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Why Are eCommerce Merchant Accounts High Risk

Posted on 15 November, 2019

Every month, merchant account providers receive applications from eCommerce and startup businesses in need of credit card processing. E-commerce startups are considered high risk by banks for a variety of reasons.

They’re Unpredictable

When it comes to new businesses, it’s impossible to know whether the business will be successful or not. Merchant services providers need to be able to protect themselves and their partner, the acquiring bank.

No Payment Processing History

When startups apply for a merchant account, they have either no or very little credit card processing history. This is normal because they are brand-new businesses, so it’s safe to expect that many won’t have any history at all. The merchant account provider will often look for other pieces of information, including:

  • Personal bank statements that prove financial responsibility of the startup.
  • Alternative business banking statements that show transactions other than credit cars, including cash and checks.
  • A business plan detailing how the merchant will market the business and increase sales.

Little Capital

During the underwriting process, many merchant account providers discover that eCommerce startups don’t have tons of money behind them or their business. This is usually not a problem since they are a new and emerging business and need to be able to process credit cards to get that necessary capital.

Some acquiring banks require a certain amount of capital in a merchant’s bank account. Merchants seeking a domestic merchant account will typically be given a volume cap to protect the bank from money lost.

Fraud Potential

high-risk merchant accounts

Identity fraud is a major concern for banks. In the digital age, people prefer to shop online, and this has further increased the risk of identity theft. Criminals are always looking for new ways to steal your customers’ information.

Data thieves may use this stolen information to make online purchases. Because of the increased potential of fraud, many payment processing companies believe the risk of working with eCommerce merchants is too high.

Read more: 5 Annoyances of Shopping Online

Excessive Chargebacks

Chargebacks occur when customers are unhappy with the product you’re selling or have buyer’s remorse. It’s possible that a customer has spent too much money or made an impulse purchase, and they’re unhappy about it.

When customers become unhappy, they’ll either complain to the merchant, return the product, or contact their bank to return the payment. This returned payment is called a chargeback.

Once a chargeback is issued, the merchant is responsible for the loss. The more chargebacks a business receives, the more risk banks and payment processors see.

What Does it Mean to be High Risk?

Being a high-risk merchant means that you won’t qualify for the traditional payment processing methods. You will most likely have to work with merchant service providers who offer high-risk merchant accounts and can accept liability for increased risks.

Every payment processor acquires risk differently. In the general sense, the risk is going to be calculated in terms of fraud and chargebacks. In a nutshell, the more chargebacks, the higher the risk for processors and banks.

High-risk payment processing comes with advantages over the traditional methods, including:

What is a High-Risk Merchant Account?

When you apply for a merchant account, no matter which company or bank you’re working with, you will need to provide business and tax information.

During the underwriting process, you will also have to submit to a credit check. If anything in your application or found during the underwriting process signals to the merchant account provider that you are a high-risk merchant, you may be refused or given a merchant account for high-risk merchants.

High-risk merchant accounts are exactly the same as regular merchant accounts. However, it’s important to understand the contract as you can often expect higher fees since the account provider and bank will need to mitigate the risk of working with you.

I’m a High-Risk Merchant, What Now?

If payment processors identify your eCommerce business as high-risk, it can be difficult to find a great deal on credit card processing. Follow these tips to help make the process easier.

Do Your Homework

Before agreeing to work with any merchant services provider, make sure that you read their website and any customer reviews you can find. There are payment processing companies out there looking to make money off of the fact that you are high-risk, so it’s important you avoid these at all costs.

Read the Contract Closely

Reading a contract can be daunting, but it’s absolutely crucial that you do it. You’ll need to understand all of the clauses that may end up costing you more money in the future. Once you understand the contract, you can ask better questions and learn more about your credit card payment processing options. Seek professional legal if you need help.

Repair Your Credit Score

Your credit score is often a determining factor. To prove you’re not a high-risk merchant, make sure that you pay all of your debts as quickly as possible prior to applying for an ecommerce merchant account.

Be Honest

On your application, it’s best to be honest. After all, your potential merchant account provider will have an underwriting process that will uncover any dishonesty. Merchants who lie are placed on a blacklist called the Terminated Merchant File (TMF) List, which makes it much more difficult to get approved for a merchant account in the future.

Merchant Accounts for High-Risk Businesses

If you’re a high-risk merchant, you’ll need to put in some extra elbow grease to find the best merchant account for your business. It’s best to compare different options to make sure you’re getting the best rates available for your eCommerce business.

Major credit card processors may not want to work with you, but you shouldn’t give up hope. High-risk merchant processors like High-Risk Pay and other reputable services will take your business and help you increase sales.

What the most significant determining factor when it comes to picking the right high-risk merchant account for eCommerce businesses? Let us know in the comments!

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High Risk Merchant Account Services

Accept all major credit cards

Regardless of Credit History!