In today’s world, it is essential for businesses to accept credit cards. Many customers now regularly use third-party apps for everyday purchases such as food delivery, transportation, and paying for necessities like groceries or medication. They prefer the convenience of cashless, touchless transactions over the hassle of using cash. However, businesses that frequently process card not present (CNP) transactions often end up managing a high risk merchant account. Unfortunately, advising on or managing a high risk merchant account is not everyone’s forte.
As managing high risk merchant accounts become more common, it is essential for business owners to understand what constitutes a high risk merchant account. This is especially important due to the increasing threat of hacking and financial interference, particularly in parts of the world with a history of such activity. In this article, we will explore what is a high risk merchant account, how to manage a high risk merchant account, and why managing a high risk merchant account is essential for merchants which are classified as such. We also list specific tips for a high risk merchant account that merchants can implement into their day-to-day operations.
Merchants will be managing a high risk merchant account if they are a business that is considered to have a higher probability of credit card chargebacks, fraud, or other types of financial risk. Such businesses may have a higher rate of customer disputes, or they may operate in industries that are known to have a higher risk of fraud. Some examples of high risk merchants include:
The classification of a business as high risk can vary depending on the specific factors. Several factors can contribute to a merchant being classified as high risk, including the industry they operate in, the type of transactions they process, the size of their transactions, and their location. E-commerce businesses, for example, are often considered high risk due to the potential for incorrect data entry and the lack of physical contact with the cardholder. Similarly, merchants that process large transactions or are located in regions outside of the US, Canada, UK, Australia, and EU may also be considered high risk. Below we look at the four main factors that are used to determine whether a business will be classified as a high risk merchant.
There are several reasons for merchants why it is imperative managing a high risk merchant account. There are obvious financial impacts for a high risk merchant account classification due to higher rates which can only increase if the above-highlighted tips for a high risk merchant account are ignored. Apart from that, merchants also run the risk of losing their merchant account if they fail at properly managing a high risk merchant account. Below are some other examples why managing a high risk merchant account is crucial.
Overall, effective management of a high risk merchant account is important for protecting the reputation and financial health of the merchant and for providing a good experience for customers.
Avoid Long-term contracts – A month-to-month contract is generally the safest option for a merchant account, particularly for high risk businesses. However, it may be difficult to get a provider to agree to a month-to-month contract for a high risk business. Instead, a standard three-year contract may be offered, which may include an early termination fee. It is important to consider the longevity of the business and negotiate for a more flexible contract if necessary.
Avoid Early Termination fees and the dreaded Liquidated Damages – Early termination fees are penalties assessed to merchants who end their contract before the agreed-upon term commitment is over. These fees can range from a few hundred to thousands of dollars. Liquidated damages are an even more severe form of early termination fees, calculated based on the average monthly payment processing fees multiplied by the remaining months of the term commitment. It is important to avoid signing agreements that include liquidated damages and to have any waivers of early termination fees or liquidated damages written into the merchant services agreement rather than relying on a verbal agreement. These fees are often negotiable and may be waived during the sales negotiation process.
Don’t Lease Equipment – It is generally more cost-effective to purchase credit card processing equipment upfront rather than leasing it. Lease agreements often have long contracts and steep cancellation fees and may require paying a high monthly fee for equipment that could be purchased for a lower upfront cost. Some merchant account providers may offer a credit card terminal for free, but it will come with a yearly renewal fee embedded into the contract.
Watch out for hidden fees – Payment processors may charge various hidden fees on a recurring or one-off basis, which may be disclosed in the merchant service agreement. These fees can often be found in the Merchant Application section, and the Terms and Conditions section may include information on chargeback fees. It is important to be aware that some contracts may allow the processor to add additional fees not previously mentioned in the agreement.
Read the contract – This is one of the most rudimentary tips for a high risk merchant account. To ensure that merchant service agreements are fair and honest, it is important to carefully read and understand the terms of the contract. Set aside enough time to thoroughly read the agreement, possibly a few hours, and use tools such as highlighters and post-it notes to identify important or confusing terms. It may also be helpful to read a digital copy of the contract and have a physical copy to track any changes or added terms. Do not hesitate to request clarification on any uncertain points.
Keep Chargebacks in Check – When managing a high risk merchant account, it is important to take measures to reduce your chargeback ratio in order to protect your merchant account and maintain a good reputation. There are several steps you can take to do this, including implementing fraud detection tools and following best practices for protecting cardholder data, thoroughly documenting transactions, auditing your sales and marketing processes, and focusing on customer service and clear communication. By taking these steps, you can reduce the risk of chargebacks and protect your business.
Avoid the Visa Dispute Monitoring Program at all costs – The Visa Dispute Monitoring Program (VDMP) is a program designed to reduce the occurrence of chargebacks by monitoring merchants who exceed a certain chargeback threshold. If a merchant exceeds this threshold, they will be placed in one of three tiers of the VDMP program: Early Warning, Standard, or Excessive Level. Merchants in the Standard and Excessive Levels may be subject to fines and periodic reviews and may be required to work with their acquiring bank to implement a plan to reduce chargebacks. To exit the VDMP program, merchants must reduce their chargeback ratio below a certain threshold for three consecutive months and may be required to implement certain controls recommended by Visa.
Merchants should avoid the MATCH list – The Mastercard’s Alert to Control High risk Merchants, (MATCH) list is a database compiled by Mastercard that lists merchants who have been terminated by their acquiring bank due to violations or excessive chargebacks. Being added to the MATCH list can be harmful for merchants as it is used by acquirers to decide if a merchant is trustworthy or not. Merchants can be added to the MATCH list for various reasons, including account data compromise, excessive chargebacks, fraud, and noncompliance with the PCI Data Security Standard, among others. To avoid being added to the MATCH list, merchants should be honest and diligent in their business practices.
Managing a high risk merchant account can be challenging, as such businesses are often considered to have a higher probability of chargebacks, fraud, or other financial risks. These businesses may operate in industries with a higher risk of customer disputes or fraud, or they may process transactions that are considered high risk due to their size or type. To successfully manage a high risk merchant account, it is important to understand the factors that contribute to a business being classified as high risk, such as industry, transaction type, transaction size, and location. Businesses should also be prepared for higher processing fees and chargeback fees, as well as strict cash reserve requirements and other technical or industry-specific obligations. To minimize the risk of chargebacks, merchants should implement fraud detection tools, thoroughly document transactions, audit sales and marketing processes, and focus on customer service and clear communication. By following these tips and working with a reputable high risk merchant provider, businesses can effectively manage their high risk merchant account and minimize the risk of financial losses.
