If you’re running an ecommerce business, you’ll of course need a way to accept credit or debit card payments. This means you’ll need to find a merchant account. But before you apply for an account, ask yourself this: are you a high-risk merchant?
Knowing the answer can help you avoid the time and trouble of applying for an account only to be denied. It will also give a chance to research all of your options, and select a merchant account provider that best fits you and the needs of your business.
The criteria that banks use to decide if a business should be categorized as high risk or not vary. However, there are common denominators such as the type of business you have, the amount of time you’ve been in business and your credit history. If you’re unlikely to be approved for a personal loan or mortgage, there’s a good chance you’ll be denied for a merchant account. That’s because credit card companies, banks and some payments processors use professional risk management principles to stay profitable and avoid losses whenever possible.
Here are five telltale telltale signs you’re a high-risk merchant:
You’re a Startup
Unless you have a great business track record or your personal credit is close to perfect, banks tend to be jittery about new businesses. That’s for a good reason — 75 percent of startups fail. Ecommerce businesses also have the inherent risk of card-not-present transactions fraud, which is on the rise.
You have Poor Credit
If your personal or business credit is bad, or you’ve declared bankruptcy, you’ll probably be considered high risk. Other factors that will influence your outcome include criminal history, bill payment history or having too much debt. If you have a record of paying your bills late — or not all — that will count against you as will past liens and judgments.
You’re in a Risky Business
Certain types of businesses are considered riskier than others right off the bat. And many banks won’t even touch certain services, like the sale of adult materials or online gambling, because they carry potential reputational or financial risks. Other industries that often are considered high risk include debt collection, real estate, fantasy sports sites and international import or export. A business based in one country that does most of its sales in another, will also be considered high-risk. Highly-regulated industries like cosmetics, wellness and tobacco products can also be tough sells.
You have a Subscription Model
The subscription business is booming, with sales having grown by 100 percent every year for the last five years, but it still falls into the high-risk category. The subscription model includes online dating sites, magazine and movie subscriptions; clothing and food delivery services; and software. These businesses are considered riskier because they attract a higher level of fraud and chargeback rates. A chargeback occurs when customers dispute a charge to a credit card company and a bank then approves the charge, taking money from the merchant and refunding it to the customer. With the subscription model also usually come with long-term fulfillment, meaning the time between when a payment is processed and when the product is delivered. The more time that passes between the sale and when the produce is received, the higher the risk score. Anything with a subscription and expiration date carries a higher risk because the fulfillment is so long.
You sell Pricey Products
Selling expensive, high-ticket products services or products is considered risky. This goes double for products like airline tickets, travel packages and timeshares that are usually bought well in advance of use because this gives customers plenty of time to change their minds, leading to high rates of cancellations, returns, and refunds. There’s also a chance that these businesses can fold, which would leave banks responsible for reimbursing those purchases.
If by now you’ve decided there’s a very good chance you’re a high-risk business, you don’t have to despair. Running a high-risk business doesn’t mean you won’t be able to get a merchant account. You’ll just need to be careful to avoid payment processors that take advantage of high-risk merchants with steep fees, or offers of too-good-to-be-true free services. Make sure to read all the fine print, and research everything carefully.
Look for processors like MerchACT that specialize in high-risk businesses, have been in operation for several years and are upfront about the fees they charge. MerchACT provides custom, managed risk processing that is easy and quick so that you can get back to business.