High Risk Credit Card Processing

Being labeled “high risk” for credit card processing seems like a bad thing and in many cases it is. But the situation is not as clear as it sounds: For some merchants in certain verticals, the cost of being a high risk merchant processing could be eclipsed by the potential benefits.

To accept credit card payments, a business must first obtain a merchant account with an acquiring bank. The cost of this service can vary widely depending on several factors including the type of business, the way transactions are conducted and the risk of historical loss. The fees are naturally higher for higher risk projects, and a specialized payment processor will usually be required. (For a detailed explanation of high-risk merchant accounts, see our Knowledge Base article.) In general, processors avoid these “dangerous” merchants because of the perceived risks.

Among the multiple factors that make high risk traders a threat, the main danger is the increased possibility of chargebacks. Certain things (type of product or service sold, average monthly sales amount, country the merchant sells to, etc.) can increase the risk of chargebacks, leaving banks and processors with potential losses in the millions. of dollars.

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The high-risk status is the defense of a bank (or processor) against the cost of too many chargebacks, but, paradoxically, too chargebacks may actually do in such a trader be considered high risk. For most merchants, this is a bad situation, and here’s why:

For most businesses, being labeled “high risk” only brings problems:

Excessive fees

All processors assume that high-risk customers will inevitably generate more chargebacks, so they will impose prohibitive fees up front. High-risk traders are likely to shell out $ 300 or more during initial setup and then pay a higher monthly fee plus double or more of the normal processing fee. Unless a business has significant earning potential, these excessive charges can put a high-risk merchant into bankruptcy, even without a chargeback.

Flying renewable reserves

High-risk payment processors typically require their customers to have a reserve on their merchant account, an interest-free savings account used by the absorbing bank as a type of insurance: if a chargeback is filed against a business and the merchant does not. Cannot do so to reimburse the issuing bank from its current account, the reserve will be mobilized to cover the loss.

Merchant account reserves typically hold 5-10% of monthly sales for about six months. Technically, the money in the reserve account still belongs to the merchant – it can only be used after 180 days (assuming there are no fees to pay). However, limited access to income can lead to significant cash flow problems for traders.

Increased chargeback fees

For each chargeback received, the merchant is billed a fee covering the administrative costs associated with processing the chargeback. A high-risk payment processor, however, will have significantly higher fees for each instance. And if a trader already in a high risk business receives excessive chargebacks, the costs increase even more. Since high-risk businesses are by definition at increased risk of chargebacks, these additional charges are a type of “double jeopardy” that costs merchants even more. Download our FREE guide on 35 effective chargeback prevention techniques, step by step. Uncover inside secrets that will lower your risk of chargebacks, increase your profits, and ensure the sustainability of your business.

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