High-risk merchant accounts: what they are, pros and cons

Whether tapping and swiping in person, typing in account details online, or providing their information over the phone, consumers are making more card payments than ever before. 

It’s also never been easier for even the smallest businesses to cater to this demand, with payment processing specialists providing front-end tech like portable card machines, as well as necessary back-end infrastructure such as merchant accounts. 

A key component of debit and credit card transactions, merchant accounts are temporary holding areas for funds after they leave customer accounts and before they’re transferred to business accounts. However, some businesses deemed to be especially financially risky may struggle to be approved for regular merchant accounts.

This is where a special category known as high-risk merchant accounts come in. In this guide, we’ll talk through how high-risk merchant accounts work, the pros and cons of these accounts, and whether you might need one for your business. By the end, you’ll have a better understanding of what’s right for you.

What does high-risk merchant mean?

There's no central authority which sets official risk level criteria for businesses. Instead, individual banks and processors decide their own risk thresholds – similar to how you'd assess the challenges and vulnerabilities affecting your enterprise when drawing up your own small business risk management strategy.

Here are some of the main traits which financial institutions will consider when determining what is a high-risk merchant.

Industry

Some industries are just riskier by nature. We’re talking about sectors like online gambling, adult entertainment, auction houses, and CBD products. 

These businesses often face tough legal and regulatory challenges, and are more prone to complaints and fraud, meaning they’ll almost always require specialist support from high-risk merchant account providers.

On the other hand, low-risk industries might include general retail and the food and drink sector. For example, such popular side hustle ideas as selling homemade cakes or running a craft stall at a monthly market will fall into the low-risk category.

Credit history

Businesses may be considered high risk in the context of obtaining merchant accounts if they’ve experienced financial issues such as low credit scores or outstanding loans.

This is something to consider whether you’re thinking about registering as a sole trader, forming a partnership or setting up a limited company. Banks and payment processors will often look into the creditworthiness of business owners, and a shaky credit history can negatively impact your status.

Average monthly transaction volume

Businesses with high monthly transaction volumes can sometimes be flagged as high-risk because of the increased potential for fraud.

The amount that triggers this can vary, but generally, higher volumes can raise concerns. Low-risk businesses typically have lower transaction volumes, which reduces the chances of large-scale fraud.

Average transaction value

High-risk businesses often have higher average transaction values, which can result in greater potential losses if fraud occurs. Low-risk businesses typically deal with smaller transaction amounts, making them less risky in the eyes of banks and payment processors.

As with average transaction volume, the threshold for concern varies between merchant services providers.

Chargeback rate

High-risk businesses are often more prone to chargebacks, where customers dispute transactions in order to get their money back. 

Chargebacks cost financial institutions money and can disrupt the operating cash flow of businesses, so having a high chargeback ratio is generally a red flag for payment processors.

On the flip side, low-risk businesses usually have low chargeback rates, meaning they’re less likely to get entrenched in disputes, suffer reputational damage, and fall foul of chargeback fraud.

Sales patterns

Irregular sales patterns can make a business high-risk because unpredictable spikes in sales might suggest potential fraud or instability.

The underlying reasons for these spikes are usually perfectly innocent. Say, if you’ve been learning how to use social media for small business and one of your product videos goes viral, causing a bump in sales. However, unusual peaks and troughs in transactions could prompt a payment processor to take a second look.

Payment processors tend to prefer consistency, as it indicates a stable and predictable business. Low-risk businesses generally have consistent or predictable sales patterns, reflecting reliability and steady demand.

Length of time in business

New businesses without a solid track record may be viewed as riskier. Some payment processors prefer businesses with a history of reliable operations.

Low-risk businesses are typically those that have been operating successfully for a longer period, showing stability and reliability. That said, small business ideas won’t necessarily fall foul of this rule, assuming they aren’t in a red flag industry. 

Business model

High-risk businesses might involve subscription services or future deliveries (more than 90 days post payment), which add complexity and risk.

Low-risk businesses often have a straightforward delivery model and immediate payment, such as a local newsagent, a small bakery, or a food truck business.

What your business can expect as a high-risk merchant

If you’re designated a high-risk merchant, your business will face several unique challenges and requirements compared to standard accounts. But there are some plus points too.

Positives

Let's start with the good news, because being a high-risk merchant does have its perks:

Ability to sell a wider range of products and services

High-risk merchant accounts let you sell products/services that are restricted under standard accounts, so you’ll have a wider range of business opportunities to explore.

Access to specialised support

You often get more bespoke guidance and advice from payment processors, helping you tackle any problems and ensuring you comply with regulations.

Increased customer base

By accepting high-risk transactions, you can cater to a broader audience, potentially increasing your customer acquisition rates and boosting your revenue.

Challenges

Of course, there are also some challenges you'll need to navigate:

Limited processor options

Not all payment processors are willing to work with high-risk businesses, so you’ll have fewer options to choose between.

Higher fees

High-risk merchant accounts typically come with higher transaction fees, monthly fees, and possibly a setup fee. These help offset the increased risk to the payment processor.

Rolling reserves

Payment processors often require a rolling reserve for high-risk accounts, meaning a percentage of your transactions will be held in reserve for a specific period to cover potential chargebacks and fraud.

Stricter contract terms

High-risk merchants may face more stringent T&Cs, including longer contract durations and early termination fees. It's important to read and understand these terms before signing.

More frequent account reviews

Your account will likely undergo more frequent reviews and monitoring, with payment processors closely watching your transaction patterns and chargeback rates to manage risk.

Potential account holds or terminations

Due to the higher risk, your account may be subject to holds or terminations if your chargeback rates or transaction patterns raise concerns.

Longer waits for funds

If your business is deemed high-risk, you may need to wait longer for funds to be transferred from your merchant account to your regular business account.

How to choose the right high-risk merchant account provider

Choosing the right high-risk merchant account provider for your business can make all the difference in keeping your transactions secure and hassle free. The right account will safeguard your cash flow, reduce fraud risk, and ramp up customer satisfaction.

Here are some tips to help you find the best fit:

Compare offerings carefully 

Start by looking for providers that specialise in high-risk merchant accounts. Compare their services and fees, ensuring these fit your needs and small business budget. Don't forget to check online reviews and forums for real-world insights from other businesses. Talking to other entrepreneurs at small business networking events for your niche can also help.

Check their customer support 

For high-risk businesses, having good customer support is crucial. Make sure the provider offers reliable and accessible support, ideally 24/7. You want to be able to reach them whenever you need help with issues like potential fraud and questionable chargebacks.

Read the fine print 

Carefully go through the contract terms. Pay special attention to fees, reserves, and any termination clauses. Remember that high-risk merchant accounts can have more “strings attached” compared to regular accounts, so make sure you’re clear on all the conditions before you sign anything.

Ask about security 

Payment security is always an important consideration for any business owner, especially if you’re working in a higher risk sector. Make sure the provider has strong security measures in place to protect against fraud and data breaches. This should include things like PCI DSS compliance, encryption, and debit and credit card fraud detection tools.

Evaluate payment options  

Make sure the processor offers the payment options you need, whether it’s portable card readers, smart self-service kiosks, or innovative solutions like QR codes. Having the right tools will simplify electronic transactions whether your business is high-risk or not.

Look for industry experience 

It’s a big plus if the provider has experience in your specific industry. They’ll understand the unique challenges you face, both in terms of regulatory compliance and fraud prevention, and can offer solutions tailored just for you.

How to avoid being classed as a high-risk merchant

While some businesses will always fall into the high-risk category due to their industry, there are steps you can take to improve your chances of being classified as a low-risk merchant, which can lead to better terms and lower fees for your merchant account.

Here are some best practices:

Prioritise customer service

Offering good customer service can make a big difference in how you're classified as a merchant. Focusing on clear communication, prompt management of customer complaints, and providing high-quality products and services will all help boost customer loyalty and cause fewer chargebacks, which will in turn help lower your risk level in the eyes of financial institutions.

Choose trustworthy third-party partners to keep customer satisfaction high. For example, if you're thinking about things to make and sell and decide to open an online store, use a delivery company with quick turnaround times and great customer feedback.

Manage and monitor sales volume

Keeping an eye on your transaction volumes is important. If you’re getting close to the high-risk threshold for your payment processor, look for ways to manage and spread out transactions more evenly. Regular financial analysis and an up-to-date cash flow forecast can help keep things in check.

To avoid irregular sales patterns, try to maintain consistent sales volumes. This can help with cash flow management and make your business look more stable to payment processors.

You might think about selling gift cards or running promotions during slower times to keep sales steady throughout the year. A well-timed email marketing campaign can also make a big difference.

Maintain a good credit history

Keeping a positive credit history can be crucial for being seen as a low-risk merchant. Pay off outstanding loans and manage debts responsibly to keep your credit score high.

Diligent bookkeeping and using robust accounting tools for small business will help you maintain a healthy financial record. For example, if you run a bakery, ensuring timely payments for your ingredient suppliers and managing small business expenses like equipment and staff costs will allow you to avoid falling into arrears and debts, and bolster your credit history.

Optimise average transaction value

A careful approach to your pricing strategies can help your business avoid having an excessively high average transaction value. This can be done by offering lower-priced items, breaking down higher-priced services into smaller, more affordable parts, or introducing deposits for some of your offerings.

Understanding how to price a product or service effectively can make a big difference. For instance, if you run a home cleaning service, instead of charging a high fee for a single deep clean, you could offer package deals for multiple visits at a discounted rate.

This approach lowers the average transaction value while still providing value to your customers and encouraging repeat business.

Implement strong fraud prevention

Using advanced fraud detection and prevention tools is a must. This includes utilising reliable payment gateways, address verification systems (AVS), card verification value (CVV) checks, and 3D Secure. 

Staying updated on small business cyber security best practices can also protect your business, especially if you’re working on online business ideas. Implementing the latest tools will help safeguard your customers and build trust.

Stay compliant with regulations

Ensure your business complies with all relevant legal and regulatory requirements. This reduces the risk of penalties and enhances your credibility with payment processors. Being aware of the legal requirements for starting a small business in your sector is really important, as is ongoing compliance.

For example, if your business is registered for VAT, be sure to send VAT-compliant invoices. If you handle personal data, ensure you're following data protection regulations.

Whether you’re researching how to start a business from home or thinking about breaking into the hospitality industry by setting up your own B&B, understanding the rules and regulations involved can set you on the right path.

Don’t forget to plan

No matter if you’re getting a new venture off the ground or thinking about how to scale a business, effective planning may help your enterprise avoid being considered high risk.

Learning how to write a business plan effectively can assist with this. A well-thought-out plan outlines your goals, business growth strategies, market research, and financial projections, providing a roadmap for success and demonstrating stability to potential payment processors.

This proactive approach can boost your credibility and lower the perceived risk associated with your business.