An Introduction to High-Risk Merchant Accounts

A high-risk merchant account is a payment service designed for businesses that banks view as riskier than usual. This can be the result of factors such as frequent chargebacks, poor credit history, potential financial instability, or a higher chance of fraud. When a business is labelled high-risk, it may have fewer payment providers to choose from and face higher processing fees.

In some instances, a bank may place a rolling reserve on a high-risk merchant’s account. This rolling reserve is a portion of incoming card payments set aside to cover possible chargebacks. If your company fits into a high-risk category, it might still be possible to trade effectively by working with a specialist payment provider.

Who Needs a High-Risk Merchant Account

Any business that has been turned down by banks or mainstream payment services may need a high-risk account. Certain industries are known to carry more risk, including travel, adult entertainment, charities, regulated services, and affiliate marketing. That means a simple application to a bank may lead to refusal. However, a high-risk merchant account could allow continued operations.

How Providers Evaluate Risk

Financial providers use a system called a merchant category code (MCC) to decide which businesses are high-risk. They look at the company’s track record, the nature of its industry, and the way it accepts payments. Typical factors include:

• Business History

Younger ventures are often deemed higher risk.

• Financial Strength

A stable balance sheet can influence the risk rating.

• Creditworthiness

Directors with poor credit can raise concerns, although personal guarantees may help.

• Payment Model

Subscription services or long gaps between payment and delivery might be seen as a threat.

They also check the sector itself:

• Credit Risk

If there is a delay between payment and delivery, problems can arise if the company fails before fulfilment. Travel operators and dropshipping ventures often face this challenge.

• Regulatory Risk

Businesses in sectors with heavy regulation can experience sudden legal or policy changes, so banks may be cautious.

• Reputational Risk

When a bank’s own reputation is on the line, ventures linked to controversial products or services might be placed in the high-risk bracket.

Examples of High-Risk Sectors

Numerous industries are considered high-risk. These might include gambling, adult entertainment, travel and tourism, debt management, and anything involving crypto or alternative currencies. Firms in these areas often need specialist merchant accounts, as mainstream providers might turn them away.

Examples of high-risk sectors may include:

• Alcohol

• Adult Services

• Travel, Tourism, and Airline Bookings

• Credit Repair and Debt Management

• Cryptocurrency

• Dating and Escort Agencies

• Online Gaming and Gambling

• Nutraceuticals

• Payday Loans

• Tattoo Studios

• VPN Services

• Tobacco and E-cigarettes

This is not an exhaustive list, but it highlights the scope of industries that are often viewed as higher risk.

High-Risk vs Low-Risk Merchant Accounts

Payment providers use various criteria to decide if a business is high-risk or low-risk. Low-risk merchants often have solid credit, minimal chargebacks, a stable monthly sales volume, and only accept one main currency. These merchants might sell household goods or books and rarely face refunds.

High-risk merchants typically take multiple currencies, deal with unpredictable or larger transaction amounts, have more chargebacks, or trade in newly established sectors. They might process bigger sales volumes, handle subscription models, or operate in regulated areas.

Advantages of a High-Risk Merchant Account

Although fees can be higher, a high-risk account can be beneficial:

1. Freedom to Accept Different Types of Payments

High-risk merchants are less restricted with product lines, subscription models, or international sales.

2. International Expansion

In most cases, high-risk accounts are set up to handle payments from multiple countries and currencies.

3. Flexible Transaction Volumes

These accounts allow higher volumes, which can be helpful for special offers or product launches.

Potential Disadvantages

High-risk merchant accounts come with extra costs and conditions:

• Higher Processing Fees

Rates may be in the 4 percent to 10 percent range, compared with 1 percent to 2 percent for a low-risk setup.

• Increased Setup Costs

Establishing the account may involve more paperwork and higher administrative fees.

• Longer Settlement Times

Funds might take up to a week to clear instead of a few days, to reduce the chance of chargebacks.

• Rolling Reserve

The bank might hold a percentage of sales to cover any disputes.

Factors to Consider When Choosing a Provider

Before you decide on a high-risk merchant account partner, consider these questions:

1. Experience in Your Sector

Providers familiar with your line of work will often handle transactions and risks more effectively.

2. Customer Support Availability

Quick help by phone or live chat can be vital if you face payment issues.

3. Fee Structure

Some providers charge higher monthly fees and lower transaction costs, or vice versa. Always check the overall impact on your finances.

4. Specialisation in Online Transactions

If you only trade online, it helps to have a provider with robust tools for tackling web-based fraud.

5. Security Measures

Look for clear safeguards, like anti-fraud filters and chargeback prevention.

6. Bespoke Features

Confirm the provider can customise their setup to suit your exact needs.

7. Transparent Contracts

Keep an eye on any hidden fees, contract lengths, or early termination charges.

8. Up-to-Date Website

A regularly updated site indicates a company that is active and responsive.

Typical Costs

While fees vary, high-risk businesses generally pay more than standard merchants. For instance:

• Transaction Fees

Around 4 percent, or up to 10 percent for overseas payments.

• Monthly Charges

Could range between 50 to 100 pounds.

• Rolling Reserve

A portion, often around 15 percent, may be held as security against chargebacks.

How to Apply for a High-Risk Merchant Account

An online application is usually straightforward. You will need:

• Proof of incorporation

• A recent bank statement

• Valid ID for directors or owners

• Business ownership details

• Relevant licences (where required)

• Six months of processing records (showing volumes and chargebacks)

Your website should also display clear contact details, refund policies, and delivery methods, alongside an SSL certificate and HTTPS security. This transparency helps providers gain confidence in your business model.

Boosting Your Approval Chances

If you want to improve your odds:

• Keep Accounts in Order

Up-to-date financial statements reflect stability.

• Enhance Credit

Aim to reduce debts and avoid late payments.

• Check Compliance

Terms and conditions should meet all legal requirements.

• Review Third-Party Fulfilment

Make sure any service contracts protect your business from supply chain issues.

• Compare Providers

Seeking quotes from several sources gives you a clearer view of costs and terms.

• Cut Down on Chargebacks

Fraud filters and simple refund policies help lower the risk of disputes.

• Consider Offshore Options

Overseas providers might offer better acceptance rates.

Final Thoughts

A high-risk merchant account can be a valuable option if you operate in an industry that mainstream banks often refuse. It opens the door to reliable payment solutions, even when your sector or past history raises concerns. By selecting a specialist provider, you can still accept card payments, manage growth, and secure your revenue stream.

At 26M we specialise in helping high risk merchants, so Contact Us now to understand how we can help you!