Electronic transactions and merchant accounts are a major facet of business that new business owners, particularly those in a high risk sector, may not fully understand. It is without a doubt one of the most important aspects of commerce—and you must know how it works. For small businesses and start-ups you’re already walking on a knife’s edge; there’s so little margin for error. High risk industries are cut-throat, competitive and prone to obstacles that can break you. Here is a breakdown to answer all your questions about high risk merchant accounts.

What is a High Risk Merchant Account?

A high risk merchant account is your business’ gateway to accepting electronic transactions. To accept credit and debit accounts you need to open a merchant account. Most standard commercial businesses will open a merchant account with a bank or traditional financial institution. Yet, banks and financial institutions are hesitant to open a merchant account for businesses that are in a ‘high risk’ industry.

Why Don’t Banks Support High Risk Merchant Accounts?

Banks don’t support high risk merchant accounts because of the risk. There are two primary risks that banks and institutions examine when they consider opening a merchant account for your business: financial risk and reputation risk.

Financial risk is an analysis of the viability of your business. A bank will examine your financial history, your business plan, credit history, and your chargeback rate. Chargeback rates will be put under a microscope as the high risk sector is characterized by high chargeback rates, which will hurt the bank each time one occurs. An example of a high risk business that can create an onslaught of chargebacks is penny auctions. Customers who are unhappy they didn’t win the auction or those who don’t understand how penny auctions operate may try to cancel the transaction, thus creating a chargeback.

Reputation risk is another major consideration for banks. Banks do not want to be associated with a merchant in a sector that is unseemly or represents a legal risk. An example of the latter is medical marijuana. In states where there’s still a gray area regarding State and Federal laws for marijuana, banks will not run the risk of being prosecuted as an accessory to an illegal dispensary.

What are the Differences Between a Merchant Account and a High Risk Merchant Account?

The first and most obvious difference is who actually operates your merchant account. The majority of high risk merchant accounts are opened by banks overseas that are not inhibited by US law and less scrupulous of the risks mentioned above. Of course, due to the international nature and the risks involved in an overseas bank account, rates are considerably higher than normal merchant accounts. Also, there may be chargeback penalties to encourage productive management of your chargeback rates.

Some online, high risk merchant accounts will create contracts that could be damaging to your business. When opening a high risk merchant account, take care when you pick your merchant services provider.

Does my Business Need a High Risk Merchant Account?

The quick answer is it depends on what business you’re in. High risk sectors are typically anything related to adult content, debt collection, firearms, e-cigarettes, marijuana dispensaries, and any credit-repair or bad credit business. These industries are almost a lock for the ‘high risk’ tag.

The other way to find out if you need one is to apply with banks. If the banks won’t open a merchant account for you due to the risks involved for them, it’s a good bet you’re going to be forced to do business elsewhere.

Being in a high risk business often means you’re in a lucrative business. There is no reason to be extra-fearful of opening a high risk merchant account. The majority of high risk merchant services providers are legitimate businesses interested in the potential of your high risk business. Once you have a fundamental, easy understanding of how high risk merchant accounts look and operate, setting one up for your business should be straightforward.


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