The Difference Between High Risk and Low Risk Merchant Accounts

Opening a merchant account is a way to increase your business potential, as it provides customers with more than one way to pay for your goods or services. Accepting credit or debit card payments is a convenient payment form for both you and your consumers. However, not everyone is approved for a merchant account, as there are several risks involved that a bank or payment supplier must review and analyze before choosing to accept your payment processing application. These risks determine the type of account that is opened.

Deciding on Your Risk

All businesses face risks, and when being considered for a merchant account, these risks are the financial liabilities that are associated with your company. These liabilities could be considered the dangers your company presents, either from the nature of your operations or the consumers that you do business with. Third-party payment processors have to evaluate these risks if they are going to protect their own investments. The higher the risk you present, the more a merchant account is going to cost you. Too many risks could also leave you with an application denial.

Risks are generally divided into two categories: high risk merchant or low risk merchant. Generally speaking, how long your business has been running, the overall reputation of the business, the financials of the business, and the industry of the business play a part in evaluating risks. There are more specific factors that determine which category of risk your business falls into.

Being Tagged as a High Risk Merchant Account

If your company has one or more of the following characteristics, you may be considered a high risk merchant. 

These include:

  • Running a new business without a lengthy history and a good reputation
  • Dealing with a high rate of fraud
  • Lacking in financial stability
  • Operating in an industry with a high chargeback ration
  • Having poor credit as a merchant
  • Selling a majority of products well in advance
  • Having products or services consumed after the fact
  • Allowing different currencies to be accepted as payment

Being Tagged as a Low Risk Merchant Account

The idea that a business is a low risk isn’t always about the levels of liabilities that the company poses for the payment processor. In addition to the risk being more minimal than that of its high risk counterpart, a low risk merchant category is one that encompasses any business that doesn’t fit into the characteristics of the other category. 

Typical qualities of a low risk merchant include:

  • Bringing in less than $20,000 a month in revenue
  • Having a low or zero chargeback ratio
  • Operating in a very low risk industry
  • Having an average ticket size well below $50
  • Operating as a corporation in a low risk state

Opening a Merchant Account

The risk category your business falls into will impact the merchant account you are eligible for. Those that fall into a high risk category will have to deal with higher fees and additional service charges. There are also fewer payment processors that work with high risk merchants since the liabilities are so much greater. Not all payment companies will exploit high risk accounts, and Instabill offers lower costs, reliable banking partners, and faster application approval than other companies.

Reducing Your Risk

Though you may not be able to do anything about the risk associated with your area of the industry, you have some control over several of the other factors that label your company as high risk. Fraud potential and chargebacks are the two most significant weights when evaluating a company. However, these are two areas where you can proactively reduce the risk.

  1. Reduce chargebacks by shipping all your orders on time. If you are a new business, you need to add credibility to your services (either through customer reviews on your website, with the Better Business Bureau, and with loyal customer referrals). Customers who don’t receive their order won’t want to pay for them, so ensure delivery is on time and provide tracking for each order.
  2. Don’t make promises you can’t keep. You will want to wow your customer with promises of greatness, but if your customer isn’t impressed or your product doesn’t deliver as promised, they aren’t going to want to pay for it. Don’t promise a shipping deadline as a way to compete with Amazon. Simply make an effort to ship items quickly and inform customers of any delay with the item as soon as possible.
  3. Monitor your e-commerce activity. Internet activity is fraught with fraud, and you need to be vigilant in watching your online transactions. A mismatched billing and shipping address should raise a red flag, and you would be wise to investigate or ask for confirmation before completing the order. Always require a billing address and complete credit card number to verify authorization on the card. Added security measures can help prevent credit card theft purchases which will end up as chargebacks.

For secure payment processing, whether a high or low risk merchant, consider applying with Instabill. You can trust the support of a global provider for payment processing.

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