Understanding High-Risk Merchant Accounts
If you are a high-risk business owner then read on to know how you should pick the best high-risk merchant account for your business.
The nature of a business determines the type of payment processor required to support its transactions. Although people commonly associate high-risk industries with “taboo” businesses such as firearms, alcohol, or adult entertainment, this isn’t always the case.
Legitimate and legal businesses can also be classified as high risk, such as those that sell age-restricted items or have high chargeback rates. This article explores the features of high-risk merchant accounts and suggests ways to select the most suitable one for your business.
Example #1: A business that sells online tobacco products is considered high-risk because of the age restrictions involved in purchasing tobacco. The company may encounter difficulties with traditional payment processors, so it may need to seek out a specialized high-risk payment processor to handle its transactions securely.
Example #2: Nutraceutical companies that sell dietary supplements or herbal remedies are considered high-risk due to the potential for health claims and adverse reactions.
Example #3: Debt collection agencies that handle sensitive financial information may be classified as high-risk due to the potential for fraud or misuse of data.
This article discusses the characteristics of high-risk merchant accounts and how to find the best one for your business.
Defining High-Risk Merchant Accounts
A high-risk merchant account is designed to facilitate credit card transactions for businesses operating in industries that are deemed to have a higher risk of chargebacks or are considered risky.
Such industries are not necessarily illegal or hazardous (as shown in examples above), but their chargeback rates usually exceed the average. At times, certain businesses that don’t fall under the high-risk category may still be classified as high-risk based on their characteristics.
Thus it’s essential to understand that this assessment is based on trends observed among businesses with comparable profiles and does not reflect a business owner’s conduct.
Defining Offshore Merchant Accounts
Offshore merchant accounts and high-risk merchant accounts are often used interchangeably, but they have distinct differences. While high-risk merchant accounts can cater to businesses operating in risky industries, not all high-risk merchant accounts are offshore. An offshore merchant account refers to a processing account held by a business with an acquiring bank located in a different country. Offshore merchant accounts have fewer limitations and can be an excellent option for extremely high-risk businesses that might not have access to credit card payment processing otherwise.
For example, an online casino operating in a country where gambling is illegal might opt for an offshore merchant account to process credit card payments from international players. Similarly, a business dealing with high-value items like jewelry or rare artwork may prefer an offshore merchant account due to the high risk of fraud and chargebacks.
Understanding High-Risk Business Definitions Across Payment Processors
Visa, Mastercard, American Express, and Discover each have their own set of high-risk business categories, which payment processors use as a starting point before adding other industries according to their risk tolerance. Simply put, the definition of high-risk businesses is not uniform across all payment processors. Some businesses that Visa categorizes as low risk might still be considered high risk by a payment processor.
But there are several industries that most payment processors consider high risk. These include adult entertainment, travel services, dating websites, gambling, tobacco and vape shops, pharmaceuticals, debt collection and credit repair, bitcoin and digital currency exchanges, firearms, loan services, and multi-level marketing.
For instance, an online dating website that requires a subscription and does not allow explicit content might be considered low risk by Visa, but a payment processor may still classify it as high risk due to the risk of fraudulent chargebacks.
Understanding the varying definitions of high-risk businesses across payment processors is essential for businesses to find a payment processing solution that caters to their specific needs.
It is recommended that businesses work with payment processors that specialize in their industry to increase the likelihood of approval and obtain the best rates possible.
Understanding Other Factors That Lead to ‘High-Risk’ Classification
Often businesses with poor personal credit, high-value custom products, high dollar transactions with no business history, or a large number of international transactions also get designated as ‘high-risk.’
It’s important to note that being designated as ‘high-risk’ doesn’t necessarily mean that a business is illegitimate or operating in a prohibited industry. Rather, it’s an indication that payment processors perceive the business as having a higher risk of chargebacks or fraud.
In addition, businesses listed in the Terminated Merchant File (TMF or MATCH list) will automatically be considered high risk by all payment processors. The TMF is a shared database used by the major card brands to track merchants who have been terminated from processing credit card payments. The TMF can be a difficult hurdle to overcome for businesses seeking to secure a new merchant account.
While some factors leading to high-risk classification may be beyond a business’s control, others can be mitigated. For instance, improving personal credit can increase the likelihood of approval for a merchant account. Businesses with large transactions can consider breaking them down into smaller, more manageable transactions or provide more information to the processor to reduce the risk of chargebacks.
Identifying High Risk MCCs for Your Business
When you establish a merchant account, the acquiring bank will assign a merchant category code (MCC) to your business. Businesses often inquire about high risk MCCs and whether there is a definitive list. While there is no universal list, high risk processors will each maintain their own list of businesses that they consider to be high risk. When looking for processors, you may ask if they support your business type before submitting an application.
It is not necessary to know your current or expected MCC before opening a merchant account, as your processor will assign it to you. However, Visa and Mastercard have released a list of MCCs they categorize as high risk. (American Express and Discover do not have published lists)
Visa outlines its high risk MCCs in its Rules, but these are subject to change. The high risk MCCs include:
- 5962 (Direct Marketing – Travel-Related Arrangement Services)
- 5966 (Direct Marketing – Outbound Telemarketing Merchants)
- 5967 (Direct Marketing – Inbound Telemarketing Merchants)
- 7995 (Betting, including Lottery Tickets, Casino Gaming Chips, Off-Track Betting, and Wagers at Race Tracks)
- 5912 (Drug Stores, Pharmacies)
- 5122 (Drugs, Drug Proprietaries, Druggist Sundries)
- 5993 (Cigar Stores and Stands – for merchants that sell cigarettes in a card-absent environment)
If your business falls under one of Visa’s high risk MCCs, your processor is required to register you as a high risk business with Visa before the said business can accept Visa cards. This registration process comes with a fee, which is passed on to the business owner.
The initial registration fee is $500, and it costs $500 to renew each year.
It’s important to understand that while Visa’s high risk MCC list is a significant factor, it’s not the only consideration for processors. A processor may determine that a business is high risk even if it’s not on Visa’s list. In such cases, Visa does not require registration, and the related fees.
According to PaymentCloud, Amex permits some high risk business types, but does not allow adult entertainment and services, document preparation, and collections agencies.
It’s important to note that Amex’s policies may differ from those of other major credit card companies, and that individual processors may have their own standards for assessing high risk businesses.
We at TickleCharge suggest consulting that you ask our financial experts (who have been working within the high risk payment ecosystem for over 2 decades) to better understand how to navigate the complexities of high risk payments.
Costs Associated with High Risk Merchant Accounts
High risk merchant accounts come at a higher price than traditional merchant accounts. The final cost will depend on factors like business type, card brand registration (if applicable), and other individual details.
So, if your business wants to accept both Visa and Mastercard and belongs to a MCC that requires card brand registration, then be prepared to pay a $1,000 registration fee per year for both companies. This fee is beyond the control of your processor and is in addition to the per-transaction rates and fees.
The pricing and terms for high risk merchant accounts are set on a case-by-case basis by processors who review your business’s unique needs. It’s recommended that businesses get quotes from multiple processing companies to compare costs before making a decision.
In general, the costs for high risk businesses can start around 7-8% on the lower end but can increase to 17% or more for the riskiest businesses.
TickleCharge payment gateway solution however can work within its network of banks and payment processors to get businesses transaction rates starting at 1.99% (conditions apply). Reach out to us for most cost-effective options for high risk merchant account needs for your business.
High-risk merchant accounts are crucial for businesses operating in industries that are considered to have a high degree of risk. Some of these high-risk industries include adult entertainment and travel services, but other industries may also be classified as high-risk due to various factors such as legal and regulatory requirements, high chargeback rates, and reputational risks.
Obtaining a high-risk merchant account is not an easy task, however, high-risk payment gateway solutions like TickleCharge specialize in working with all kinds of high-risk businesses and are equipped to handle the unique challenges they face.