Payment processors are not all the same, they often have their own unique areas of specialization where they can best meet the needs of specific businesses or markets.
This means that just because a payment processor is great for one type of business, they may not be a great fit for another, or they may not even be able to provide payment processing to certain types of businesses. This is especially true when it comes to finding a payment processor for high-risk merchants.
How do I know if I'm a high-risk merchant?
When you're setting up your business, you're unlikely to think about whether or not you're going to be operating in a space that payment providers consider high-risk. Sometimes even businesses that might be perceived as perfectly reasonable may be considered high-risk because of the likelihood of fraud or chargebacks that may occur. For example, businesses selling large ticket items far in advance such as airline or event tickets can be considered high-risk because those purchases can be embroiled in disputes, refunds, reselling, and other activities that can increase the risk for the payment processor.
Your business can be considered high-risk if any of these attributes apply:
- If your business is brand new and is still developing its reputation
- If there are concerns about the financial stability of the business, or the owner has a low credit score
- If the industry the business operates in has a high chargeback ratio
- If the industry you operate in deals with weapons, adult materials, drugs or drug paraphernalia, or similar products
Different payment processors will have their own way of classifying and dealing with potentially high-risk merchants, so it's worth shopping around to collect information from several processors if you think your business might be considered high-risk.
Why would I need a high-risk credit card processor?
If you fit into one of the categories listed above, then you may be considered a high-risk merchant. If the industry your business is in or the products you sell is the reason why you're considered a high-risk merchant, there is not much you can do to change that (outside of changing your business, of course). In this case, then you may need to find a payment processor who specializes in high-risk merchants. They often have experience in this area and are able to work with high-risk merchants and provide credit card processing services to them.
How are high-risk processors different that other processors?
While high-risk payment processors are generally offering the same types of services as regular processors, they often do so at higher processing rates to account for the risk associated with providing merchant accounts to high-risk businesses. High-risk payment processors may also have longer contract terms with significantly less flexibility than traditional processors, again, to mitigate risk. Processors can also require more documentation in order to board your high-risk business than other "safer" businesses. These measures are usually because of the higher risk associated with providing payment processing to high-risk businesses, and, unfortunately, are difficult to avoid if your business is deemed as high-risk.
High-risk merchants are also at risk of having reserves placed on their account, which a common practice with high-risk processors. This means that the payment processor withholds a significant portion of the merchant's funds for up to 180 days in case there is a chargeback or if the business closes unexpectedly and is unable to pay their processing fees. This money technically still belongs to the merchant and will be released once the time period is up, however, the long wait times for your money because of these reserves can cause cash flow issues if merchants do not properly plan for them.
What should I do if I'm a high-risk merchant?
Because there are no industry standards for qualifying a merchant as being high-risk, it's worth calling around to check with several different processors on what they may be able to offer you or asking contacts in your industry who they are partnering with for their payment processing. While you can't do much about the industry you operate in, or the products you sell, if it's your credit score or business history that is making your business high-risk, you can often take steps to remediate those concerns with potential processors. Finally, when applying for a merchant account, prepare yourself for the fact that you will likely be paying higher rates than other industries and have your all your paperwork and business documentation in order, so it's easy to provide it to your payment processor during the application process.