Is your business considered high risk by your credit card processor? Here's how to know and what that means for you.
- High-risk businesses or industries face higher rates and additional terms and conditions from credit card processors.
- Volatile revenue, poor cash reserves, bad credit, excessive chargebacks or industry-wide challenges can lead to a high-risk designation.
- Higher rates, fees and rolling reserves are some of the impacts of a high-risk designation.
- Reducing chargebacks and improving communication with the processor can mitigate risk factors that lead to a high-risk designation.
Credit card processing can be a risky business. There are plenty of businesses that experience excessive amounts of chargebacks. There are also entire industries where there is an inherent risk, which could lead to major difficulties for processors if businesses' revenue is diminished or their doors are shut completely.
To manage clients with poor credit, negative processing histories or low cash flow, credit card processing companies have developed a "high risk" designation. High-risk merchants are generally subject to higher rates and fees, as well as additional terms and conditions. How can you know if you might be labeled high risk, and what can you do about it? This guide covers everything you need to know about credit card processing and high-risk industries.
What is credit card processing?
Credit card processing is the way by which businesses can accept customer payments via debit or credit card. Generally, doing so involves the use of both point-of-sale (POS) hardware and software in conjunction with the payment networks of a credit card processing company. Credit card processing service providers often charge percentage rates of each sale, as well as a per-transaction fee depending on the type of transaction.
Many processors provide the option to set up payment gateways for accepting debit and credit cards online. However, accepting payments when the physical credit card is not present, either through a gateway or over the phone, often comes with a higher rate due to the increased risk.
Risk, in general, is a key consideration in the credit card processing industry. In some cases, certain businesses or entire industries could be deemed "high risk," which carries higher rates, additional fees, and added terms and conditions compared to the credit card processor's other clients.
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What is a high-risk merchant account?
High-risk merchant accounts are those held by businesses that have an extensive history of refunds and chargebacks, according to SecurionPay. Because your business poses a higher risk of liability to financial institutions, you pay higher fees for services, and you may also be subject to a rolling reserve.
The rolling reserve provides protection to the bank in case of excessive chargebacks and refund incidences. High-risk credit card processing accounts may also be offered to merchants that have a high monthly sales volume and an average transaction rate of $500 or more.
Companies with pristine credit histories and that sell products and services with low chargeback and refund rates often qualify for standard merchant accounts.
What makes a business or industry "high risk?"
Credit card processing service providers each have their own definitions of what makes a business or industry high risk, but there are generally some commonalities. According to Douglas Keller, a writer for Finance Fox, there are several industries with different credit card processing needs that are likely subject to a high-risk consideration.
Certain industries have higher incidences of chargeback cases, fraud investigations and refund rates. Your business may also be labeled high risk if you sell expensive items in excess of $500, or if you sell items that carry potentially significant legal risks. The following are examples of industries categorized as high risk by credit card processing companies:
- Online gaming
- Rare and collectible cars
- Debt collectors
- Adult entertainment
- Credit repair
- Bail bonding
- Legal/Law firms
- Calling cards
- Affiliate marketers
- Life coaching
- Consumer electronics
In addition, businesses with cyclical sales or a high volume of recurring payments for subscription-based products can be considered high risk due to the potential volatility of their revenue. Ultimately, whether a business or industry is deemed high risk is at the discretion of the credit card processing service provider.
In other words: Businesses can be considered a high-risk merchant if they operate in an industry identified as high risk by the credit card processor, or if there is a significant risk of financial obstacles inherent to the business model.
In some cases, predatory credit card processing companies can use a high-risk designation to charge clients higher rates and additional fees. A high-risk designation could even result in a company's credit card processing capability being revoked by the company, so it’s important to understand what goes into the decision to designate your business high risk to ensure it is a legitimate decision.
Credit card processing in high-risk industries
While most credit card processors maintain roughly the same list of high-risk businesses and industries, the terms and conditions attached to a high-risk designation can vary significantly depending on the provider. Typically, a high-risk designation means a business faces higher rates from credit card processors, as well as different rolling reserve targets, tiered pricing plans and a liquidated damages clause, Keller said.
If you're deemed a high-risk business or industry, expect the following impacts to your transaction rates, fees and merchant accounts:
Fees: Generally, high-risk merchants are subject to elevated fees. Setup fees, payment gateway fees, chargeback fees and more are likely to be more expensive when you've been designated high risk, potentially eating into your profit margin.
Rolling reserve: A rolling reserve might be held for high-risk merchants. This is a portion of your daily transactions that the credit card processor holds and releases later. It acts as a guarantee to the processor in case your business fails, or some major development negatively impacts your industry. Often, credit card processors hold 10% of your transactions for 90 days before releasing it back to you.
- Minimum reserve: Like a rolling reserve, a minimum reserve is a portion of your transactions you are always required to keep in your balance by the credit card processor. It is a preset number that must be met, either in one lump sum deposit or as a percentage of transactions over time. A minimum reserve must always be maintained.
In some cases, little can be done to avoid the high-risk label. For example, businesses that operate in the cannabis industry are automatically considered high risk due to the ongoing federal prohibition of cannabis and the potential legal volatility associated with the industry. It is easier for businesses in other industries to avoid the high-risk designation by ensuring there are mitigating factors that put credit card processors at ease.
What can you do if you are labeled a high-risk business?
If you find yourself labeled a high-risk business when signing up with a credit card processor, taking steps to mitigate perceived risks could improve your situation.
Communicate your company's return and refund policies openly and clearly with customers.
"They [businesses] should establish clear communication with their customers to avoid transaction issues. In addition, they should ensure that enough fraud prevention systems are in place," Keller said. "Keeping a lower chargeback ratio below 1% is also a great mitigation factor." Provide clear refund and return policies and make sure your customer service department is reliable and easy to contact. Aim to keep customers happy by being flexible and professional.
Set aside a liquid source of capital.
Also, you should maintain a significant amount of liquid cash on hand. Well-capitalized businesses, whether they are considered high-risk merchants or not, are better positioned to handle losses or shortfalls in revenue. Credit card processing service providers can view hefty cash reserves as a mitigating factor. Credit card companies want to ensure you have enough assets to cover any potential losses related to chargebacks and refunds.
Actively work to reduce chargebacks.
Finally, working to reduce chargebacks is a major way to improve your standing with a credit card processor. Typically, if you reduce your chargeback rate to less than 1% of transactions, processors look upon you favorably, said Keller.
To reduce chargebacks, confirm that your merchant name is easily recognizable by customers on their card statements. Moreover, provide details about return and refund policies clearly on all client communications, including order forms, receipts and invoices. Also, avoid gimmicks like "lifetime" memberships or annual subscriptions that kick in after a brief free-trial period. These sales tactics lead to a high number of chargebacks.
Of course, once you have been deemed high risk or had a merchant account shut down, it will be harder to convince credit card processors to remove the designation. If possible, set up a credit card processing account only when you have good credit, substantial cash reserves and a fraud prevention system in place.
If you are already operating as a high-risk merchant, however, it might be a good idea to open a second merchant account elsewhere. That way, in the event your account is shut down by your credit card processing partner, you have another one ready to go and can continue accepting your customers' card-based payments uninterrupted.
Choosing a high-risk credit card processing company
To mitigate risk, conduct your own research on high-risk credit card processing providers. Look for a company that specializes in your industry. For instance, there are high-risk merchant account providers that work with pharmaceutical and wellness companies specifically. Once you create a shortlist of providers, review their policies extensively. Your merchant account may be subject to a monthly service fee as well as a higher per-transaction fee. As an example, you could have to pay as much as 5% per transaction if the processor deems your business a high risk.
Although imposed fees will comprise the bulk of your decision about which high-risk credit card processor you use, look at other services rendered by the processor. For instance, what type of payments will the company accept? Does the company provide any solutions to high-risk merchants such as POS terminals and mobile payment solutions? Although these solutions may cost you extra per month, the provider could offer a discount to merchant account holders.
Another aspect to consider involves the contract terms. You never want to enter into a long-term contract that keeps you locked into a high rate for an extended time frame. Your business needs will likely change over time, and you may be eligible for better rates in the foreseeable future.
What is the best high-risk credit card processing provider?
When choosing a credit card processor, it can be hard to tell which is best for a high-risk merchant. Everyone's situation is different, and certain high-risk designations might carry different rates, fees and terms even from the same processor. For example, a company with a bad credit history might face different restrictions than a company in a high-risk industry.
If you're looking to partner with a credit card processor to open a merchant account, see our best picks and credit card processing reviews, along with a guide of what to look for when researching companies.
Here's a quick look at some of our best picks.
Flagship Merchant Services – Best contract
Flagship Merchant Services is a full-service credit card processor with the best contract, because it offers its services to all its customers on a month-to-month basis and doesn't charge a cancellation fee. By contrast, standard credit card processing contracts have lengthy three-year terms with a short cancellation window of 30 to 90 days before automatically renewing for an additional one- or two-year term. They also have early termination fees to discourage you from exiting your contract before the term expires, some with liquidated damages clauses that make it very expensive to cancel.
Additionally, Flagship offers a choice of interchange-plus or tiered rates, allowing you to select the better pricing model for your business. If you're already processing, Flagship will negotiate with you to see if it can meet or beat your current pricing. It charges a monthly fee, a monthly payment gateway fee and has a monthly minimum. It also charges an annual PCI compliance fee. It doesn't charge application, setup or payment gateway setup fees, though.
Helcim – Best for small businesses overall
Helcim is the best credit card processor for small businesses. It's very transparent with its pricing, posting its complete rates and fees online. This full-service account provider offers interchange-plus pricing to all its merchants, its retail rates are lower than average, and it has a rate-lock guarantee that promises not to raise its markup for the life of your account.
Also, instead of charging a handful of standard fees like most full-service processors, it charges a single monthly fee, which includes statements, customer service, PCI compliance and access to Helcim Commerce, the company's all-in-one payment platform. Like other top processors, Helcim provides its services on a month-to-month basis, so there are no early termination fees to pay if you close your account.
Square – Best low-fee credit card processor
Square is the best low-fee credit card processing company – the only fee it charges for its basic processing service is a flat rate for each transaction. There are no monthly, gateway, setup, annual, PCI compliance or early termination fees. It doesn't even have a chargeback fee, which is unusual. Square's lack of fees makes it an affordable option for small businesses and individuals that don't process enough transactions to justify paying regular account fees each month.
Square also has the best mobile credit card processing app. Not only can you accept payments, Square includes full-featured POS software that tracks inventory, manages customer information and runs sales reports. The app is free to use – all you pay for is processing. It works on both Apple and Android phones and tablets, and you can add more business features by subscribing to paid services like payroll and email marketing, or by integrating with third-party applications you already use, such as accounting software.
Fiserv – Best credit card processor for retail
Fiserv, formerly known as First Data, is one of the world's largest payment processors. It's also the best retail credit card processor because established merchants can negotiate competitive pricing and favorable terms, it offers Clover processing equipment and veteran perks, and it allows merchants to accept Alipay, a popular Chinese payment app.
The company provides a full range of processing solutions, so you can accept payments every way your customers want to pay: in store, online, on the go and over the phone. You can accept every type of payment: magnetic stripe and chip credit and debit cards, mobile wallets like Apple Pay and Google Pay, paper checks, ACH transfers, and gift cards. Fiserv has a program to offer loyalty rewards to your regular customers as well.
PayPal – Best low-volume credit card processor
PayPal is the best low-volume credit card processor because anyone can sign up for an account, making it an ideal choice for freelancers, solopreneurs, startups, and businesses that typically accept cash or checks and only rarely accept credit card payments. It has flat rates, with no monthly processing minimum or lengthy contract, and you only pay for the processing you use. You can accept credit, debit and PayPal payments from customers online and in person.
It's also the best Android mobile credit card processor. Its mobile payment app, PayPal Here, works equally well on Android and Apple phones and tablets, and both versions have all the same features. With this app and a card reader, you can use your phone or tablet to accept payments, manage your product list, send receipts by email or text, and generate sales reports. You can add multiple users to your account and control what features they can access. You can also transfer money from your PayPal balance to your PayPal Business Debit Mastercard or your bank account.
TSYS – Best credit card processor for professional service providers
TSYS has been in business for more than 35 years and recently merged with Global Payments, making it one of the country's largest payment processors. It works with large and small businesses in many industries, providing reliable and comprehensive credit card processing services.
We selected TSYS as the best processor for professional service providers, specifically those in healthcare-related industries, because it offers competitive pricing, charges few fees, has in-house customer service agents trained in healthcare services and partners with the American Medical Association to offer discounts to medical practitioners.
Fattmerchant – Credit card processor with the best rates
Fattmerchant is the credit card processing company with the best rates. It uses the interchange-plus pricing model but doesn't charge a markup percentage. Rather, it only adds a per-transaction fee to the published interchange fee – the rate set by the credit card companies (Visa, Mastercard, Discover and American Express) that everyone pays.
For account fees, it charges a single monthly membership, or subscription, fee. There are no separate fees for statements, PCI compliance, customer support or account maintenance. Though the monthly membership fee is higher than what some of its competitors charge, its processing limits are less restrictive. The company notes that businesses need to process at least $7,000 per month for this to be a cost-effective processing solution. Small businesses that process a high volume of transactions each month will see the most savings on their overall costs.
Worldpay – Best direct processor for small businesses
Worldpay, known as Vantiv before last year's merger, is one of the world's biggest credit card processing companies, processing more than 40 billion transactions worth over $1.5 trillion annually. It recently announced a merger with FIS and will be known by that name once the deal closes. It's also our pick as the best direct processor for small businesses. It works with businesses of all sizes, provides a full range of processing services, has more than 1,000 software integrations, and offers competitive rates and favorable terms to small businesses.
Although Worldpay doesn't post its pricing online, the sales rep we spoke with in our testing offered competitive interchange-plus pricing and a one-year contract that can be canceled anytime without penalty if you provide 30 days' written notice. The monthly fee includes PCI compliance, and there's no application fee, setup fee, annual fee or batch fees.
Stripe – Best credit card processor for online businesses
Stripe is the best online credit card processor because it's very versatile. Its integrations, prebuilt forms, UI elements and built-in payment gateway make it easy for even very small businesses to use it, and its APIs allow larger businesses to create custom checkout forms and payment flows. There's no extra charge for its integrations, prebuilt forms and developer tools; for its basic payment services, all you pay are transaction fees.
As we announced last November, Stripe has partnered with WordPress.com to make it easy for the platform's users to sign up for Stripe, and add its recurring payment buttons to their WordPress.com and Jetpack-powered sites. WordPress.com says there are just three steps to set it up, and it doesn't require the user to have any technical know-how to do so. Using Stripe, WordPress.com users can offer different subscription tiers and frequencies to their audience, which could be used to offer exclusive content through site memberships or ongoing subscriptions, or simply to accept recurring donations.