What Are The Differences Between A High-Risk And A Low-Risk Merchant Account?

A merchant account is required if you want your company to be able to take payments via credit cards, debit cards, or both. An essential financial middleman for a high-risk business is an effective high-risk payment gateway.

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High-Risk And A Low-Risk Merchant Account

It is important to determine if your business poses a high risk or a low risk before applying for a merchant account. The criteria that merchant account providers use to classify businesses according to the level of risk that they pose are different for each type of merchant, but there are certain aspects that are common to both types.

The payment gateway high risk business will differ from low-risk businesses in terms of cost and processes involved.

What Are Merchant Accounts?

A merchant account is a specific kind of bank account that gives businesses the ability to take payments using a variety of methods, most often credit cards and debit cards. For the purpose of processing and settling payment card transactions, a merchant account can be created when an acquirer and a merchant acquiring bank enter into a contract with one another. The merchant agreement may include additional parties, such as a payment processor under some circumstances.

You will be able to begin accepting credit cards and debit cards from your clients as payment for goods and services as soon as a payment processor has established a merchant account for your business.

Obtaining A Merchant Account

1. Research

Doing some preliminary research is the first thing you need to do to open a merchant account. There is a wide range of costs and capabilities, and you will need to do some research to see which organizations can provide your business with the optimal option.

2. Get Your Documents

You will be required to provide information about your company, such as the name of your organization, your contact information, the amount of time that your company has been in operation, your tax identification number, financial statements, business bank account and routing numbers, and in some cases, a credit card to pay the application fee.

 3. Start The Process

Once you have provided the processor with all of the information that they have required, they will most likely verify both your personal and corporate credit histories. It is possible that you will be required to pay an application fee.

4. Be Patient While Your Application Is Reviewed

The provider of merchant accounts will review your application and determine whether or not you present an acceptable level of risk.

If you plan to process transactions in person while clients use their cards in their possession, then your company is regarded to have a lower risk profile. Because of the increased likelihood of fraud associated with conducting business via online or telephone card processing, your organization will be assigned a higher risk rating. When cards aren’t physically present, certain merchant account providers demand an address verification as a precaution against this risk.

What Are High-Risk Merchant Accounts

Your company has been categorized as having a greater potential for instances of fraud or chargebacks, and as a result, your payment processor has recommended that you open a high-risk merchant account. The increased processing costs that high-risk merchant accounts are required to pay are a form of compensation for the risk that the payment processor is taking on.

A high-risk merchant account is a subset of the services that make it possible for companies operating in high-risk sectors to accept credit card payments from their clients. Standard merchant accounts often come with fewer criteria and stipulations, but these accounts typically have more stringent regulations and will cost more to maintain.

While high-risk merchant accounts may be costly. It has some benefits attached to it.

Benefits Of High-Risk Merchant Accounts

  • Possibilities for progress in the long term
  • Increased financial gain
  • The acceptance of several currencies
  • Reserve account with high chargeback protection to accommodate unexpected chargebacks
  • Processing of credit card transactions, even for customers with poor credit or who have experienced financial difficulties

The following is a list of some of the disadvantages of dealing with a high-risk merchant account:

  • Additional costs for processing
  • Possibly obligatory reserve account, the amount of which may reach as much as fifty percent of the monthly volume
  • Reserve that is continually rolled over and can be held for up to 180 days after an account is closed.

What Are Low-Risk Merchant Accounts

Low-risk merchants are often merchants who have been operating with very few chargebacks or none at all and have a strong financial history.

Retail shops, pet supply stores, online fashion retailers, parking garages, book stores, and auto parts stores are all examples of typical businesses that qualify for low-risk merchant accounts.

Transactions referred to as card-present (CP) are typically conducted frequently with low-risk merchant accounts. This indicates that the card was physically present during the transaction, which often results in a significantly reduced number of chargebacks.

Medium-Risk Business

The medium-risk business serves as the middle ground for the two extremes, (High-risk and Low-Risk). Card-not-present transactions are typically accepted for payment at medium-risk enterprises, which typically conduct business online. They may also be card-present businesses that offer high-priced goods such as jewelry, handbags, sporting/concert tickets, and other such items, things that are easily resold on the black market.

What Are The Differences Between High-Risk And Low-Risk Merchant Accounts?

You will need to determine if you are a high-risk or low-risk merchant before you can apply for a merchant account that processes credit cards and processes credit card transactions. There are a number of criteria that can discriminate between the two types of organizations, despite the fact that merchant account providers typically classify businesses as either one or the other.

Account For High-Risk Merchants

You may be placed in the high-risk category based on your processing history, and more specifically on the number of chargebacks you have received. Your company will be considered high-risk if it has any of the following traits. Other merchant account providers may add their own to this list, but these are the most common ones.

  • A minimum of twenty thousand dollars in monthly revenue.
  • Transactions made with credit cards that average more than $500
  • Conducting business with nations infamous for having high fraud rates
  • A history of credit problems
  • Multiple charge-backs and refunds

When applying for a high-risk credit card processing and merchant account, it is important to provide as much information as possible regarding your industry in the application. If you try to gloss over the realities of how your business operates, the price estimate that you obtain can be off.

A Merchant Account With Low Risk

It’s possible that to qualify as a low-risk merchant, you’ll need to fulfill a number of standards; nonetheless, the ones that stand out as the most essential are: low revenue, few transactions, and minimal chargebacks and returns. These are some more qualities that should be present in a low-risk merchant:

  • All transactions involving credit cards are for less than $500.
  • The total amount of transactions each month is less than $20,000.
  • The industry is seen as having a minimal risk, including necessary products, apparel, household items, and items for infants.
  • The percentage of chargebacks, as a percentage of total transactions, is less than 0.9%.

The United States, Europe, Japan, Canada, and Australia are examples of low-risk regions in which commercial transactions take place.

Can You Become A Low-Risk Merchant Once You Are Determined To Be High-Risk?

There is no straight answer to this, there are businesses that are classified as high-risk like gaming, adult stuff, entertainment and goods that have legal questions hovering around them among others.

For low-risk businesses, they are businesses with some level of certainty. Here, you need to consider two factors.

Cost and Risk. If you can take calculated risk and not mind the outcome, you might want to stick with a high-risk business but if you are risk averse, you should consider the low-risk

The high risk payment gateways and the cost of maintaining it is higher, you can go for the one you can cover the cost. After you have considered important factors, you can make your decision

Bottom Line

Because high-risk merchant accounts can be more susceptible to fraud, check out a merchant account that has advanced security, protection, and authentication. If you run a low-risk business, you can seek healthy practices to optimize your business operation.

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