What Is a High Risk Merchant Account?

Each business that applies for a merchant account is evaluated and determined whether it is low risk or high risk. The main difference is that payment providers monitor high risk merchants more strictly and charge higher costs. Low risk merchants can operate cheaper and more freely.

Why are risks important for payment service providers?

You can probably sell everything on the internet, but some businesses and products are riskier to operate than the others, so they need a high risk merchant account for their online business.
Let’s say you are thinking about opening an online shop, expanding your business and start selling your goods or services on the internet. You most probably want to find an online payment service provider that would handle the online transactions between you and your customers safely, promptly and legally. Payment service providers can identify you as a low risk or high risk merchant depending on the business field you are in, products you sell or services you provide.

Let’s imagine you, as an investor, are wondering about funding a startup that is planning to manufacture and sell self-driving electric cars. The idea sounds great. The guys behind it seem serious and trustworthy. They are about to start with 20000-unit production worldwide. However, trying to enter a market already filled with big brands that try to achieve the same sounds scary. Furthermore, while some countries are willing to accept self-driving cars, others are not ready yet for this technological marvel due to the lack of regulations and laws. It seems that the idea has its boundaries. It has big potential, but also – high risk.

The same goes among all the payment service providers. When a new business applies to open a merchant account, the decision whether to provide services or not has to be made by evaluating the risks that the business bears.

High risk merchant vs. prohibited business

All businesses come with risks. It is only a matter of fact whether these risks are acceptable or not. That is the main difference between high risk businesses and prohibited businesses. While being a high risk business, it is possible to open a high risk merchant account and start accepting payments online. However, if you are on the prohibited business list, you are not eligible to apply for a merchant account. The two are similar, so let‘s go through the differences between them.

There are different reasons why a business or activity might be considered prohibited for online payments. Payment service providers do not want to be exposed to anything that would also harm them. For instance, a business that has any connection to illegal products or activities is going to be prohibited from accepting online payments. Working with them also threatens provider’s legitimacy and reputation.

Other activities may be legal only when complying with some specific laws or rules. However, it is usually hard to check these things online, thus putting it on the prohibited activity list. Businesses with high fraud potential or economic instability are considered ineligible for accepting payments online.

A business that is not on the prohibited activity list, but has obvious high risks, is eligible to start accepting online payments. A payment service provider evaluates the level of these risks and legitimacy of a client. Then they decide whether to open a merchant account or not and set the conditions of such cooperation.

Examples of high risk businesses might be:

Low risk vs high risk merchant account

The main difference between the two is a risk level that a provider is willing to take. Some may be tolerable to higher risk clients, others – very careful about what businesses they are going to work with. There are ‘check boxes’ that have to be marked in order to determine whether the business is high risk merchant or not. Usually, the risks include the geographical location of a business, management interferences, products merchants sell or services they provide.

The payment service provider will offer different terms and conditions of opening a merchant account depending on the risk level that a business bears. Examples are:

• A client is considered high risk when they are more prone to chargebacks. For this reason, they can be charged higher processing fees.
• Due to lack of legitimacy in the business activity or proof of suspicious activity, a high risk merchant is going to be monitored more closely.
• Providers may also charge higher chargeback fees or apply a rolling reserve. It is a risk management tool to save the merchants and banks from possible loss due to chargebacks.

With high risks come high rewards. Even with higher costs and liabilities, opening a high risk merchant account can be beneficial.