Recent studies have shown that the United States' credit card debt is higher now than ever before. For industries and companies that are using credit cards, overspending can lead to becoming a high-risk merchant. But what is a high-risk merchant account, and what will it mean for you?
If you're interested in learning more about the terminology behind a high-risk business, we're here to help. Read on to learn more about the effects and causes of this classification.
What Is a High-Risk Merchant?
To begin, what is a high-risk merchant?
If you're using a high-risk merchant account, it means that payment processors view you as a financial risk. The primary reason behind this will be that they view the account as likely to default on payments.
Defaulting on a payment is the term for failing to pay them. You may fail to make a principal payment or to stop interest from gathering. As a result, the company in charge of the payment views you as unable to pay them.
Defaulting on payments will significantly lower your credit score. Due to this, many companies will view lending you money or credit as a risky move. Ergo, you've become a high-risk prospect.
In the business world, a high-risk merchant is almost always a business or entrepreneur. It's rare for a single person to be considered a high-risk merchant.
How Does a Merchant Become High-Risk?
Now that we better understand the term, what can most often lead to becoming high-risk? It's important to note that high risk doesn't always mean someone has made mistakes.
High-Risk By Default
Most often, we assume that a high-risk account is someone that failed to make payments. Such an issue can be the result of bankruptcy, a failing business, or simple neglect. That doesn't mean that all high-risk accounts fit such issues.
For example, a company may be listed as a high-risk account if they operate in an unpredictable or volatile market. Many finance accounts, such as investing firms, qualify as high-risk by default due to the tumultuous nature of investing.
It's also possible for a client to choose a high-risk credit processor for business reasons. While exceptionally uncommon due to the downsides of high-risk credit, it's not unheard of.
Frequent Chargebacks
Arguably the most common reason to need a high-risk merchant account is frequent chargebacks. A chargeback occurs when a customer issues a refund, resulting in the charge needing to be returned. Most often, the merchant is responsible for covering a chargeback.
A few chargebacks are expected and far from strange. However, a high volume of chargebacks can lead to an accrual of fees and other issues. A credit card processor may also see this as a hint of fraudulent action.
Illegal Sales
Another common reason is illegal sales. When discovered, illegal sales are most often refunded, leading to the merchant needing to cover the funds.
In some cases, a credit card processor may need to cover the fees. While they'll do so, there are often severe repercussions for the merchant account.
Needless to say, there are also legal consequences for illegal sales. One of the most common types of illegal sales is substances. Alcohol or tobacco products being sold to minors are a frequent illegal sale that can lead to a high-risk classification.
Additionally, fraudulent actions can fall under this category. Some merchants may attempt fraud to try and make money off of their credit card processors. Doing so is grounds for legal action and will often nullify a contract with the credit company.
In short, keep all sales legal and above the board. Doing so will prevent most issues with a credit card processor.
Defaulted Payments
As stated previously, defaulted payments are a large reason for needing a high-risk merchant account. But what causes payments to default?
Bankruptcy is the most common reason. When a company files for bankruptcy, they default on all credit or payments, as they can no longer pay them.
If you've gone bankrupt before, companies will continue to consider you high risk. That said, bankruptcy isn't the only reason you may fail to pay your payments.
Another core reason is simple neglect or accounting mistakes. Make sure that your payments are prioritized and always recorded. Failing to make payments can make a company be considered high-risk despite being financially stable.
Consequences of Being High-Risk
Now that we better understand what a high-risk merchant is, what's the issue with being high-risk?
When searching for credit card processing for high-risk merchants, you should be familiar with the qualities of such a processor. These terms are often radically different from a standard credit card. Here are some of the consequences of a high-risk business account.
Higher Fees
The most common issue you'll find is higher payment processing fees. These fees can seem relatively minor on the surface but become much higher as they add up.
The precise fees will depend on the company that opens your high-risk merchant account. These fees can make paying off your credit loan significantly more difficult.
One good way to navigate fees is to engage in dual pricing payment methods. These plans will give rewards to merchants that pay in cash while reducing credit and debit card fees.
By doing so, merchants can save on their fees and keep their prices competitive. We suggest looking into Zenti dual pricing to learn more about the process.
Difficulty Seeking Loans
Another consequence is that a high-risk merchant will often struggle to find loans or credit lenders. A high-risk credit processor isn't willing to take on all applicants.
The reason behind the high-risk classification can affect this. For example, if a company has committed fraud, it's not likely that most credit lenders will want to take them on. Doing so runs the risk that the company will use them to commit fraud once again.
Part of this manifests as higher fees for the company. The credit lenders willing to take them as clients will often seek security through these fees. The company also has fewer choices, making it so credit lenders can give more aggressive charges.
One way that the difficulty will appear is in lengthier processes for approval. Standard accounts can take hours or even minutes to get approved.
By contrast, high-risk merchants take more vetting. They also will need to share more information, such as income, accounting pages, and bank statements. Overall, it can take several days or even weeks, posing much more of a difficulty.
Stricter Terms
Stricter terms are given for a high-risk business account. The processing fees are only one area where the fees may appear.
Chargeback fees are exceptionally common. While all credit card processors will have some level of chargeback fees, a high-risk account pays much higher fees. These fees can reach more than $100 for a single chargeback.
More frequent payments or higher capital payments are another strict term. You also may not be given as long of a signing contract, depending on the company.
Reserve Requirements
Many companies will choose to hold onto the client's cash as a way to hedge their bets. When this occurs, the funds held are referred to as a "reserve." Should a client default, the credit card processor will keep the reserve similarly to a deposit.
Reserves come in three separate methods:
A capped reserve is when a processor holds a portion of all transactions up to a limit. When that limit is reached, the funds are held and the processor stops taking a portion. The reserve will remain until it's needed.
An upfront reserve is the result of a merchant sending the processor a set amount. The money sent will become the reserve. In some situations, the processor may withhold all transactions until the reserve is reached.
Finally, a rolling reserve is the most complex. In short, the processor will set aside a percentage of every transaction and give the percentage back later. These are often done on a basis of three, six, or twelve months, depending on the loaner and industry.
Volume Caps
Volume caps are the simplest term that a high-risk merchant will agree to. Volume caps are when a processor stops the merchant from card transactions exceeding a certain dollar amount each month.
By doing so, they limit the extent of credit the merchant can use. As a result, they can stop the merchant from accruing too much debt.
Volume caps often accompany technical requirements. For example, a processor may enforce the merchant to use certain tools or equipment. These are common in the case of illegal sales.
Making Your Payments
A high-risk merchant may struggle to find a high-risk credit processor willing to take them. These accounts often have higher fees, stricter terms, and more intense guidelines to follow. If you're struggling with a high-risk merchant account, we recommend seeking dual pricing to handle the higher fees and principal payments.
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