Modern consumers want to pay for almost everything with credit and debit cards. However, businesses often experience obstacles on the way to establishing a merchant account that can threaten to keep them from getting off the ground. From the outset, a business has credit challenges that often make the cost of a merchant account greater than the cost faced by established competitors. However, the credit worthiness of a business and its owner are not the sole factors that classify a business as high risk.
A high risk business can be one that has a high volume of sales, and above-average return rate and a high rate of chargebacks. Market data has established companies that operate online payment services, travel services, online pharmacies, dating services, ISPs and adult-oriented products are traditionally high-risk enterprises. This does not necessarily mean the owners themselves are major risks, but that their business model has a high failure rate. It can mean that owners have trouble documenting their charges in ways that can prevent fraud, chargebacks and disputes. It can also mean that customers are risky because they have a higher frequency of disputing charges. Other businesses that are often classified as high-risk operations include:
- Computer stores
- Check cashing companies
- Massage parlors
- Pawn shops
- Fortune tellers
- Seminars
- Timeshare sellers
- Car rental companies
- Gun dealers
- Others
Business owners are basically slaves to industry statistics, especially when getting started; they are designated as a high risk if they operate in a high-risk segment of the market. Over time, if a high-risk business demonstrates that it has a below-average rate of fraudulent charges, product returns and chargeback disputes; a business owner may be able to challenge his or her high-risk designation and get a better rate on a merchant account.
Qualifying for a high-risk merchant account can be difficult, especially for a new business or a business whose owner has a poor credit history. This is because credit card processors know they will be obligated to process an above-average amount of refunds and disputes, resulting in a higher cost to them. In fact, when chargebacks exceed the reserve deposits made by the merchant, the processing company stands to lose a lot of money if the merchant chooses to fold. When this happens, the transaction processor is left holding the bag, with little recourse outside of the court system.
Businesses with few or no assets, businesses that operate only online, and businesses in risk-prone industries often instantly are funneled into high-risk merchant account programs. However, securing a high-risk account may not be as easy as it seems. Seeking to protect themselves, payment processors often demand a very large reserve deposit, more stringent owner financial statements, business inspections and other actions that cost businesses more money up front. Even after jumping through many hoops, a business is not guaranteed to be able to get a high-risk merchant account.
Although qualifying for a merchant account may at first seem difficult, business owners should not give up trying. Many third-party payment processing companies specialize in high-risk accounts and offer a higher rate of approval. These are often the choice for businesses that are rejected by mainstream payment processing companies. Businesses that still cannot qualify can always look into offshore payment processors who are not subject to as many regulations as are domestic processors.