A merchant is considered “high-risk” when it runs a business that is highly susceptible to fraud and chargebacks. This can be due to the industry they belong to, the products or services they provide, or a history of high chargeback claims.
When this happens, merchants go through a more rigorous process before being approved for a merchant account A bank account that allows merchants to accept credit card payments . This is because financial institutions are extra careful before agreeing to bear the risk of processing payments for businesses that are likely to experience chargebacks.
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Key Takeaways:
- Businesses can be tagged as high-risk for different reasons: industry type, high chargeback rates, or poor credit score.
- A high-risk merchant will have difficulty getting approved for merchant services and will require a service provider that supports high-risk businesses.
- High-risk merchant accounts have higher transaction rates, additional restrictions, and less favorable contract terms than low-risk merchants.
Factors That Determine High-risk Merchants
Every bank and payment processor has its own criteria for determining whether a merchant is high-risk or not. However, there are generally acceptable guidelines among financial institutions that identify a high-risk merchant. These are as follows:
Inclusion in the TMF/Match List
MATCH (Member Alert to Control High-risk Merchants) list: A database created and managed by Mastercard that keeps a record of businesses whose merchant accounts were canceled by their acquiring banks. Previously known as the terminated match file (TMF) list.
Acquiring banks (banks that provide a merchant account) will close a merchant account when businesses violate the provisions in the merchant agreement, such as:
- Going past the acceptable chargeback claim ratio (also known as the chargeback rate) The acceptable maximum chargeback rate for businesses is 1%
- Numerous reports of unauthorized transactions
- Falsifying business documents
- Proof of suspicious merchant activity
Other acquiring banks check this database whenever they receive a merchant account application.
Providing Highly Regulated Goods & Services
Businesses that sell highly regulated items such as CBD, tobacco, and wellness products or offer services such as gambling and multilevel marketing are classified as high-risk. This is because businesses in these industries are imposed with heavy compliance measures, making them subject to cancellation at any time.
Other examples of high-risk industries include the following:
- Financial or legal services
- Subscription businesses
- Life and other coaching services
- Travel services or clubs
- Health, wellness, and supplements
- Money transfer businesses
- Precious metals
- Cryptocurrencies
- Dating/adult industry
- High-volume import-export
- Credit institutions
- Alcoholic beverages
Business Profile Considered “Risky”
The main difference between high-risk and low-risk merchants is their susceptibility to chargeback claims and the risk of fraud based on the nature of the business. Below are some examples of how a high-risk merchant may differ from a low-risk merchant.
However, note that this list is not exhaustive, and businesses can be flagged as high-risk for having just one “risky” attribute.
High-risk vs Low-risk Merchants
High-risk Merchants | Low-risk Merchants | |
|---|---|---|
Industry | Regulated products and services | Regular retail, restaurant, and service types |
Transaction Type | Mostly remote, subscriptions, future services | Mostly in-person, instant exchange type of transaction |
Client Base | Mostly overseas sales | Primarily local |
Business Financial Profile | Low credit scores, high chargeback rate and/or returns | New businesses, average credit score, within acceptable chargeback rate |
Fulfillment Timeframe | Extended; payments are received long before goods or services are rendered | Immediate to a few days |
High-risk merchants will have to provide more requirements before being approved for a merchant account. Compared with low-risk merchants, they typically incur higher transaction rates, more incidental fees, and additional restrictions such as rolling reserves. Until recently, high-risk merchants were often locked into long-term contracts.
How to Find a High-risk Merchant Service
Not all merchant account service providers can support high-risk merchants. To do so, they require financial institutions such as banks that are willing to accept the higher-than-usual risk that comes with certain industries or business types. Payment processors should also have special tools that can manage business activities that may be flagged as “risky.”
If you find that your business is classified as high-risk, follow these steps to secure a merchant account provider:
Step 1: Do Your Research
Make a list of merchant service providers that specifically work with your industry. This information is often available on provider websites, or the provider would typically list industries they don’t support.
Read our recommendations for high-risk merchant account providers.
Step 2: Compare Features
Once you have your list, compare their fees and services to find which best matches your business needs. Look into their fee structure, contract terms, fraud and chargeback protection tools, and reputation as a high-risk merchant service provider.
Related:
Step 3: Check for Expertise & Industry Knowledge
High-risk merchants require extra attention to get approved for a merchant account because of its sensitive nature. This is why it’s important to make sure that you find a provider with knowledge of your industry or an expert reputation for managing high-risk merchant accounts.
Some of the questions you should ask are as follows:
- Do they offer load-balancing?
- What is their chargeback protection policy?
- Can they assist with the merchant application process?
- Do they work with businesses on the MATCH list?
Step 4: Prepare for the Merchant Application Process
Once you are ready to reach out to your chosen high-risk merchant account provider, the last thing you need to do is prepare for the merchant application process. Gather relevant business documents that may be requested, and check to make sure that you have significantly reduced chargebacks since you last applied for a merchant account.
Lastly, be open with your prospective merchant account provider about any business issues that you currently face. Doing this will let them know exactly how to help you move along with the application process.
Download our free step-by-step guide to get started on a merchant account application.
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Frequently Asked Questions (FAQs)
These are the most common questions we encounter about high-risk merchants.
A high-risk merchant means that financial institutions view your business as an elevated risk. This may be due to several reasons such as frequent chargeback claims and refunds or belonging to an industry that is considered high-risk. It considerably limits your choices for merchant accounts.
In general, high-risk merchant accounts carry higher transaction rates, additional restrictions such as rolling reserves, and longer contract terms than low-risk merchant accounts.
MCC, or merchant category codes, come from card companies (Visa, Mastercard, AmEx, Discover). If a card company considers your goods or service high-risk, you will be assigned a high-risk MCC, meaning that your business trade is deemed a financial risk to the payment processor.
Note that while MCC codes with major card networks are standard, not all credit card companies use the same MCC.
Bottom Line
A high-risk merchant faces challenges such as higher fees and less favorable contract terms. So, finding out that your business is categorized as high-risk is a serious matter.
It is not hopeless, however, as there are many providers that are experts at helping high-risk merchants get approved for a merchant account.
Knowing what a high-risk merchant is and finding the right high-risk merchant account provider can help you get competitive rates and payment tools that match your business needs.
