A Guide to High Risk Merchant Accounts
Businesses must obtain a merchant account with an acquiring bank of a financial institution that processes credit card or debit card payments on behalf of a merchant before accepting credit card payments. There are two categories of merchant accounts, low risk and high risk. Most credit card processors would prefer to handle low risk merchants because it is safer to deal with than high risk merchants which only a few processors are willing to accommodate. When we speak of high risk, it means that you expect a higher than average numbers of chargebacks. The issuing bank issues a chargeback in protection of the customer. In other words, when a cardholder file a complaint regarding fraudulent transaction on their statement, the issuing bank makes an investigation into the complaint. When upon investigation it will be proven that the transaction is indeed fraudulent, the bank will refund the original value to the cardholder. If you cannot, as a merchant, prove that a transaction is legitimate then the whole amount will be taken back from your account with additional fees. The fee for chargeback will range from free to a hundred dollar but this will depend on the merchant bank sponsoring your account. However, if the cardholder complaint is proven untrue no refund is requested from the merchant, though additional processing fee may be charged.
Chargebacks are really dependent on several factors including the kind of products or services that the merchant is offering. It could come as a superficial factor based on the business’s industry or clientele, while others are directly related to the merchant’s business practices.
Low risk merchants are characterized as one who accepts one currency only, and that the items you are selling are considered low risk like books, office supplies, home goods or clothing. Low risk merchants have chargebacks and returns kept to a minimum. For high risk merchants the products include casinos, gambling, gaming, VoIP or telemarketing, pharmaceuticals or drug stores, adult products or activities, travel accommodations, attorneys, dating services, magazine subscriptions, and e-cigarettes among other things. The assessment of businesses is really on a case to case basis and not all the industries above will be considered high risk by all processors and there are other businesses not listed above which can also be considered high risk.
If there is excessive chargeback levels then low risk merchant account can easily be terminated. When this happens they can apply for a high risk merchant account but it comes with higher fees.
Whatever type of business you are in, chargebacks affect your business more than the category of your account. Fraudulent transactions will always hurt a business whether high risk or low risk.