Certain business types are almost require a high risk merchant account due to the nature of their business. For instance, products with moral ambiguity, high likelihood of fraud, federally monitored substances, and foreign incorporation are classic reasons for categorizing entire industries as high risk. Under this umbrella fall adult services, online casinos, e-cigarettes, and online pharmacies, along with aggregate industries that do not sell their own products.
A history of chargebacks will send your firm into the high risk merchant account category. A chargeback occurs when a customer reverses a credit card or debit charge. Some industries are more prone to chargebacks by the nature of what they do. Other businesses fail to track and correct issues that cause chargebacks; over time, this can harm their reputations with merchant service providers.
Payment processors consider merchant accounts a form of credit. This makes sense if we understand the payment processing procedure. When a credit or debit card is swiped for payment, the card issuer (Visa, MasterCard, etc.) approves the payment, and the merchant account services provider processes it. Here’s the hitch: the processor is liable for the payment in case of a chargeback or fraud. Typically, these costs are passed on to the merchant. However, if the merchant goes out of business, the processor is still responsible for payment. Therefore, the processor “floats” the credit during the processing phase. A poor credit history is therefore a red flag for payment processors.
It might surprise you to learn that e-commerce sites tend to require a high risk merchant account. In-person transactions have lower chargeback rates. Restaurants, for instance, are considered low risk; for every million dollars that restaurants process, just $100 will be charged back. However, travel payments tend to be done remotely, and often in advance. Accordingly, the travel chargeback rate tends to be about ten times higher than that of the restaurant industry. Advance payments are risky because the payment processor is still responsible for chargebacks if the business is insolvent before prepaid contracts end or if a consumer does not agree with the cancellation policy and initiates a chargeback to fight it.
Underwriters consider business longevity, financial profile, and profitability when evaluating merchant account applications. New or not-yet-established businesses have nothing to prove their solvency so they may not be approved for card processing. Limited assets can also be problematic. For example if you’re asking to process a million dollars of transactions, but you only have $1 to your name – this is obviously considered a problem merchant service providers.