounts also have their fair share of downsides.
High Risk Means Higher Fees
The main disadvantage of high-risk merchant accounts is that businesses are charged higher fees than low-risk merchants.
For starters, the general card payment processing fees for high-risk merchants are higher, sometimes more than double what low-risk merchants pay. While all businesses accepting card payments are bound to pay chargeback fees, high-risk merchants are more likely to pay higher charges since they get several chargebacks.
High-risk companies may also pay extra fees due to the strict contract terms of the high-risk merchant accounts. Some of these additional charges include early termination fees, and monthly or annual fees, to mention a few.
It Takes More Time for the Money in the Merchant Account to Be Cleared
Typically, high-risk merchant accounts are subject to a rolling reserve. This refers to when the payment processor holds a certain percentage of the money in the merchant account. They usually do so until they can verify that the card payments made are not at the risk of a chargeback or are fraudulent. While this process is an advantage, it can inconvenience businesses.
While high-risk businesses are challenging when it comes to card payments, they can still thrive thanks to high-risk merchant account service providers.
However, business owners need to take their time and consider all the necessary factors when choosing a provider. Doing so will help find a high-risk merchant account service provider that caters for their needs.