Starting a new business requires opening a merchant account which is a complicated process. It is necessary to facilitate payment processing, such as credit card payments. They can be set up through the bank or Credit Card Company. While opening a merchant account, it should be clear whether your account will become a high risk.
Your business will be classified under high risk when the criteria for low-risk merchants don’t meet. Problems in a high-risk merchant account are that it will have high chargeback rates, decrease in credit, or reputational risks to process the payments. And high-risk merchants are those that impact their bank to heightened scrutiny and financial loss.
What is the reason for banks to label a business as high-risk?
Banks issue merchant accounts, set electronic payment methods, and allow the business to use such payment methods. Low-risk business is secure due to being safer in terms of chargebacks, fraudulent activities, business credit history, etc. high risk merchant accounts are dangerous for the banking system to process.
Several factors represent a high risk. It has a less stable financial environment by producing an increased chargeback and worries to the bank of poor credit from previous years. It is due to the nature of business and using poor business practices. Bank worries about the four main factors and assesses them as a risk. They are as follows:
1. Your industry
All the banks go through the processing history of all businesses and will check how many refunds or chargebacks, fraud, etc. Especially for those new to the company, the average of your industry is the baseline for banks to confirm how much risk they expect from your processing through them.
2. Your financials
The bank will look at your operating system vertically or at others. They will check your current business, such as debt to equity, burn rate, total profit, etc. These are things the bank will consider. The account will be undersigned by the merchant and not by the business entity.
3. Your billing model
You have to inform the bank about your payment method. If you are using a card, these transactions will have lower risk; without card transactions, they are riskier. Annual billing is a specific interest to the bank.
4. Your processing volume
Banks and card associations are interested in your processing. A sliding scale got created for the risk depending upon the number of annual transactions you send:
1. In level 1: over 6 million transactions
2. In level 2: 1 million to 6 million
3. In level 3:20,000 to 1 million
4. In level 4: under 20, 000
What industries do banks consider high-risk?
A high-risk merchant account is not only for industries having an adult product, gambling, and casinos. But there are also other high-risk business merchants offering travel services, airline companies, social networks, etc. Always consult the bank or a payment processor to confirm whether your business falls under this category.
Adult entertainment, Gaming, subscription-based businesses, gambling, and betting, Multi-Level Marketing, travel agencies, pharmaceuticals, alcohol, tobacco, CBD products, vitamins, telemarketing, supplements, accommodations, cryptocurrencies, magazines, computer hardware, and software, etc., are high-risk categories.
Why is your business denied payment services?
In addition to increased chargebacks and card and card, not transactions, some other reasons are there to deny merchant services, including:
1. Licensing issues
A business license is necessary compulsorily to approve a merchant account. To many organizations, it is simple, but companies related to pharmacies, and gambling sites that are online, should adhere to stricter permits. They should follow the rules, where they can operate, and what products they can sell. You may only qualify for a high-risk merchant account if your company meets these requirements.
2. Possibility of merchant fraud
Service providers should be more aware of merchant fraud than their low-risk counterparts. If your application appears as if it engages in undesirable behavior, your account may be under termination.
3. Excessive chargebacks
Preventing excessive chargebacks may have a chance to accept your application. High-risk accounts always grant more space to industries and have disputed transactions. The same applies to businesses that provide services such as annual memberships or automated recurring billings that increase the period the company exposes to vulnerable chargebacks.
4. High decline rate
If your customers give wrong information during transactions, banks can decline transactions. It is unavoidable and has some serious repercussions if it happens continuously. If your transactions decline by 10 percent, service providers may not be willing to do business with you.
5. Inappropriate sale volume
One of the benefits of opening a high-risk account is by producing high sales. Transparency is essential; the application may only stand up if your sales volume is at least your average ticket size.
6. Lack of documents
While filling out your application, you must submit all the necessary documents they ask for. You have to give up-to-date monthly statements of your company, chargebacks, and decline rates to achieve the goal.
7. Tax liens
You must provide your personal and business details to have a merchant account. A tax lien represents a warning sign to service providers and institutes a debt solution process to confirm that it will not affect your application status.
8. Failure to meet agreement terms
Exceeding the processing limits of the agreement made by your service provider may withdraw the partnership from you. Therefore, it is necessary to understand the contract terms and follow them according to them to gain future merchant accounts in a pitfall.
9. Making the MATCH List
Member Alert To Control High Risk (MATCH) lists offenders for fraud, money laundering, illegal transactions, collusion, etc. Suppose your mane or business comes on the list, and getting your merchant account for up to five years takes much work.
10. Applying to the wrong processor
Some service providers are willing to overtake poor credit and chargeback histories; others will be more forgiving. If some service providers reject your application, don’t give up. Seek out another agency that meets your situation better.
Conclusion
Industries may be marked as high risk by some traditional banking institutions for various reasons. You have to research to find service providers at an affordable rate. If you are running your own high-risk business, get support from payment processing services without paying high costs.