31) PayFac Problems: Understanding High Risk Merchant Accounts
What exactly is a high risk merchant account, and what does it mean if your payment processor labels you as a high risk merchant account?
Businesses that accept credit/debit card transactions utiliza a “provider” to process the payments and deposit them into the business’s bank account.
Providers charge the businesses a transaction fee for each processes payment, the transaction fees often differ!
That’s because payment processors divide businesses into two categories: low risk merchant accounts and high risk merchant accounts.
Payment processors identify merchants as either a low or high risk merchant account. High risk merchant accounts are perceived as greater risks when it comes to chargebacks and fraud, meaning charge higher fees.
How Do Payment Processors Decide What Is a High Risk Merchant Account?
High risk merchant accounts usually:
- Have a poor personal credit score
- Sell products and services in high-risk geographic regions
- Have a financial history of chargebacks or fraud
- Have a different business address from where they actually do businessYou are a newer business without an established financial history
- Have poor financial standing
- Sell particularly expensive products and services
- Provide risky or questionable products and services
What Happens If Im Classified as a High Risk Merchant Account?
High risk merchant accounts will likely have to:
- Allow your payment processor to temporarily keep a portion of your sales in reserve to protect against fraud
- Sign a long-term contract locking in favorable rates for your payment processor
- Accept that your payment processor can freeze or terminate your account if they detect unusual processing patterns or risky behavior
- Agree to automatic contract renewals or early termination fees
- Pay higher fees per transaction
- Pay higher chargeback fees when a customer requests a chargeback
Payment Facilitators (PayFac) will tend to prefer low risk merchants. However, being classified as a high risk merchant is far from the end of the world, and there are still many great PayFac for you.