Behind every financial transaction that happens online, over the phone, or on a point of sale terminal, there are merchant providers working tirelessly to make sure that the money changes hands safely and securely. They use risk management, as a tool to analyse and predict fraudulent behaviour.
Risk management is the process of identifying, assessing and controlling risks to an organisation. It is a proactive process that seeks to minimise the negative impact of risks to the various stakeholders.
When it comes to payment processing, certain industries or verticals come bundled with a higher degree of risk. This is because they are more susceptible to fraud or chargebacks, and as a result, merchant account providers deem them to be “high risk”.
We help our clients in the following industries below to obtain high risk merchant accounts in the UK with great rates and terms that work well for their business.
Businesses that operate in high-risk industries often have a hard time getting approved for a merchant account. This is because merchant account providers and issuing banks are wary of the increased risk of chargebacks and fraud.
As a result, businesses in high-risk industries often have to comply with exorbitant terms and charges for their merchant accounts. They may also have to put up collateral, such as a rolling reserve to get approved.
A standard merchant account on the other hand will have much lower fees and almost no collateral requirements.
Despite the increased risk, there are a number of merchant account providers that specialise in high-risk industries. If your business is categorised as high risk, it is imperative that you find a high-risk merchant account provider.
It’s the law of averages. Every industry has an average transaction value, a chargeback ratio, fraud rate and an average refund rate. Based on these, the industry is termed as a low risk or a high risk one.
The average ticket size is the average transaction value for a merchant. A high average ticket size puts the merchant account provider at greater risk of loss if a chargeback occurs.
For example, if a merchant processes a £10000 transaction and gets charged back, the merchant account provider is on the hook for the £10000. Banks consider this to be a higher risk than if the merchant was processing £100 transactions because the loss is greater.
Travel and hospitality are prime examples of industries with high average ticket sizes. These industries have a long lead time, which means there’s a sizeable timespan from the time the customer makes a booking and the actual travel date.
This gives them ample opportunity to cancel their trip or request a refund. Buyer’s remorse can set it. Habitual offenders use this as an excuse to leech money off businesses.
A chargeback is when a customer disputes a charge with their credit card issuer. The issuer then contacts the merchant account provider to get their side of the story. If the issuer sides with the customer, the chargeback is processed and the customer is refunded.
The chargeback ratio is the number of chargebacks a merchant has divided by the total number of transactions. Some industries have always had a high chargeback ratio, which automatically makes them a high-risk vertical.
Dietary supplements for instance, often come with a 60-day money back guarantee as an incentive for the customer to swipe that card. But results with supplements are highly-subjective, which means that scamsters can use this as an excuse to use a product and then claim a chargeback.
It is estimated that CNP fraud cost UK businesses £326.2 million in 2020, while unauthorised charges cost £783.8 million. That’s a staggering amount of money, and it’s one of the reasons why fraud is such a big concern for businesses and merchant account providers.
Some industries are rife with fraudsters because they offer easy targets. For example, luxury goods, event tickets, and digital services are all popular targets for fraudsters.
Underwriters in the merchant account industry assess your financial history as a merchant. They use something called a “chargeback to transaction ratio” when assessing risk. This is the number of chargebacks a merchant has divided by the total number of transactions.
If a merchant has a history of chargebacks, they will be considered high risk. This is because they pose a greater risk of loss to the merchant account provider.
The refund rate is the number of refunds a merchant processes divided by the total number of transactions. Some businesses have a higher rate of refunds than others.
For example, the travel industry has a higher refund rate than most because customers often cancel their plans or request a refund for unused services. The retail industry also has a higher refund rate because customers often return items they’ve purchased.
Some industries are more heavily regulated than others. For example, the gambling, CBD & Dietary supplements industries are highly regulated. This means that there are a lot of rules and regulations that businesses in these industries must follow.
If a business doesn’t comply with the rules and regulations, they can be fined or shut down. This poses a greater risk to merchant account providers, which is why businesses in these industries are often considered high risk.
Most financial institutions, such as banks and credit card processors, will not work with businesses in high-risk industries. This is because they view these businesses as too risky.
That said, some standard merchant account providers may consider the application with several caveats. For example, the merchant account provider may levy a much higher transaction rate along with a rolling reserve. A rolling reserve is a percentage of each transaction that is held by the merchant account provider for up to 3-months.
Merchants in these industries, often reluctantly agree to these terms because they think that they have few other options.
It’s not unheard of for standard merchant account providers to freeze a high-risk merchant’s account or even suspend the account with no prior intimation. This can leave a merchant in the doldrums with grave financial risks.
It is, therefore, important that businesses in high-risk industries find a merchant account provider that specialises in their industry. These providers have the risk appetite that’s required to operate in these industries. Club that with a greater understanding of the nuances, and hence more flexible terms.
When you partner with a high-risk merchant account provider, your account will never be suspended without prior intimation. Also, your funds will never be frozen. In fact, you will have 24/7 access to your account so that you can run your business without any hitch.
Just because banks and traditional merchant account providers shy away from high risk merchants, it doesn’t mean that they should sign-up for exorbitant prices or unfair terms and conditions.
While shopping around for a high risk merchant account, it’s important to consider the following criteria:
Every industry has its own market leaders when it comes to merchant accounts. For instance, PayPal and Stripe enjoy a great reputation when it comes to payment processing for ecommerce businesses.
Similarly, businesses in the high risk industries should look for merchant accounts that have a flawless reputation. How long have they been in the business? Do they work with businesses in the same vertical? How transparent are they when it comes to fees and charges? What about their customer reviews?
Reputable merchant account providers take pride in their customer service and will strive to provide a great experience for merchants.
In the end, it all boils down to providing excellent customer support. High risk merchants need a payment processor that can help them navigate all the complexities and challenges of their industry.
The best merchant accounts offer 24/7 customer service through multiple communication channels. Most top account providers assign a dedicated account manager so that merchants can get assistance whenever they need it.
A lot of merchant account providers are actually ISOs or Independent Sales Organisations. This means that they are essentially middlemen who act as a go-between for merchants and the actual payment processor.
In these situations, if the acquiring bank were to stop processing payments, the merchant account provider couldn’t do anything about it.
The best high-risk merchant accounts have their very own acquiring bank which means that merchants have complete control over their processing activities. This is a great advantage especially in high risk industries where regulations keep changing frequently.
3D Secure Verification (3DS) is an additional layer of security that protects merchants and customers from fraudulent transactions.
It’s important to find a merchant account provider that supports the latest version of 3D Secure, which is 3D secure 2.0 or 3DS2. This will ensure a seamless experience for customers while also adding an extra layer of security for merchants.
A high risk merchant account will come with additional fees and higher processing rates. But what's a ballpark rate?
Here are some average numbers that might help while shopping for a high risk merchant account.
This is a one-time setup fee that’s usually charged by the merchant account provider. It ranges from £100 to £1000 or more depending on the provider.
This is the fee charged by the payment processor for every transaction. It’s usually a percentage of the total transaction amount and can range from 1%-3% or more.
This is a monthly fee that’s charged by the payment processor for using their services. It ranges from £10-£50.
Merchants must pay an annual rental fee if they use payment terminals such as credit card readers. This can range from £100-£200 depending on the type of terminal.
PCI DSS is the security standard for protecting cardholder data. Merchants must pay an annual fee to remain compliant with this standard. It usually costs £20-£25 per month.
High Risk merchants must pay a chargeback fee for any fraudulent or disputed transactions. The fee ranges from £15-£20 per chargeback.
This is a percentage of the total transaction amount that’s held as security by the payment processor. The reserves are usually released after 6 or 12 months.
Some payment processors may require an upfront deposit (up to £1000) in order to create a high risk merchant account. Merchants with a poor credit rating may also be asked to pay a higher deposit.