What Are High Risk Merchant Accounts?
High risk merchant account is a merchant account or a payment processing agreement that is associated with a business that is high risk or operating in a high risk industry. Since high risk merchant accounts have higher fees than the regular merchant account, and this amount is added to the cost of business. Some companies that are re-classified as belonging to a high risk industry were not prepared for this high cost of merchant services and thus has affected even their profitability and ROI. There are companies that work with high risk merchants and they offer competitive rates, faster payouts, and/or lower reserve rates, which are all designed to attract companies which are having difficulty finding a place to do business.
There are factors which businesses are classified as high risk and some has to do with the nature of their industry, the method by which they operate and other factors. Examples of high risk businesses include adult businesses, travel agencies, collections agencies, legal gambling both offline and online, bail bonds and other online and offline businesses. When you work with these companies and you process payments for them, it carries high risks for banks and financial institutions. And this is the reason why these businesses need to sign up for a high risk merchant account which has a different fee schedule than regular merchant accounts.
There are additional worries about the integrity of funds for these merchant accounts and it is very possible that the bank may be financially responsible in case of any problem. That is why high risk merchant accounts often have additional financial safeguards in place such as delayed merchant settlement in which the bank holds the funds for a slightly longer period to offset the risk of fraudulent transactions. Another way banks deal with risk management is to use a reserve account which is a special account at the acquiring bank where a portion or about ten percent of the net settlement is held for a period of 30 to 180 days. It may or may not be interest bearing and the amount in this account is returned to the merchant on standard payout schedule once the reserve time has passed. The risks for high risk merchant account are fraud, chargeback, refund, or reversal, like a stolen credit card used to make purchases or renting something using a debit card with insufficient funds. These transactions increase risk for the bank and the payment processor because they have to deal with fraud.
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