If you are reading this article then almost certainly you are wondering why the “High Risk Merchant” category exists, how you ended up being classified as a “High Risk Merchant”, what you can expect if you are considered a “High Risk Merchant”, and who you can rely on to provide you with a competitive and reliable credit card processing solution.

First of all, we’ll start out with the “Why”.

Why do merchant account providers bother with classifying certain businesses as “High Risk”?

Obviously, the credit card providers and banks all make a profit every time you process a transaction, so why do they care about your business model if they make money every time your customers make a purchase?

It seems kind of silly you’re making money, they are making money, why do they care?

The answer is simple it is all about the potential financial liability that the banks and merchant account providers could end up with if your merchant account balance ends up in a serious negative position. You’re thinking, if I am processing and they are taking a reserve, maybe my chargebacks are a little high, but how in the world could they worry that my account would somehow end up costing them money?

To begin with, is it important to explain the role of the various service providers, and the potential risk that each service provider faces.

At the top of the food chain is the bank which ultimately underwrites the merchant account, and provides you with a merchant ID (MID). The bank is referred to as an “Acquirer” or “Acquiring Bank”, and this means that the bank has an agreement with “card brands” (Visa/Mastercard and other card brands) to provide credit card processing accounts to merchants.

Very few Acquiring Banks accept merchants directly in most cases there are middle parties called an “ISO” (Independent Sales Organizations) which have agreements with Acquirers via which the ISO accepts/reviews the merchant account application before submitting to the Acquirer for final approval.

Another step down the chain are other independent organizations referred to as “Partners”, “Agents” or “Resellers” which have agreements with ISOs for the purpose of this article we will refer to these organizations as a “PAR”. The PAR accepts/reviews the merchant account application and works with the ISO on the package which is ultimately submitted to the Acquirer.

Now back to the key question: why would any of these service providers worry that your merchant account could possibly end up costing them significant money?

Chargebacks and Fraud are a key component. Even if the provider is collecting a reserve, if the levels of chargebacks and fraudulent transactions processed against your account reach certain levels, the associated debits and fees could add up to something significant enough to put your account in severe overdraft. It’s not just the fees and debits, either Acquirers are measured and reviewed by card brands based on the overall chargeback levels and fraud/sales levels of their overall merchant base.

Merchants with high chargeback and fraud levels can actually put the entire Acquirer merchant portfolio in jeopardy, resulting in card brands terminating the Acquirer’s agreement to provide credit card processing. The same thing can happen to an ISO, as ISOs are also measured by the Acquirer on overall chargeback and fraud levels. The other problem with chargebacks is the long period of time which can pass between when the transaction is processed and when the chargeback is permitted to be processed this can be up to 6 months. The 6-month period not only presents uncertainty regarding the financial risk on the account, but also presents a window by which merchant account providers must also worry about being scammed by the actual merchant without getting into detail we can say it is possible for a merchant to defraud a bank using bogus transactions and a combination of refunds and/or chargebacks, then disappear with the funds.

Another very significant issue is the fines which are levied by card brands against the Acquirer if the card brand determines the Acquirer was permitting processing which violates the card brand policy or permitting processing for a merchant which exceeded certain levels of fraud and chargebacks over an extended period of time. The fines which card brands levy against Acquirers are huge on average 50K.

If a merchant account ends up in overdraft for any of the reasons outlined above, the Acquirer is stuck with this debt. The Acquirer will then hit the ISO with the debt, the ISO will hit the PAR (if applicable) with the debt, and the ISO or PAR will attempt to collect this debt from the merchant.

All these providers are at risk of absorbing this debt if the merchant cannot settle the account and/or disappears into the night.

If an Acquirer loses its relationship with card brands, or an ISO loses its relationship with an Acquirer, or a PAR loses its relationship with an ISO, this means ever larger ultimate financial consequences for the organization which has blown its relationship due to the processing of a specific merchant.

So this is why all of these organizations categorize merchants as “High Risk” it’s all about the ultimate financial consequences and preservation of their relationships and contracts.

The “How” part of the whole High Risk Merchant argument is both complex and inconsistent.

All providers are worried about their potential financial liability and consider many different factors; however, Acquirers, ISOs and PARs can all be very different in how they weigh certain risk factors. This is generally referred to as a “risk appetite”, so we will use that term in explaining how these various risk factors are considered by different providers around the world.

First of all, what are the various risk factors considered?

You may be considered a High Risk Merchant simply based on your product or service.

If you are in an industry which has had a history of scamming, this will hurt you.

Some examples: Tech Support, where scammers freezing up people’s computers with viruses and popups telling the consumer to call a phone number for support, outbound telemarketing pretending to be from Microsoft, have tainted the industry. Herbal Supplements (aka Nutraceuticals), where a wave of scamming merchants created bogus product lines and misleading “free trial” recurring billing programs. Debt Consolidation, where outbound telemarketers charged exorbitant fees to consumers to cancel credit cards and transfer debt to a new credit card, with no real savings to the consumer. In all these cases, a wave of scammers and the resulting chargebacks and consumer complaints have now made it very difficult for an above-board merchant operating in the same sector to be treated with respect and credibility.

If you sell something that is not a physical product, where there is not much to validate what the customer is actually purchasing/receiving, this could also hurt you. An example of this would be Web Design, where you could actually be selling something illegal with the web design as a “front”, and it would be difficult for the Acquirer to catch the deception. If you sell digital products, where it is more difficult to prove receipt of merchandise, you are more exposed to customers filing false chargeback claims of “merchandise not received”.

The size of your average order is considered the higher the value of the average order, the greater the chance that with very few orders the account could be put into a negative position.

The size of your maximum order amount is also considered if you have an average order value of $500 but can process a single order up to 10K, the greater the chance that one bad order can negatively impact your overall fraud/sales metric (fraud/sales is measured in $fraud/$sales, not using #transactions).

Your order and fulfillment process may put you in the High Risk Merchant category.

If you process recurring billing payments there is a far greater chance of chargebacks (people forget to cancel), and also multiple chargebacks from the same customer. If you perform outbound telemarketing, taking payments over the phone, there is a greater chance of buyer remorse and/or confusion, as the customer did not proactively seek you out, and less documented evidence to defend your transaction.

If you take a deposit, not full payment, and there is a lengthy period between the deposit and payment, this will hurt you. Or if there is simply a lengthy period of time between full payment and provision of service, this will hurt you. An example of this would be in the travel industry, where many months can pass between the date the deposit is taken and the balance is paid, or many months can pass between the date the full payment is made and the service is actually provided – in these situations the funds which have already been paid to the merchant remain at risk of chargebacks for a far greater period of time.

Even a delay in delivery of something like 10 days delivery as opposed to 3 days delivery can make a difference, as there is a greater chance of buyer’s remorse or misunderstanding that the product has not been received.

There are certain “no brainers” such as proactive customer acceptance of Terms, order confirmation emails, telephone call recordings, delivery signature, solid refund policies, solid customer support – these do not need a lengthy explanation other than to say that these things all need to be executed very carefully to best fit and mitigate the risk of your business model.

Remember, the Acquirers, ISOs and PARs are all worried about some big overdraft occurring on your account.

If this occurs, they are going to want to ultimately pass the debt back to you. So your location becomes important. Let’s say there is some big fee or fine from the card brands, and your account is now 50K in the negative. If you are a business in the USA or Canada, there is a greater chance these providers can recover the funds from you than from a merchant who is hiding out in Eastern Europe, Caribbean or Africa.

If you are not located (as a citizen as well as a company) in the same region as the Acquiring Bank providing the merchant account, there is greater risk to the Acquiring Bank. So USA Acquirers prefer USA merchants, European Acquirers prefer European merchant, and so on. It is possible for a merchant in one region to set up a company to obtain a merchant account in another region, but this is still considered more of a risk by Acquiring Banks.

Anti-Money Laundering is also becoming more and more of a factor, so if you are located in a country which doesn’t have an appropriate tax treaty, or is known as a “tax haven”, then this will present a problem.

There are many aspects of your business history that the merchant account provider checks out when they review your application.

If you have prior credit card processing history, it’s a double edged sword. Prior processing history with low chargeback levels helps you, prior processing history with higher chargeback levels hurts you.

If you have never processed credit cards before, this is also considered a negative factor, as you are now an unpredictable “unknown”.

Some providers run a credit check on you personally, and consider a poor credit rating as a negative factor.

Some providers search online complaint message boards.

If you or your business has ever been involved in a lawsuit or bankruptcy then this would be considered a negative factor.

If any business you currently own or formerly owned has had a merchant account cancelled/terminated then this could weigh against you, depending on the reason the merchant account was closed.

There are legal and regulatory issues that could deem you as a “High Risk Merchant”, depending on what you sell.

You might sell something with an ingredient banned in some countries, but not banned in your country. You may sell something which does not need to be licensed/regulated in your country, but which requires licensing/regulation in another country you are selling to. For example, you could be a pharmacy or online gambling website with the appropriate license in your own country, but without the required license in another country.

The bank which provides your customer with his/her credit card is referred to as a Card Issuer.

Card Issuers are often an adversary of the merchant. In some cases, this is taken to extremes by problem Card Issuers which abuse the fraud and chargeback process. Every merchant category is identified with its own distinct product/service category code, referred to as an “MCC” (merchant category code).

Some problem Card Issuers engage in severe prejudice against certain merchants simply based on the MCC assigned to the merchant.

These problem Card Issuers will flag transactions based on the MCC, proactively contact your customer, fear monger the customer by telling them the transaction is “likely fraudulent”, and force the cardholder to agree to a false claim of fraud chargeback on the transaction.

They engage in this unscrupulous practice not only using the MCC, but also by flagging Acquiring Banks in certain countries, and specific merchant billing descriptors.

In some cases they will actually instigate the false claim of fraud without even speaking to the cardholder, or despite the emphatic disagreement by the cardholder.

Of course, this is extremely unfair to the merchant, beyond the merchant’s control, and makes a complete mockery of the actual chargeback process. Nobody seems to be willing to stand up and take action against this type of Card Issuer abuse, but merchant account providers are aware of this and some consider this a risk factor depending on the MCC.

Some Acquirers worry more about “Reputation” than others. There are certain types of products such as Adult (pornography) and gambling that some banks won’t touch simply because they think it harms their corporate image.

How do the various providers weigh these different Risk Factors?

The “risk appetite” is all over the map when it comes to the various merchant account providers.

Generally speaking, Acquirers in Europe and Asia seem to be friendlier to high risk merchants, while Acquirers in the USA tend to be the most unfriendly and rigid in the world.

USA providers seem to worry more about personal credit rating than other providers. It is easier for a foreign owner to set up a company in Europe to obtain a merchant account than it is for a non-USA owner to set up a company in the USA to obtain a merchant account. USA providers tend to have more products and services they simply won’t accept on a blanket level. USA providers also seem to provide less respect for merchants which are properly licensed/regulated in their own jurisdiction, as opposed to the other way around.

So the USA currently seems like the most difficult place for a high risk merchant to obtain an account.

Some providers are willing to accept a greater level of risk if the merchant can generate higher sales volume, which means more profit for them in exchange for assuming the risk on the account. Other providers want the opposite, lower sales volume for at least 3-6 months so they can further evaluate the risk.

There are certain providers which may generally avoid high risk merchants but have taken on one certain “niche category” like travel, gambling, CBD, adult or pharmacy. For example, a provider may have no problem with Adult, but not accept any other high risk. Another provider might specialize in gambling, but not take on any other high risk categories. Some provides care about the “reputational issues”, others could care less about that as long as the processing will have low chargebacks and fraud.

Some providers simply won’t accept a merchant if they have previously had a merchant account terminated, others are more willing to consider the reason the account was closed. Every merchant is unique, and every merchant account provider seems to have its own mix of how it considers the various risk factors.

So what kind of treatment can you expect to receive if you are considered a “High Risk Merchant” for some reason?

If you are a new business, with no processing history, in most cases you can expect to be completely ignored or misled. It’s all about the money, after all.

If you are a start-up merchant in a high risk category, you submit an application with no processing history, and you expect to process maybe 10K-20K per month, odds are you will either receive no response or you’ll get a response like “thanks very much for your application, we will review it and get back to you” with no follow up after that.

If you phone initially or in follow-up, you will be quickly blown off the phone call. In some cases you may have a sales agent who is anxious to convert any lead, and they’ll tell you “no problem, we can do this” and then once again you’ll never hear back from them.

If you are a high risk merchant with some business history and processing history, one of two things will happen in most instances.

In some cases you will be told that you cannot be provided with a merchant account because the provider does not accept your business model under and circumstances - at least this is an honest and clear answer.

In other cases, especially if you are able to demonstrate that you can generate higher sales volume, you will be promised that they can provide you with an account, but weeks will go by until you finally realize you wasted your time and they cannot provide the account. This can all be very frustrating, and we’ll get more into this aspect in the final “Who” section below.

You should expect that there will be a reserve of at least 10% for 6 months. They call this a 6-month rolling reserve, which means they will keep 10% of your most recent 6 months’ total processing, releasing what they collected 7 months ago while still collecting in the current month. So they will always have 10% or your most recent 6 months’ total processing.

You may need to set up a company and a virtual office in another country, as card brands mandate that the merchant has a company and physical location in the same region and the Acquirer providing the merchant account. Setting up the other company could be anywhere from $1000 to $3000 one-time, with an annual renewal of about $1500 per year, and there are many agencies which provide this service. There are also agencies which provide virtual office, physical address, voice mail and postal mail forwarding, for about $1100 per year.

You can expect extensive background checks of you, your business, and your online “reputation”.

You can also expect some large providers like Paypal, Stripe and Chase to approve your account almost instantly, because the actual risk review is done after the fact, which leaves you at the risk of having your account cancelled and funds held at a later date after you have started processing when they tell you “we don’t accept your type of business”.

Depending on your product or service, you will need to provide appropriate licensing and regulatory compliance documents.

If your business is extremely high risk, you may have no choice but to deal with an “aggregator”. This is someone who has a large pool of sub-accounts which are assigned under one MID, and allocates the sub-accounts to various different merchants. So with an aggregated account, many merchants are sharing the same MID, and often this is being done without the knowledge of the Acquirer. Aggregated accounts are dangerous, because if a policy violation is caught, or one bad merchant creates a problem, the whole thing blows up and you end up losing any funds still held in the account.

The whole process will take time, you won’t get an account overnight, and you will be asked to provide much paperwork and documentation. This whole thing can take up to 6 weeks in some cases. However, if you find the right provider, it will be worth the pain.

The good news is the world is a big place, and there are many merchant account providers out there.

It may be difficult, and it may take time, but if you are persistent you have a good chance of finding somebody that can help you.

Think of the difficulty in finding a merchant account for your “High Risk” business as a “disease” that most of these service providers have. You need to find a “cure” for the disease, but the service providers are all genetically different so only a handful can be “cured”.

All the various risk factors which are all viewed in different ways by the service providers are the “ingredients” for the cure.

You, as the merchant, are also unique, so you have your own very unique combination of risk factors. If you keep mixing your unique combination of risk factors together, and injecting this to various service providers, you should eventually “treat and cure” the appropriate service provider.

Here are some tips on how to find someone who can help you, and whether we here at Cascadia Pay can help you.

You are a high risk merchant, right?

Don’t believe anyone who tells you right away “no problem, we can do this”. Anyone who tells you this is either a rookie who is hoping to convert a sale, or someone who knows there is not a great chance of getting you an account but wants to keep you to themselves until they know for certain they can’t help you.

If you hitch your wagon to a single provider you may end up waiting 4-6 weeks, getting the run around, until they finally come clean and tell you they can’t help you. If you are a high risk merchant you want to have as many fishing lines in the water as possible, and don’t believe anyone who tells you that they can get you a merchant account until you actually have the MID, start processing, and get paid.

Look into any and all options.

If possible, try to speak to people on the phone rather than by email. If you talk to providers in person, you have a chance to make a good impression on them and they might try harder to help you. Also, talking with the provider in person gives you the chance to evaluate how sincere and honest they are.

Don’t withhold any information or mislead the account provider in any way. You will get caught, either right up front, during the application review, or (worst case scenario) at some point after you start processing.

If there are any current or past issues with your business, disclose this.
If you have prior merchant accounts and processing history, provide it.
If you have had a prior merchant account closed, discuss it.

Don’t candy coat how you market and sell your product.

Get all the bad things out there right at the beginning of the process and you will save yourself time and also have no risk of having your account terminated (with funds held) and being put on some kind of merchant blacklist at some point in future.

If the provider won’t share certain information with you, this is not a good sign.

Ask them who the Acquiring Bank will be.
Ask them which gateway will be used.
Ask them if they have other accounts for the same merchant category.
Ask them to explain their payment cycle - are remittances daily or weekly, how many business days in arrears are you paid?
Are they able to provide you with your own unique billing descriptor?

If a Provider can’t or won’t provide you with this type of information then they are probably not someone you should work with.

Before you submit your merchant application or begin to speak to merchant account providers, make sure your house is as clean as possible.

Your website should be completely up to date, your Terms & Conditions solid, your order process fluid, documents and contracts up to date.

If you have sample order confirmation emails, marketing material, get this all ready.

Create a document which provides an overview of your business model and business history.

If you start working with a merchant account provider and your website or any other aspect of your business is half completed or non-existent, you might not even get your foot in the door.

There may be ways you can adjust or enhance your business model to reduce the perceived risk factors.

For example, using 3D secure or Docusign, adjusting your delivery times, capturing but holding transactions until a verification process is completed, making changes to your Terms and Conditions.

With a creative and open mind, you may be able to overcome the risk factors flagged by the Provider.

Remember we explained Paypal, Stripe and other large providers seem to accept everything up front, do their risk reviews at some later point, then close the account stating “we don’t accept your product type”?

If you get to the point where a provider is telling you the account is fully approved, make sure you get some things confirmed in writing.

The biggest thing would be your product category and billing model. For example, you would want to send an email saying something like “just want to be sure the bank understands I am selling XXX product, doing recurring billing, I’m incorporated in XXX country and that they have confirmed my product and business model are acceptable”.

This way, if at some point in future they close the account because of an aspect of your business model, it will be very clear the error was on their end, not yours, and you cannot be placed on some kind of merchant blacklist.

You may end up with an option which requires setting up an offshore company, virtual office, paying some kind of high risk registration fee, or setting something else up which will cost you additional money. Don’t spend any money on any of these things until the provider assures you, in writing, that the account is fully approved pending only those remaining items.

Well, if you have come this far then hopefully you can see that here at Cascadia Pay we understand the industry and high risk merchants.

Can we help you? Honestly, we will have no idea until someone on our end can have an in-depth discussion with you.

What we can promise is that we will deal with you honestly and respectfully.

We understand each merchant is unique and you will not be “pre-judged”.

If we can’t help you we will let you know right away, rather than keep you hanging for weeks.

If we are able to provide you with an account we will be open and up front about what will be required from you, what you will pay in fees, and all other aspects of the merchant account we can provide.