It finally happened. You built a business plan, set up a website, added product pages, and secured an inventory management platform, and are set to launch your new ecommerce business.
Then the phone call.
It’s your merchant bank telling you that your application for a merchant account has been denied. You fall into a high risk category and the bank will not be taking on the additional risk your business presents.
You can’t accept payment cards online.
It’s a common story for business owners that are categorized as “high risk”, even when they don’t know why or what that means. These merchants have filed the appropriate paperwork, gotten their proverbial ducks in a row, but are still left hanging with no viable way to accept credit cards online. Essentially, they are out of business before they even start.
If this sounds like you, fret not. While being a high risk merchant has its challenges, it also has some hidden benefits. We’ll explore how you can use this label to your advantage and get your business launched and positioned for success.
What it Means to be High Risk
Is there a positive side to being a high risk merchant? The short answer is yes. The longer answer is that it may require a bending of traditional concepts. Being labeled “high-risk” for credit card processing sounds like a bad thing, and in some cases, it is. There are hoards of unscrupulous merchants out there that have given a bad name to the good ones.
First, it’s important to understand where the label “high risk” comes from. For a business to accept credit card payments, it has to obtain a merchant account from an acquiring bank. Many merchants obtain merchant accounts through payment processors, which may specialize in their industry or business model. In any event, obtaining a merchant account requires the merchant to present information about the business’s financials and history, the owner’s financial information, and the type of products and/or services being sold.
The bank takes this information into consideration when determining whether to issue the merchant account. If a merchant is deemed high risk, it is often denied a merchant account by a traditional bank. One of the leading factors that contributes to this high risk designation is a high proclivity to chargebacks. There are several reasons a business may be more prone to chargebacks:
- Type of product/service sold
- Average dollar amount of sales
- International sales
- Monthly variance in sales
- Customer service processes.
Acquiring banks are looking for stable, predictable businesses with little shock value. Unfortunately, not many businesses fit this mold these days. The bottom line is that the less predictable a business’ financials are, the less likely it is to obtain a merchant account. Those that do – and that end up in the high risk category – often find that their merchant accounts are terminated without warning and that they have been added to the Terminated Merchant File (TMF). At this stage, it can seem hopeless that a high risk merchant will ever be able to operate and accept credit cards again.
But the situation isn’t as clear-cut as it may seem: for some merchants in certain verticals, the cost of being a high-risk merchant might be overshadowed by the potential high risk merchant benefits.
The Plus Side: High Risk Merchant Benefits
What some merchants may not know is that there are specialized high risk payment processors available to help high risk merchants obtain merchant accounts – and manage them – so the business has an opportunity to flourish.
In obtaining a high risk merchant account, merchants are not necessarily beholden to the limiting “rules” of traditional merchant accounts. Some of these high risk merchant benefits include:
The Ability to Expand Globally
Traditional merchant accounts are often limiting in that they restrict a merchant from doing business outside of its country of origin. The way this happens can be indirect. For example, low risk processors may not let merchants primarily conduct card-not-present (CNP) transactions. They may also limit the types of payment methods, including international currencies or restrict international payments altogether.
High risk merchant account benefits include the ability to transact freely, regardless of currency, or payment method, or location of the transaction. This is essential for online merchants looking to grow their customer base to global proportions. It’s also imperative to any ecommerce merchant, as purchases may originate from any part of the world.
No Volume Caps
Volume caps are common in low risk merchant accounts. It goes back to the predictability factor that many banks equate with financial stability. Unfortunately, certain business models (think MLM or direct response) are simply not built to have the same volume month after month.
One of the biggest high risk merchant account benefits is the ability to transact freely, without worrying whether you will surpass the expected volume for the month. It affords merchants unlimited earning potential. Merchants that benefit from this may include any that:
- Have a recurring billing model
- Offer high ticket items ($500+ per item)
- Process over $20,000 in transactions each month
Recurring and subscription merchants in particular have a lot to gain with a high risk merchant account. They are not limited or forced to restrict transactions and can enjoy recurring revenue with the potential to grow.
Minimized Chargeback Issues
Chargebacks are a tangled mess for most merchants, but especially for high risk merchants. Merchants with a low risk merchant account often have tenuous relationships with their acquiring bank, especially if they get close to breaching the 1% chargeback ratio. A low risk merchant account is at risk of being terminated at any moment.
One of the high risk merchant account benefits is that there is increased flexibility when it comes to chargebacks. The merchant may be subject to higher fees due to chargebacks, but their business isn’t perpetually in danger because of them. High risk merchant accounts are rarely terminated due to high chargebacks.
All in all, merchants should consider the high risk merchant account benefits before deciding to throw in the towel. Working with a specialized high risk payment processor can help streamline the payments flow and position your business for long-term success.