As a merchant, you probably look up to big stores as the epitome of success. They’re big, they’re profitable, and they’re everywhere. So it’s no surprise that you want your business to be like them. This article breaks down the difference between high-risk offshore merchant accounts and low-risk merchants so you can know which category you fall under and what it means for your business.
What Are Merchant Accounts?
A merchant account is a bank account that gives the opportunity for businesses to accept payments by credit or debit cards. Merchant accounts are established with an acquiring bank, also called a payment processor, which handles the transactions between the customer’s bank and the merchant.
Merchant accounts enable you to process both card-present (swiped) and card-not-present (keyed in) transactions. You can process transactions online, by phone, or in person. That is why large stores like Kroger accept different forms of payments.
High-risk merchants are those that have been assigned a higher risk level by banks and credit card processors. This is generally because the merchant’s business is in an industry with a high rate of fraud or chargebacks or because the merchant has poor credit.
Some examples of high-risk industries are online gambling, dating services, pharmaceuticals, and nutraceuticals. You may have trouble getting approved for a standard merchant account if you’re a high-risk merchant. That’s why high-risk offshore merchant accounts exist – to give high-risk merchants the ability to process payments without worrying about being denied by a bank or credit card processor.
Am I a High-Risk Merchant?
A bank or PSP (payment service provider) will decide if you’re a high-risk merchant based on several factors. These include:
- Your business or industry has a high chargeback ratio: A chargeback is called the situation when a customer contacts their credit card issuer to dispute a charge. If you have an increased number of chargebacks, it means that customers are frequently disputing charges with your business. This is a red flag for banks and PSPs, who will see you as a high-risk merchant.
- You deal with high-value transactions or high-volume sales: If you’re a business dealing with high-value transactions, you’re considered high risk. This is because there’s more money at stake and thus a higher likelihood of fraud. The same goes for businesses with high-volume sales – the more transactions you process, the higher the risk of fraud.
- You have a poor credit score: If you have a poor credit score, banks and PSPs will see you as a high-risk merchant because you’re more likely to default on your payments.
- You process international transactions: If you do business with international customers, you’re considered to be high risk. This is because it’s harder to track down fraudulent activity when it crosses borders.
- Your business is new: If you haven’t built a reputation yet, banks and PSPs will see you as a high-risk merchant. This is because there’s no history to show you’re a reliable and trustworthy business.
What Are the Risks of Being a High-Risk Merchant?
There are a few risks that come with being a high-risk merchant:
- You may have to pay higher fees: High-risk merchants generally have to pay higher transaction fees than low-risk merchants. This is because there’s a higher risk of fraud or chargebacks.
- You may be required to put down a reserve: A reserve is an amount of money that’s held by the bank or PSP in case of chargebacks to protect the processor from losses if there is a lot of chargebacks.
- Your account may be terminated: If you’re a high-risk merchant, your account may be terminated at any time. This is because banks and PSPs can choose to stop doing business with you at any time.
Low-risk merchants are those that have been assigned a lower risk level by banks and credit card processors. This is generally because the merchant’s business is in an industry with a low rate of fraud or chargebacks. Some examples of low-risk industries are retail, restaurants, and hotels. You should have no trouble getting approved for a standard merchant account if you’re a low-risk merchant.
A business is considered low-risk if:
- It has modest sale volumes: If you don’t process many transactions, you’re not as attractive to criminals. You’re also less likely to have the operational capacity to deal with a sudden increase in fraud or chargebacks.
- It deals with low-value transactions: If the average transaction value is low, there’s less at stake for a fraudster.
- It has a good credit history: A strong credit history means you’re less likely to default on your merchant account agreement. It also suggests you’re running a well-managed business.
- It has a long-standing relationship with its bank or credit card processor: If you’ve been with your bank or processor for a while, they’re more likely to be lenient if you have the occasional problem.
- It only accepts one currency: If you only deal in one currency, it’s easier to track suspicious activity.
High-Risk Versus Low-Risk Merchants: Which Is Best For You?
Honestly, there is no easy answer. It all comes down to your business and what you feel comfortable with. Consider your industry, your transaction values, and your overall risk tolerance. Then, make a decision accordingly.