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. In most instances, what these merchants do is pay for a higher fee to acquire merchant service that adds on their business expenses which impact their profitability as well as 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.
But don’t worry because there are also many different companies that have specialization with high risk merchants by means of offering clients with competitive rates, lower reserve rates and/or faster payouts. All of these are designed carefully to increase people’s interests.
Businesses in different industries are considered high risk primarily because of the nature of business they’re in, the methods that they apply and a number of other aspects. 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 provides merchant account is called as the “acquiring bank” while the bank that issued the consumer’s card is referred as 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 might be offering payment processing contract or perhaps, the merchant might have to open a 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 case of high risk merchant account, there are going to be additional risks regarding the fund’s integrity and possibility that the bank might be financially accountable in case of problems. Because of this, high risk merchant accounts oftentimes put extra layer of security such as delayed merchant settlements in which the bank is going to hold the fund for extended period of time to be able to offset the risks for fraud transactions.