High Risk Merchant Accounts

High risk merchant accounts - It is up to the underwriting department at the third-party processor, acquiring bank, aggregator, or provider to determine which merchant accounts are considered high risk. It is possible that your business will be considered high risk by one provider, where another may assign your type of business a normal risk factor.

What makes a merchant account high-risk

Each merchant service provider has underwriters that are responsible for determining the risk factor associated with certain types of businesses and accounts. Through past experience, providers have formulated guidelines that dictate whether or not they are able to grant a merchant account to certain business types. When determining whether a business type is unacceptable or restricted a provider considers criteria such as:

Chargebacks -
Certain business types are prone to having a high occurrence of chargebacks to sales. Any business type that has a typical chargeback ratio that is 1% or higher, is usually considered high-risk or unacceptable by most credit card processors.

Credit card fraud -
Certain business types are more susceptible to credit card fraud than others. Credit card fraud is more common in certain industries because of the products or services offered. Any business type that has a higher than normal fraud rate will be considered high risk or unacceptable by many providers.

Charging too far in advance for services -
Merchants that charge for products or services too far in advance heighten their exposure to excessive chargebacks. Businesses such as subscription publications, online memberships, and other similar services are most affected by this guideline. Typically, a provider will limit the time in advance that a merchant is able to bill their customers to around 4 months.

Target Market -
Target market is the reason why certain business types fall in to the high risk merchant category. Specifically, businesses with an international (outside of the United States) client base are considered high risk. Exporters, international freight forwarders, and shipping businesses can all be considered high risk merchants due to their international customer base.

Business Operation -
Business operation has an affect on the risk factor associated with the business. Businesses that use outbound telemarketing, door to door sales, multi-level marketing, and third-party order fulfillment services are all considered by most providers to be high risk merchants. This type of business operation increases the likelihood of chargebacks for various reasons.

Type of Merchant -
The risk factor associated with a merchant account can vary depending on how the merchant transacts their credit card sales. For instance, a courier service that utilizes a wireless terminal to swipe cards at a customer's residence may be considered high risk, when the same business would be prohibited if they were to take credit card numbers over the phone. Card present merchant accounts are always considered lower risk than card not present merchant accounts.

Legality -
Businesses that offer products or services that are illegal, or are closely related to illegal activities, will be considered high risk or prohibited by most providers.

Marketing -
Products or services sold using marketing that exaggerates results are at a high risk for chargebacks. Customers will ultimately issue chargebacks once they realize that the product or service that they purchased does not deliver the results promised in the marketing.

High Risk Business Types

The following is a list of business that are typically considered to be high risk, or are prohibited by many merchant service providers such as third-party processors, acquiring banks, and aggregators.

Not all processors have the same underwriting guidelines.

It is important to understand that a business that is considered high risk by one provider, may not be considered high risk by another.

The business types listed below are considered high risk by many providers for one or more of the reasons listed above.

Travel Related services (high risk merchant accounts) - Travel agencies, ticket brokerages, trip planners, airlines, and other similar businesses are considered to be high risk merchant accounts by many providers due to high chargeback ratios in the industry.

Gaming, Lottery, or Raffle Business - High risk due to a heightened chance of chargebacks because of the services offered.

Adult Businesses (largest demand for High Risk Merchant Accounts) - The largest, and most lucrative high-risk industry is the adult products and services industry. Some providers have begun to make a distinction between adult businesses that are selling tangible products, and businesses that are selling services. Services are considered to be more risky than tangible products. Subcategories for high risk adult merchant accounts are:

• Escort Services
• Online Adult Web sites
• Adult Bookstores
• Adult Product Stores

Credit - Any businesses that deal with credit and collections are considered to be high risk by most providers. The following businesses would fall into the sub-category of Credit.

• Collection Agencies
• Debt Consolidators
• Debt Repair Service
• Credit Repair Services
• Credit Protection
• Credit Counseling

Annual Subscription Services - Annual subscription services such as magazines, online publications, membership sites, and other businesses of this type are considered to be high risk merchants. Reason being is that the risk of chargebacks increases the further in advance that a customer is charged for a product or service. Many providers will limit a merchant's ability to charge their customers too far in advance. Typically, a provider will allow a merchant to charge for product or services up to 4 months in advance.

Exporters - Exporters are considered high-risk merchants because of their international customer base. There is little recourse in the occurrence of fraud or a chargeback for both the providers and the merchant themselves.

Gift Certificate Clubs

Get-Rich Quick Schemes - Businesses that make overly exaggerated promises of riches and success have a high chargeback ratio and are considered high risk.

Online Pharmacies - Recently, a few major processors have moved online pharmacies from a "prohibited" status to a "high risk merchant" status.

Extended Warranty Companies - Extended warranty businesses have a tendency to be "here today, gone tomorrow" leaving many customers to issue chargebacks for services never rendered.

Time Share Programs (see Travel Related services)

Dating Services online and off - Like online pharmacies, some major providers have relieved the restrictions against dating services and web sites, moving them from a restricted status to a high-risk status and making it possible for such businesses to obtain merchant accounts.

Check Cashing Services - Check cashing businesses are inherently high risk due to the nature of service that is provided.

Bail Bondsmen - Bail bondsman are considered high risk merchants for both the chance of chargebacks and their customer/client base.

Charities (other than well known) - Charities and non-profit organizations are looked at closely by providers. Unfortunately, charitable businesses are big targets of fraudulent activities. Many providers will only issue merchant accounts to well know char ties, or to those that can provide extensive documentation proving their validity.

Illegal Products or services - High risk for obvious reasons.

Drug paraphernalia - Businesses that offer products or services that are directly related to illegal activities will be considered high risk or prohibited by most providers.

Cellular phone service (service, not the actual product sales) - The sale of cellular service is considered high risk by most providers. However, the sale of tangible products related to cellular phones such as cases and hardware are considered moderate to low risk.

Pseudo-Pharmaceuticals & Supplements - Products that are sold under false pretenses are at a very high risk of chargebacks. Customers will issue chargebacks when the product does not meet the high expectation that the original marketing portrayed.

Real Estate Seminars/Schemes (see get-rich quick schemes)

Multi-Level Marketing and Distribution Businesses - A combination of high pressure marketing and the get-rich quick mentality make multi-level marketing businesses a prime candidate for high chargeback ratios.

Pawn Shops - Although acceptable to most providers due to their card-present business operation, pawn shops are considered high risk due to the products being sold (used without warranty).

Aggregators & third-party payment processors - Yes, providers consider themselves high risk merchants.

Fortune Tellers - Fortune tellers are considered high risk because of high instances of chargebacks related to unsatisfied customer expectations.

Sports Forecasting/Odds Making

Electronics and Computer Related - Electronics and computers make up a huge product industry and are not prohibited by most providers. However, providers will consider any businesses selling primarily electronics or computers to be high risk even if the merchant is a physical retail store.

Antiques - The antique industry has a high chance for chargebacks due to the products sold.

Bankruptcy attorneys - High risk due to customer base.

Where to get a high risk merchant account

Each merchant service provider has a niche that they target. Larger processors such as:

NOVA
First Data
National Processing Company (NPC)
Wells Fargo

usually have stricter guidelines, and are more likely to decline a merchant application based on the criteria discussed in the section above entitled, "What makes a merchant account high risk". These processors are not the best choice for high risk merchants. Even if a high risk merchant were to get approved by one of these processors, they are at constant risk of having their account cancelled if their chargeback ratio were to become too high, or if other account difficulties were to arise.

Aggregators utilize processing services of a larger processor or acquiring bank, and have their own underwriting department. Aggregators usually have more lenient underwriting guidelines, and they would be more likely to accept high risk merchants.

The Merchant Council is currently researching different ISOs, third-party processors, aggregators, and acquiring banks so that we may present our finding and recommendations on merchantcouncil.org. At this time, our research is incomplete. To be notified when the data is available please subscribe to our newsletter.