High Risk Merchant Accounts

Don’t assume that just because you have been classified as a High Risk Merchant (HRM) that it will be difficult to obtain a merchant account  or that any account you do obtain will be expensive. As the classification states, your relative difficulty in obtaining a merchant account is based on financial risk to the payment processor or acquirer. Fortunately, risk assessment and management science has greatly improved over that past five years, making it easier for HRMs to obtain accounts.

In order to understand what it takes to obtain a high risk account, it makes sense to appreciate the high risk environment. Visa and MasterCard, as well as the other card schemes, classify certain businesses as being high risk merchants. Definitions aside, there are two basic types of high risk merchants:

“Administrative” High Risk Merchants

This group includes:

• Merchant categories where the products incur a high likelihood of consumer fraud
• Merchant categories that have historically high refund and chargeback rates
• Merchants categories that have an elevated risk of bankruptcy

Some examples of merchants categories included in this group are: travel-related arrangement services, inbound telemarketing services, outbound telemarketing services, credit repair services, debt reduction services, nutritional supplement products (neutraceuticals), weight-loss supplements, and adult oriented dating/social networking services.

“Regulatory” High Risk Merchants

This group includes merchants that sell products and services that are regulated by the United States or other jurisdictions. Some examples of merchants categories included in this group are: sexually oriented (adult) products and services, gambling or gaming services, tobacco products, cross-border prescription pharmaceuticals and others.

Regulatory HRMs are generally considered to be of higher risk than Administrative HRMs because the former is subject to fines and/or other punishments if the law is broken. The U.S. Government and the U.S. divisions of the card Associations have made it difficult for U.S. acquirers and processors to accept Regulatory HRMs, so generally speaking merchant accounts relating to these kinds of services are obtained outside of the U.S.

Administrative HRMs, not restricted by federal and state regulations, are generally able to obtain merchant account within and outside of the U.S. Most acquirers, however, do have specific internal policies dealing with moderate risk, high risk, and prohibited merchants.

High Risk Merchant Tips

We learn in What Pricing to Expect  that risk is a major consideration when it comes pricing merchant accounts -- the higher the risk, the higher the fees. This doesn’t necessarily mean that you have to pay an arm and a leg for a merchant account. What it means is that you have to be more diligent in finding a vendor that will treat you fairly. If you are an Administrative HRM operating in the U.S., there is no reason why should not be able to obtain pricing very close to MOTO and Internet merchants as described in What Pricing to Expect. Keeping the following points in mind will help both Administrative and Regulatory HRMs obtain favorable pricing while avoiding undue scrutiny from the Associations and authorities.

1. Maintain a well-run organization with strict financial controls and precise reporting. Presenting clean financials to prospective vendors will almost always result in more favorable pricing. This is especially true if you can demonstrate consistent profits, retained earnings, and relatively high stockholder equity.
2. Obey all regulations religiously. This includes state and Federal regulations like the Fair Credit Billing Act (15 USC 1601), as well as rules from agencies like the Federal Trade Commission including the Mail or Telephone Order Rule.
3. Control your refund and chargeback rates. High refund and chargeback rates alarm the Associations, as they see this activity as damaging their brands. In particular, the Associations see high rates as indications that a merchant’s customer service is below par. Strive to maintain refund rates well under 15%, and chargeback rates well under 1%. Exceeding these levels can result in fines, termination, and placement on the MATCH list (Terminated Merchant File, TMF).
4. Improve customer service. Be certain that your customers have an easy way to obtain refunds, be it through a customer service representative, via the Web, or both. Consider implementing the most liberal refund policy fiscally possible. This will reduce chargebacks. Consider using fraud and chargeback reduction services like Vindicia or Verifi.
5. Everyone makes mistakes. Own up to them by being truthful with your payment processors about past or current problems. Many processors have developed technology aimed at reducing chargebacks or otherwise keeping merchants out of troubling situations. It is important for your processor to anticipate any potential challenges.
6. Employ general best practices. There are literally dozens of best practices aimed at improving the risk profile of your business. A good source for such practices can be found at Litle & Co. LLC.
7. Negotiate any reserve you are required to maintain. As a HRM, you will most likely be required to post a reserve or hold-back. Namely, your processor will withhold a certain percentage of your receipts to cover any potential losses due to refunds and chargebacks if you cease operations. Structures vary, but you should attempt to negotiate the lowest reserve possible based on historical refund and chargeback rates.

Overseas Merchant Account Tips

While not all Regulatory HRM merchant accounts are overseas, most accounts are obtained outside of the U.S. Merchants should pay particular attention to overseas merchant accounts because these relationships frequently involve multiple players over great physical distances and several time zones. Overseas accounts are governed by the laws of non U.S. jurisdictions. Keeping the following points in mind will help Regulatory HRMs maintain control over their costs and their cash.

1. Overseas accounts frequently involve multiple players. It is highly likely that you will be working with a member bank, an ISO, and potentially a third party processor. Because Association rules differ significantly outside of the U.S., merchants should fully understand the relationship between the players. Most importantly, you should understand the flow of cash through the various entities. It is also important that you work with well-known, reputable entities operating in reputable countries. Ask for references.
2. Pricing structures are often different than those in the U.S.. Merchants should scrutinize their offers and agreements and understand their pricing structure. It is likely that your discount rate will be significantly higher with an overseas account. If you run a tight operation, however, there is no reason that you should be saddled with egregious fees. While fees are relative to the level of risk, strenuously avoid discounts greater than 7%.
3. Understand any delays you might encounter in receiving your cash. The amount of time it takes for you to receive cash after making your deposits can be much longer with overseas accounts. There is some justification for this delay; however it should not normally exceed seven days. Many overseas processors can make your funds available in two to four days. Be sure that you understand exactly what your settlement timetable will be.
4. If you are required to maintain a reserve, understand the terms. As an overseas merchant, you will most likely be required to post a reserve or hold-back. Because your rights under law are likely to be different in different jurisdictions, it is critically important that you understand when and how your reserve funds will be returned. Make sure that the terms are spelled out in the agreement, and that you understand the laws in the countries where your cash is being held.