What’s a High Risk Merchant Account?
High risk merchant account is a payment processing agreement customized to fit businesses which are considered to be high risk or operating in an industry that’s considered as such. Most of the time, these merchants need to pay higher fees for merchant services which can then add to their business expenses that affects their profitability and ROI. This is strongly felt especially among companies that were reclassified as being in high-risk industry and weren’t prepared to deal with the associated cost of operating as high risk merchant.
There are companies that specialize specifically with high risk merchants by providing competitive rates, lower reserve rates and/or faster payouts. All of these are designed carefully to increase people’s interests.
Businesses in varieties of industries are deemed to be high risk mainly because of the nature of industry they are in, the method which they’re operating or several other factors. To give you an example, all adult businesses are deemed to be high risk operation as are auto rentals, travel agencies, legal offline as well as online gambling, collections agencies, bail bonds and several other offline and online businesses. Because working with and processing payments for such companies are riskier for the financial institutions and banks, it obliged them to sign up for a high risk merchant account. Because of this, it is carrying varying fee schedule in comparison to the regular merchant accounts.
As for the merchant account, it’s actually a bank account but in this case, it serves as a line of credit that has allowed the merchant or an individual or a company to receive payments from debit as well as credit cards used by customers. The bank that’s providing the merchant account is the acquiring bank while banks that are issuing the card used by consumers are simply the issuing bank. Another critical component of the processing cycle is the gateway. This handles the transfer of transaction information from the customer to the merchant.
Acquiring bank can offer payment processing contract or the merchant may need to open high risk merchant account w/a high risk payment processor. What the payment processor do is collect the funds and send it to the rightful account of acquiring bank.
In terms of high risk merchant account, there will be additionally risks about the integrity of the funds and also, the possibility that the bank may be in charge financially if ever a problem arises. With this being said, the high risk merchant accounts usually include more security measures similar to delayed merchant settlements wherein the bank holds the fund for extended period of time in order to prevent risks of fraudulent transactions.