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How Do Merchant Account Providers Determine a Business’s Risk Level?
How Do Merchant Account Providers Determine a Business’s Risk Level?
As part of the underwriting process when applying for a merchant account, companies are assessed for their potential risk. During the process the underwriter will thoroughly examine every aspect of your business to determine whether you will be accepted as a new client.
In deciding whether your business is high risk, the underwriter takes into consideration many factors including:
- Credit score
- Chargeback history
- Financial history
- History of business conduct
- Any history of fraud
- Unpaid bills, loans and debts
- How long you’ve been in the industry
- Jurisdiction
- Legitimacy and risk of products
If the underwriter finds your business to be high risk you will be charged higher processing fees. Merchant service providers can charge high risk merchants approximately 1%-2% more per transaction than they charge low risk merchants.
What you Can Expect from Your High Risk Merchant Account
Businesses with a high risk merchant account must be prepared to pay higher fees and accept tougher terms and conditions.
Commitment to a Long Contract – merchant account providers will try to get high risk clients to commit to a long-term contract so that rates will remain high even if, over time you become low risk.
Tiered Pricing Model – tiered pricing is the most common pricing model offered to high risk merchants. This means you’ll be paying more per transaction than with other pricing models such as interchange-plus pricing.
Automatic Contract Renewal Clause – high risk merchant account contracts often contain an automatic renewal clause. If you don’t notify the merchant account provider by a set date the automatic renewal clause comes into effect and the previously agreed contract terms are extended.
Contract Termination Fee – early termination of a merchant account contract before the expiration date will incur a termination fee. This fee is set in the merchant account contract.
Liquidation Damages Clause – high risk merchant account contracts often include a liquidation damages clause. This states that you will have to pay a specified amount if you fail to meet the terms of the contract.
High Chargeback Fees – in the event of chargebacks your merchant account provider will charge high risk clients higher chargeback fees than they charge low risk clients.
Account Freeze or Contract Termination – the merchant account provider may freeze or terminate your account if your business becomes increasingly high risk. If your account is frozen you will not be able to process transactions. Eventually the provider may decide to terminate your account. This is common with large providers like Square or Stripe where one merchant account is shared by all their clients. If one merchant becomes exceedingly high risk it is in the provider’s interest to terminate the merchant’s contract rather than risk driving the price up for all customers in the shared merchant account.
Reserve Accounts for High Risk Merchant Account Holders
Merchant account providers will create a reserve account for high risk merchants, as a type of subaccount. The reserve account gives the provider security until they feel comfortable dealing with a high risk client. A portion of the merchant’s credit card sales are withheld in the reserve account to cover any unexpected issues such as chargebacks or fraud. The three types of reserves are rolling reserve, up-front reserve and fixed or capped reserve.
Rolling Reserve – the merchant account provider withholds a percentage of the merchant’s gross sales, in a non-interest bearing account, for a predetermined period of time before gradually releasing the funds to the merchant. Rolling reserve levels are substantially higher for high risk merchants.
Up-Front Reserve Escrow – on signing a merchant account contract, high risk merchants are required to place funds in escrow. This money will not be returned until the value of the reserve is met in fees.
Fixed/Capped Reserve – a percentage of every transaction is withheld by the merchant account provider until the reserve reaches an agreed upon amount.
Take Away – The demanding terms and conditions of high risk merchant accounts can negatively impact a business. Not all merchant account providers offer the same conditions or require the same fees and charges. It is advisable to shop around for a high risk merchant account provider that offers affordable processing rates and reasonable conditions. Use our list of top high risk merchant account providers to help you find the provider that best suits you and your business.
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