Increasingly entrepreneurs, whether new or experienced, are moving their ideas online. Creating an online business or shifting your current brick-and-mortar business online has plenty of advantages, including reduced overhead, convenience, and an expanded potential customer base.
At the same time, you’ll have to consider things you might not have otherwise thought about.
One example is a merchant account so that you can accept card payments for your online business. While this is something you do have to think about with a brick-and-mortar business, it can be more challenging and also more important with your online business.
If you’re considered a high-risk business, you’ll need to work with a merchant services provider that will accept high-risk businesses. With that in mind, the following are things to know about a high-risk merchant account.
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Why You Need a Merchant Account
First and foremost, you need a merchant account because as was mentioned, this is how you’ll accept card payments. Some merchant accounts will also work for other payment types.
When you’re taking online payments, there are three entities involved in the transaction.
There’s a merchant, a bank and then a payment services provider. The merchant makes card sales, the bank provides the account and handles tractions, and the payment services provider is for processing.
Are You a High-Risk Business?
There are different scenarios where you might be considered a high-risk business. Therefore you would need to explore high-risk merchant accounts. For example, some industries are inherently considered high-risk.
Payday lenders are an example of high-risk merchants. It would be tough for an online payday lending business to get approved for a traditional merchant account.
Other examples of high-risk businesses and industries are:
- Pharmaceuticals: This can include controlled substances and along with prescription medicines the cannabis and CBD industries are considered high-risk, even with the growing legalization of marijuana. Despite the fact that many states are moving to legalize recreational use, it’s still illegal at the federal level and a lot of financial institutions are reluctant to provide a merchant account as a result.
- International business: If your online business goes outside of the U.S., it can be considered high-risk because of this ups the potential of fraud.
- Gaming: This includes online gambling and sports betting.
- Adult entertainment
- Travel: The reason travel is considered high-risk is because of the high rate of chargebacks that result from dissatisfied customers.
- Network marketing
- High-volume transactions
- High ticket amounts
Along with the industry you’re in or the type of business you operate, you could also be considered high-risk because of your credit and financial history.
What Options Are Available if You’re a High-Risk Business?
Luckily there are options available to you as a high-risk business, which is why you see so many online businesses operating even when they are considered high-risk.
With a high-risk merchant account, you are going to pay higher fees because your business is more likely to get chargebacks.
Sometimes, depending on the specifics of your business situation, you might have a rolling reserve on your account.
This is money that covers the chance of fraud or chargebacks that could occur. This can be anywhere from 5 to 15%, and it’s usually held for six months to a year.
Another thing you might have to pay for a high-risk merchant account is an up-front reserve. An up-front reserve is money you have to put into escrow when you start a new agreement.
There’s a capped or fixed reserve option too, and then once you reach the cap set by the merchant, they won’t take more funds.
What Are the Pros and Cons of High-Risk Merchant Accounts?
While high-risk merchant accounts may be your only option, they do have some downsides but upsides as well.
When you have a high-risk merchant account, it lets you expand your customer base with global coverage. You can accept transactions in different currencies and sell to people outside the U.S.
It also offers you a high level of chargeback protection rather than having your account terminated. You can also expand your business with one of these accounts because you can offer different products or services, and this gives you the chance to be more profitable.
The main downside is the additional fees.
Finally, when you’re looking for a provider of high-risk merchant accounts, make sure they offer options to customize your account to the needs of your business and transparent pricing. Customer service is important as well because there will be times you need to get in touch with your merchant services provider.
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