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If you want to run a successful business, then you will need to make the experience of shopping with you as friction-free as possible for the consumer. In most cases, shoppers would prefer to pay using a credit or debit card, because that’s what they’re used to elsewhere, and with credit cards in particular there are consumer protections in place that make the shopping experience that little smoother and safer for them.
To accept credit card payments, you will need to have custom risk solutions. These companies handle the transactions for you, providing a secure way for your customers to enter information, and have that transmitted to the bank for the payment to be authorized. These providers charge a fee, and the fee that they charge will depend on the type of business that you operate and the industry you are in, as well as how established your company is.
High Risk Businesses
Some businesses will fall into a “high risk” category, industries such as gambling, pharmaceuticals, etc. that have a high rate of fraudulent transactions will be classed as high risk, and no matter what your credit score is and how many transactions you process per month, you will find that it’s going to cost more for you to process transactions than someone in a more mundane industry. It is not your fault. Your business may be sound, but the companies do not know that, all they have to go on is the operational histories of the companies that came before you, and if they had issues with fraud or charge backs, there is a risk that you will too.
Which Are High Risk Industries
There are numerous industries that are high risk, including:
– Merchants from standard industries that have earned a spot on the TMF list for issues with past accounts
– Third party payment processors
– Air/water purification companies
– Bail bond companies
– Attorneys that deal in bankruptcy
– Debt collectors
– Credit repair services
– Online dating services
– Adult video providers
– Pharmaceuticals companies
– Vape shops
– Online gambling / gaming
– MLM companies
– Telemarketers
– Travel agencies
– Used car dealerships
– Importers/exporters
Individual merchant accounts could also be assessed as being high risk depending on the history of the business.
Why Risk Matters to Service Providers
Service providers are concerned about the risk profile of companies because, in effect, a merchant account is a line of credit. The company that processes the transaction will pay you the amount that the customer spends within24-48 hours, instead of forcing you to wait until the customer gets their statement and pays the purchase off. If there is a fraudulent charge made, the person whose card was charged can dispute the transaction, and if they win the dispute then the merchant processing company will have to refund the transaction. Of course, that company can bill the merchant but if the merchant doesn’t have enough money in their account to cover the refund then the processing company still has to issue the refund and will be out of pocket.
In most consumer industries, chargebacks account for a tiny percentage of sales. There are some industries that are riskier than others, however, and “Card not present” services are some of the riskiest because the customer does not need to show the card to complete the transaction.
Risk and Your Business
If you are trying to take out a merchant account and you are in a high risk industry, then you should expect there to be some delays, and you should expect that you will have to pay more for the account. The merchant services provider might ask you for 12 months of bank statements, and for 12 months of prior processing statements, as well as financials, tax returns, and other paperwork. If that sounds like you’re doing the same amount of work as you would for a loan, that’s because in the eyes of the provider you are applying for a loan.
You should expect that the underwriting time will be longer. It could take up to a week for the merchant services provider to make a decision about the account. It may also take longer for payments to be released from the merchant services account to your business, and the percentage fee or per transaction fee could be higher.
If you get approved for a domestic merchant account, it is likely that the account will have higher-than-market rates at first. If you get turned down, then it may be worth looking for an off-shore account, although be aware that offshore accounts can have even higher fees. The offshore providers are willing to consider account applications from a wider range of companies, but because they take on ’risky’ customers they need to charge even more.
Avoiding Excessive Fees
It’s important to understand that not all merchant services providers use the same criteria when assessing risk. Sometimes, a customer will apply for a merchant services account and be labelled as high risk with one company, but then get approved as a standard customer with another company. If you’re going to be processing a lot of transactions, then you could save a lot of money by working with a company that knows the merchant services market well, so that you can find an account that makes sense for you.
Many companies will assess your business and recommend a provider for you, and the fee that they charge will be based on the amount of money that their recommendations saved you so if they cannot save you money, perhaps because your business is indeed high risk to the bulk of the market then you are not out of pocket. It is well worth seeking expert advice to try to cut the amount of money that you are spending just accepting payments for your customers. Be sure to shop around every year too, because as your credit history improves your business might be viewed as being lower risk, and sometimes your existing provider might be willing to cut rates, or a rival might offer you a better rate for the service.
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