Today’s business environment is such that virtual or brick-and-mortar, it is impossible to operate without the facility of processing customer payments via credit card, debit card, or other online payments like gift cards and loyalty cards.
Providing credit card processing services carries uncertainties and the possibility of running losses if client companies were to close shop. This factor becomes especially relevant in the case of high-risk industries. To compensate for this risk, processor companies levy high fees and additional terms and conditions. Here’s some information about how that works.
Identifying High-Risk Businesses
High-risk industries are characterized by factors like:
- Bad credit score
- Volatile sales and revenues
- A high number of chargebacks and refunds
- Low cash reserves and cash flows
- Frequent fraud investigations
- Expensive merchandise and services with typical sales valued at $500 and above
- Businesses dependent on periods of economic uptrends and growth
- Subscription-based products with revenues based on renewals
Some Examples of High-Risk Businesses
Designating a business as a high-risk merchant account relies on the discretion of the credit card processing company. Some examples include:
- Travel and tourism
- Legal consultancy and law firms
- Life coaching
- Tech-support agencies
- Collectible, rare objects like cars and stamps
- Consumer electronics
- Pharmaceuticals and nutraceuticals
- Online gaming
- Gambling and online casinos
- Affiliate marketing and MLM businesses
- Marketing and advertising services
- Moving companies
- Storage facilities
- Debt consolidation assistance
- Debt collection agencies
Credit Card Processing Services Have Distinct Terms and Conditions
Credit card processors may require that high-risk industry clients comply with several terms and conditions to sign up for their services. Here are some of them:
- High-risk merchants pay fees, setup charges, chargeback costs, and payment gateway costs at inflated rates compared to other standard industries.
- Rolling reserves are mandatory where the provider holds back a portion of the transaction as a fail-safe. This safeguard is critical in case the client company incurs substantial losses and goes out of business. Typically, this reserve is around 10% of the sales amount and is released to the client after 90 days.
- The credit card processor fixes a specified minimum balance that clients must maintain in their accounts. This figure can be in the form of a single payment or deducted from transactions processed over time.
- Client businesses must enter into a contract, but depending on individual processors and the industry, clients may have to pay a cancellation fee when exiting the agreement. Informing the processor 60 to 90 days in advance of cancellation is usually one of the contract clauses.
- Processing companies may offer clients the option of purchasing any equipment required or leasing it for a monthly charge added to the fee.
- Client businesses have the option of paying fees by way of five different ways, such as a Flat Rate, Monthly Membership Plan, Tiered, Interchange Plus, or Enhanced Recover Reduced (ERR).
In case a high-risk business is transferring ownership, sellers working out how to sell the company would have to factor in existing contracts with credit card processors. Negotiating better terms and lower fees could help lower operating costs. Buyers could also scout around different providers and look for competitive pricing structures and conditions.
How Credit Card Processing Helps High-Risk Businesses
- Having a high-risk merchant account makes it possible for businesses to access global markets. Credit card processing allows companies to serve customers in different countries and accept payments in multiple currencies. A more extensive customer base helps grow operations quickly.
- Considering that high-risk industries have more chargebacks, processors keep their clients in business despite such setbacks. Standard merchant accounts could be terminated once they cross a specified refunds’ threshold.
- Low-risk merchant accounts typically do not accept transactions in high-risk goods, a factor that can restrict the product portfolio that businesses can offer customers. Getting a credit card processor account for high-risk merchants can help companies expand.
- High-risk merchandise is typically expensive and yields higher profit margins for companies that deal in them. The elevated fee rates could be viable for these companies.
Lowering Processing Fees
Businesses working in high-risk industries can negotiate for more favorable fees and terms by negotiating with credit card processors. Several other practical strategies include maintaining large cash reserves, building a long-term working relationship with the provider, and developing excellent customer service. Improving credit scores and lowering the number of chargebacks and refunds also works to reduce processing fees.
High-risk merchant accounts are beneficial for companies dealing in goods that carry an increased likelihood of chargebacks, refunds, and order cancellations. Although the fee structure is inflated as compared to standard accounts, such businesses can continue to remain operational and serve customers thanks to the payment security and other facilities provided by credit card processing services.