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What Makes a Merchant Account High Risk?
So, you’re looking to open a high-risk merchant account. Or, you already have a merchant account but are struggling to stay afloat because of the restrictive fees or obligations. Although there’s no magic formula for removing the high-risk tag from your business, there are some tips you can use to make the most of what’s at your disposal. Before diving into how you can make the most of your high-risk merchant account, it’s important to identify why a merchant is considered high-risk in the eyes of providers and networks.
Time is the primary determining factor of risk when it comes to your merchant account. The more time between the payment and goods/services provided, the riskier the transaction is. A larger time span between payment and delivery means that it’s more likely that the:
- Business spends the money and ends up stuck in a lurch if there’s a chargeback.
- Customer cancels the good/service provided and issues a chargeback.
- Business declares bankruptcy or shuts down.
Ultimately, the riskiness of an account is tied to chargebacks, fraud, and merchant responsibility.
Additionally, acquiring banks and providers consider a merchant high risk if they have weak financials, a lot of chargebacks, or tapped-out lines of credit. They’ll have a harder time with underwriting or getting approvals on any financial initiatives. So, if you’re considered high-risk, what actions can you take to compensate for the risk and minimize the penalties to your business?
Tips for High-Risk Merchants
Tip #1: Stay Off the MATCH List
Mastercard’s Alert to Control High-Risk Merchants, better known in the industry as the MATCH list, gives acquirers the ability to look up if a merchant has been terminated by another acquirer previously, along with the reason behind termination. Essentially, MATCH is a database of merchant accounts that have been closed by processors from rule violations or excessive chargebacks.
MATCH is one of a number of databases that act as a blacklist for merchants. They help acquirers make a decision during onboarding on whether the merchant in question is trustworthy or not. Ending up on one of these lists can be extremely dangerous for merchants. Although every Terminated Merchant File, or TMF, will result in painful consequences for merchants, MATCH is the most common one and the only one that has a global reach.
How Does MATCH and Other TMFs Work?
Jill, a fictitious merchant in a high-risk industry, has a high number of chargebacks and her acquiring bank had decided enough is enough. Her bank terminates her merchant account and adds Jill to the MATCH list. Jill finds another acquirer that’s ready to take on her account and the papers are all but signed. Before the final signature, the new acquirer runs Jill’s information through the MATCH list and sees that her business is vulnerable to chargebacks. As a result, the acquirer calls off the deal and Jill is back to square one.
How Do Merchants End up on the MATCH List?
When an acquirer adds a merchant to the MATCH list, they assign a reason code to the merchant termination event in the system. Below are reasons why a merchant could be added to the MATCH list, as described in Mastercard’s developer section:
- Account Data Compromise
- Common Point of Purchase (CPP)
- Laundering
- Excessive Chargebacks
- Excessive Fraud
- Fraud Conviction
- Mastercard Questionable Merchant Audit Program
- Bankruptcy/Liquidation/Insolvency
- Violation of Standards
- Merchant Collusion
- PCI Data Security Standard Noncompliance
- Illegal Transactions
- Identity Theft
You can see that many of the reasons on the list above are quite severe, and most merchants won’t find it difficult to comply. However, the most common pitfall is not malice but negligence. Ultimately, the best way to stay off the MATCH list is to be honest and do your due diligence.
Tip #2: Protect Yourself From Chargebacks
As a high-risk merchant, chargebacks are your worst enemy and should be avoided at all costs. A high chargeback ratio is dangerous for all merchants because it adds unnecessary risk into the equation. Chargebacks are so dangerous, in fact, that the fallout from a high chargeback ratio can impact your relationship with your acquiring bank and put your merchant account at risk, while also putting a bad stamp on your business through the eyes of card networks and your payment processor. As a result, pay close attention to the chargeback ratios attached to each credit card network you accept and do everything you possibly can to keep chargebacks at a minimum.
How Can High-Risk Merchants Reduce Their Chargeback Ratio?
Chargebacks occur due to a number of reasons, and not all of them are preventable. However, by focusing on the ones that are, you can greatly reduce your ratio. Causes of chargebacks include friendly fraud, chargeback fraud, true fraud, poor customer service, a mistake by the merchant, or deficiencies in process or production. So, what can you do to address these sources of chargebacks?
- Secure your merchant account by implementing fraud detection tools and ensuring you’re PCI compliant while following the necessary best practices for protecting your cardholder data. Cyber fraud is constantly evolving, so make sure you understand the current fraud landscape.
- Thoroughly document everything associated with a transaction. This includes requiring your customer to physically sign the package before release if the transaction was ecommerce. For brick and mortar transactions, make sure your customer signs both the payment card receipt and the detailed transaction receipt from your POS system. Finally, keep track of your product’s serial numbers and reference them regularly.
- Audit your sales and marketing processes. If customers feel misled about the product or service you sold them, they are more likely to trigger a chargeback or demand a refund at the very least. Make sure your customer’s expectations are met based on what you’re selling them and how you present your products and services.
- Focus on customer service and clear communication. Tell the customers when their order is arriving, when their payment is processed, and for how much, and always accommodate their questions and concerns. If they ask for a refund, process it quickly and tell them you’re doing so.
Tip #3: Be Prepared for Handling High-Risk Merchant Providers
Providers that support high-risk merchant accounts aren’t doing it because they’re charitable and like helping merchants. They also don’t do it because they’re the Evel Knievel’s of payment processing and like the thrill of having risky accounts. Instead, they support high-risk merchants because it can be very profitable to do so, especially when considering contractual obligations and fees. Look for providers that emphasize good customer service and have offerings that make sense for your business: integrations, alternative payment methods, ecommerce processing, POS systems, and gateways, to name a few. Although most will incur extra fees, they can still be reasonably priced and a worthwhile investment.
Understand Merchant Account Fees and Read the Fine Print
Merchants need to be careful while setting up a merchant account with high-risk providers, and should always be aware of setup and operations fees they’ll incur. For starters, high-risk merchants are charged higher payment processing fees on top of the interchange rate. In some cases, they could find themselves spending 400% more than lower-risk merchants of a similar size. Additionally, payment processors can charge exorbitant chargeback fees (understandably so, as many high-risk merchants are more vulnerable to frequent chargebacks).
These fees can significantly reduce the profitability of your business in the medium to long term and makes starting a business in a high-risk industry that much riskier. On top of additional fees, your acquiring bank could apply strict cash reserve requirements to your merchant account. Although the structure of the reserve requirements varies, they all reduce the short term cashflow of your merchant account.
Most of these restrictions are unavoidable, but it’s still important to shop around and find the best rates and features available. Some important questions to ask as you decide where to open your high-risk merchant account:
- Is there an early termination fee? How much is it?
- What are the transaction fees?
- How costly is it to set up an account?
- How much will reserve requirements impact my bottom line?
- How high are chargeback fees?
- Are there transaction volume caps?
- Are there other technical or industry-specific obligations for my account?
Renegotiate Your Rates Annually
Another important note is to remember to renegotiate your rates annually. Any more frequently and you’ll most likely be denied and waste time, but any less frequently and you could be missing out on better rates. This only applies to merchants who keep a good track record and are in good standing throughout the year, so remember to be responsible and maintain a tidy merchant account.
As a side note, try not to lock yourself into long-term contracts and look for providers that offer flexible options like month-to-month contracts. It’s also important to keep an eye out for automatic renewal clauses. You will find it much more difficult to renegotiate a contract that has a term of multiple years, and this is especially true if that contract auto-renews.
Always Be Prepared for the Worst
If you operate a business in a high-risk industry, or your merchant account is deemed high-risk, then there will always be roadblocks for you. Payment processing is a very risk-averse industry and companies will take extra precautions to mitigate this risk. Unfortunately, much of that risk falls on the merchant. Regardless of how well things are going, be prepared for the unexpected. Usually, your acquiring bank will give a warning and 30-day notice before freezing your account, and many providers have a similar policy before terminating your contract, but this isn’t the law of the land. The best you can do as a merchant with a high-risk account is do your due diligence and have a backup plan in case things turn sour. Oftentimes, a merchant services provider can help you with this task while acting as your guide throughout the entire process.
Finding a Merchant Services Provider That Has Your Back
High-risk merchants need somebody in merchant services that has their backs as advocates. It’s hard to find a resource that’s looking out for you, especially when they find out your merchant account is high-risk. Evolve Payment has high-risk merchant services expertise because we understand what it takes to run a high-risk business. We’ve leveraged the experiences and know-how from over twenty years of working with high-risk merchants while staying true to the ethical business practices and core values we were built on.
We will be your advocates at every stage of your merchant account process, from setup to implementation and competitive negotiation. Our experts will make sure your account stays off the MATCH list and minimize your chargeback ratio while maintaining the highest level of customer experience possible. We’re only a phone call or message away, and talking with us is free!