Are You a High-Risk Merchant?
Running any business these days more or less requires that you give your customers the option of paying with credit or debit cards. If you’re an eCommerce entrepreneur, credit/debit cards are just about your only option for getting paid. Although very small businesses can get by with a payment service provider (PSP) such as PayPal or Square, once your business reaches a certain size, you’re going to want to upgrade to a full-service merchant account. While it would be nice if credit card processors treated all businesses equally, the fact is that they don’t. Larger, high-volume businesses receive lower processing rates and often get more generous contract terms. Businesses are also treated differently based on the degree of financial risk they present to their processor. All processors will carefully judge your business to determine whether you fall into the “high-risk” category.
If, for whatever reason, your business is determined to be a high-risk one, the consequences can be severe. Many processors will simply refuse to approve you for a merchant account, while others will charge you significantly higher rates and fees than you would otherwise have to pay. Unfortunately, there are also plenty of merchant services providers that deliberately market to high-risk businesses that are struggling to get approved for a merchant account, only to rip them off with outrageously high fees and rates, as well as draconian contract terms.
In this article, we’ll discuss the factors that lead to a business being labeled high-risk and how this determination will affect your ability to get a merchant account. We’ll also provide some recommendations for high-quality providers that specialize in servicing the high-risk sector. Finally, we’ll give you some tips for avoiding the not-so-high-quality providers that prey on high-risk merchants.
Looking for the best high-risk credit card payment processing companies? If you’re having trouble getting approved, take a look at our top picks for high-risk merchant accounts.
Table of Contents
High-Risk Business Categories
The first thing to understand about high-risk businesses is that your processor will determine whether you fall into one of their high-risk categories when you apply for a merchant account. Either you’re high-risk, or you’re not – there is no middle ground. Beyond that, it gets complicated as every processor has their own unique guidelines for determining whether you’re in the high-risk category. While some business types, such as pornography or drug paraphernalia will almost always be placed in the high-risk group, others may or may not be, depending on your processor. Some merchant services providers have very strict guidelines for determining high-risk status, while others use more relaxed criteria. If you’re considering a particular provider, check their website or contact them directly to see if they find your business to be high-risk. This can save you a lot of time and effort in wasted applications to providers who aren’t going to approve you.
How a merchant services provider treats a high-risk business can also vary widely. Many providers, particularly those that try to offer merchant services at the lowest possible prices, simply do not accept any high-risk businesses at all. This helps to reduce their exposure to fraud and keeps costs low for their existing clients. Other providers will allow certain high-risk companies, but will charge you significantly higher rates and fees for your merchant account due to the elevated risk they’re accepting by giving you a merchant account. There’s also a third category of providers who specialize in placing high-risk businesses. While their rates and fees aren’t a good deal for non-high-risk merchants, they can often provide a merchant account for high-risk businesses that have been turned down by other providers.
While the exact criteria for determining high-risk status vary from one provider to the next, the following factors are usually used to determine whether a business qualifies as high-risk:
- High chargeback or fraud rate: If your line of business has historically shown a high rate of either chargebacks or outright fraud, you’ll probably be deemed high-risk, too. This determination is usually based on the behavior pattern of your customers, not you personally.
- Offshore businesses operating in the United States: If your business is headquartered overseas, but you primarily sell to US customers, you might be flagged as high-risk. While the potential for fraud is a strong factor here, lax banking regulations in your home country can also be a determining factor.
- Products or services of questionable legality: This factor is the one most people associate with high-risk businesses. Distributing pornography or selling drug paraphernalia are the most obvious examples, but there are many others as well.
- Questionable sales and marketing practices: Is your business the type that’s often thought of as a scam? If so, the principle of guilt by association is alive and well, and most providers will label you as a high-risk business.
- Bad personal credit: While most criteria for determining high-risk status focus on your business, this one focuses on you, the business owner. If, for whatever reason, you have a low personal credit rating, you’re more likely to be placed in the high-risk category by some processors.
- High average ticket sales: If your business routinely accepts unusually high-cost purchases via credit card, you could be considered high-risk. This factor primarily affects businesses such as furniture stores and companies who process a lot of B2B transactions.
Below is a list of business types that are often considered high-risk. While this list doesn’t cover every single possible high-risk business, it does include the categories that are most often regarded as high-risk. Remember that every provider has their own criteria, so while you might be considered a high-risk business by one provider, you might be approved for a regular, non-high-risk account by a different provider. Here are the most common types of high-risk businesses:
- 1-800-type chat sites
- Airlines or airplane charters
- ALL sexually-oriented or pornographic merchants: (i.e., companion or escort services, adult telephone conversations, adult bookstores, dating services, online adult membership or matchmaker services, adult paraphernalia or toys)
- Amazon, Yahoo or Google Stores
- Annual contracts
- Attorney referral services
- Automotive brokers
- Bankruptcy attorneys
- “Business opportunities”
- Casinos, gambling or gaming
- Check cashing services
- Cigarettes, e-cigarettes, or vape shops
- Coins, collectible currency, or autographed collectibles
- Collection agencies
- Coupons or rewards-points programs
- Credit protection, counseling, or debt repair services
- Debt collection services
- Discount health or medical care programs
- Debt consolidation services
- Drug paraphernalia
- eBay stores
- eBooks (copyrighted material)
- Event ticket brokers (unlicensed or non-registered (i.e., Stub Hub-type merchants))
- Exporting services (non-US based)
- Extended warranty companies
- Fantasy sports websites
- Federal Firearms License (FFL) dealers
- Finance brokers, financial consulting, or loan modification services
- Furniture sellers
- Indirect financial consulting (i.e., “How to Save Money by Lowering Your Electric Bill”)
- Financial planning, strategy or advising
- “Get rich quick” books, programs, etc.
- High average ticket sales
- “How-To”-type websites (i.e., “Learn How to Make Money on The Internet”)
- Horoscopes, astrology or psychic services, fortune tellers
- “Hype” products or services
- Hypnotists or self-hypnosis services
- International merchants (non-US based) operating in the United States
- International shipping, cargo, or import/export
- Investment firms, strategy, or books
- Life coaching
- Lingerie sales
- Lotteries or sweepstakes
- Magazine sales and subscriptions
- Mail or telephone order sales
- Membership organizations (contracts over 12 months)
- Merchants on the Terminated Merchant File (TMF) or MATCH List
- Merchants with poor credit
- Modeling or talent agencies
- Multi-currency sales
- Multi-level marketing (MLM) sales tactics
- Music, movie, or software downloads or uploads (i.e., copyrighted digital products)
- Non-US citizens doing business in the United States
- Off-shore corporation establishment services
- Pawn shops
- Prepaid calling cards
- Prepaid debit cards
- Real estate
- Replica handbags, watches, wallets, sunglasses, etc.
- Self-defense, pepper spray, mace, etc.
- SEO services
- Social networking sites
- Sports forecasting or odds-making/betting
- Telemarketing services
- Telephone companies
- Third-party processing, factoring merchants (i.e., payment processors, vacation rental brokers)
- Time-shares or time-share advertising
- Tour operators
- Travel clubs, services, or agencies
- Vacation planners
- Vacation rentals (unless the property is owned by the merchant)
- Vitamin and supplement sales (i.e., diet pills, prescription pills, health supplements, pharmacy products)
- VoIP services
- Weapons of any kind, including guns, knives, stun guns, or ammo. Also includes any parts of weapons (i.e., butts, triggers, magazines, etc.)
Fees and Rates for High-Risk Businesses
If you’ve been reading this so far and you’ve determined that your business is in the high-risk category, it’s time to face this harsh reality: merchant accounts for high-risk businesses inevitably cost more than those for non-high-risk ones. In fact, they usually cost a lot more. You’ll pay more in both account fees and processing charges, and you’ll probably be stuck in longer contracts as well.
While most non-high-risk businesses have some ability to negotiate the length of their contract terms, the industry average is around three years for the initial term, with an automatic renewal clause that extends it for one-year periods after that. These lengthy contracts have been very unpopular with merchants, and the trend within the industry is moving more toward month-to-month agreements so you can cancel your account at any time without incurring a penalty. Unfortunately, high-risk merchants don’t have much (if any) bargaining power, so you can expect to be stuck with a contract running anywhere from three to five years, again with an automatic renewal clause that extends it beyond that initial time frame. Your contract will also usually include an early termination fee that applies if you close your account before the end of your contract term. If that’s not bad enough, you might even have a liquidated damages clause in your contract that raises the price of breaking it even further.
While the processing industry is generally moving more toward lower monthly and annual account fees, you won’t be so lucky as a high-risk merchant. You can expect that at least some of your recurring fees, particularly your basic monthly account fee, will be higher than what it would be for a non-high-risk business. This is all a reflection of the fact that your processor is taking on additional risk by supporting your merchant account.
Higher processing costs are also an unfortunate reality for high-risk merchants. While we ordinarily recommend an interchange-plus pricing plan for most businesses, you’re far more likely only to be offered a more expensive tiered pricing plan. Even if you are offered an interchange-plus plan, expect to pay both a higher percentage markup and a higher per-transaction charge. While the actual rates will vary widely from one processor to the next, as a very general rule, you can expect to pay close to twice as much as what a comparable non-high-risk business with the same processing volume would pay. If you’re offered rates that are even higher than this, you should probably look elsewhere.
Another expense you’ll have to deal with as a high-risk merchant is a rolling reserve. While this requirement is sometimes also imposed on non-high-risk businesses that are just starting up, they’re almost always imposed on high-risk businesses. A rolling reserve is set aside from the proceeds of your sales to cover unexpected expenses such as chargebacks, and as a hedge against you suddenly going out of business. While rolling reserves decrease over time (and eventually go away altogether if your business is successful), they can present serious short-term cash flow problems and even force you out of business if you don’t manage them carefully.
Lastly, we always recommend that you review your proposed contract thoroughly before signing up with any processor. While this advice is critical for any business, it’s even more important for high-risk merchants. The fine print in your contract may contain the most important clues that you’re about to do business with a predatory “high-risk specialist” provider who’s going to charge you even higher fees and rates than you’d normally have to pay as a high-risk merchant.
High-Risk Merchant Services Providers
If your business falls into a category that almost any processor would classify as high-risk, you’re going to want to find a provider that specializes in serving the high-risk community. Unfortunately, there aren’t very many merchant services providers that specialize in high-risk accounts and offer top-notch service at fair prices. Our top two recommendations for high-risk providers are Durango Merchant Services (see our review) and Instabill (see our review). Both will provide you with high-quality service at fair, reasonable prices. Of these two providers, Durango is the better choice for domestic merchants, while Instabill is more suited to working with offshore merchants operating in the US. See our article The Best High-Risk Merchant Account Providers for several more recommendations.
Avoiding Predatory High-Risk Merchant Services Providers
As we’ve noted above, there are plenty of merchant services providers who claim to serve the high-risk community, but actually charge highly inflated rates and fees to unsuspecting business owners who are desperate to get approved for a merchant account. If you’re a high-risk merchant, know in advance that the deck is stacked against you. While some providers will treat you fairly and charge you reasonable fees, there are far more other providers that are looking to take advantage of your plight.
It’s not always easy to distinguish the reputable high-risk providers from the predatory ones, but we can offer a few tips to help you avoid the latter:
- Check their website: If their website layout looks very basic or dated, that’s a bad sign. Many predatory providers are small companies that don’t have the budget for a snazzy website, and a lot of them simply haven’t updated their site in years. A website that looks like it was put together back in the late 1990s should be your first clue that something isn’t right with the company.
- Check their online reputation: You’ll want to research what others are saying about the company on the internet. Obviously, review sites such as this one should be your first stop. If the reviews are bad, stay away. If you can’t find any reviews, that’s an even stronger indication that the company should be avoided. Also, don’t forget to check out consumer protection sites such as the Better Business Bureau (BBB) and Ripoff Report for feedback from merchants who’ve done business with the company.
- Read their contract: Relatively few providers offer sample contracts online, but if you can obtain a copy of the company’s standard Terms and Conditions or Merchant Application, review it thoroughly. It’s usually in the fine print of these documents that you’ll uncover the many ways the company can rip you off.
Finding a merchant services provider that’s a good fit for your business is never easy, but it’s far more difficult if you’re in the high-risk category. While you’ll inevitably have to pay higher fees and processing rates, you shouldn’t have to settle for sub-par customer service and support. As we’ve noted, there are providers on the market that offer high-quality service and fair pricing to the high-risk community, although your choices are more limited than they are for non-high-risk merchants.
One final point requires special emphasis. When you’ve repeatedly been turned down for a merchant account due to being in a high-risk business, it can be tempting to be less than completely honest about the nature of your business when applying for an account. Don’t do it! Merchants who misrepresent the products or services they’re selling when applying for an account inevitably get caught by their processor when the transactions start coming through, resulting in a quick and complete shutdown of the merchant account by the processor. Not only that, but merchants who get caught doing this also often end up being placed on the Terminated Merchant File (TMF) or MATCH List, making it far more difficult to get approved with any merchant account provider in the future. The bottom line is that you need to be completely honest about what you’re selling when applying for a merchant account. Not doing so can cost you far more than the higher expenses of a high-risk merchant account in the long run.
For reviews of some of the highly-rated high-risk providers we’ve found, check out our article The Best High-Risk Merchant Account Providers. You’ll find a brief overview of several providers that work with the high-risk community and offer quality services at fair prices.