Want To Process Card Transactions But Work In a Risky Sector?
Businesses need a merchant account to accept credit card payments, and a payment gateway to process cards online. For businesses with a good trading history that operate in certain business sectors like retail, this is usually a straightforward process.
However, it can be much more difficult if your business is considered to be high risk. In this case you will need a high risk merchant account, which is likely to be more expensive.
- What is a high risk merchant account?
- Which industries are considered high risk?
- The best high risk merchant account providers
- High risk merchant account fees
- Next steps: Getting the best deal on a merchant account
What Is A High Risk Merchant Account?
When provided with a merchant account from an acquiring bank or merchant services provider, you enter into a legally binding credit agreement.
This means that your provider allows you a line of credit, so that when a customer issues a chargeback (i.e. request a refund) and you don’t have the funds to repay it, your provider is obliged to foot the bill. Likewise if your customer obtains goods with a stolen or cloned credit card.
”A merchant account provider assesses your risk based primarily on a percentage estimate of how many chargebacks are likely to be issued.”
In short, high risk merchant accounts are for businesses who fall into one of the high risk industries listed below, which are generally regarded as being more likely to incur chargebacks.
High Street Merchant Service Providers
Many high street merchant service providers refuse to provide high risk businesses with merchant accounts, so these businesses need to use specialist high-risk merchant account providers.
While there is no shortage of high risk merchant providers, you can expect to be charged higher fees. Specialist providers might also impose other safeguards to cover their risk, and some of these are described below.
Who Needs A High Risk Merchant Account?
As explained above, certain businesses are considered to be high risk if they are likely to experience a higher rate of chargebacks.
This applies to businesses that take payments in advance of delivering the goods, for instance, advance booking and subscription services. High volume and rapidly growing businesses are also considered high risk even when products are delivered soon after payments are processed. This is because of the size of the provider’s liability.
Other sectors are high risk as they are more susceptible to credit card fraud; this applies particularly to the greyer sectors such as online gambling and adult products and entertainment.
Industries Considered High Risk
If your business falls into tone of the following industries or sectors, then you will more than likely be considered high risk by merchant account providers.
Industries that need a high risk merchant account
|Industry||Why is it considered high risk?|
|Travel||Frequent cancellations and changes to travel plans resulting in refunds|
(theatre, gigs, etc)
|Event cancellations, ticket refunds and transactions determined by popularity of shows|
(magazines, online entertainment, etc)
|Businesses can fold quickly in print media and other problems can occur before the contract has been fulfilled|
|Online pharmacies||Considered grey businesses with an associated high risk of fraud|
|Online casinos and bookmakers||High risk of fraud, although more established operators are considered a lesser risk as they employ substantial fraud prevention technologies|
|Replica clothes and products||Potential to be shut down quickly due to copyright laws. A grey business area with high risks of fraud|
|Debt collection services||Unstable cashflow very much dependent on the business they can secure|
|Online dating services||Paid membership can fluctuate and is never steady. Risks of fraud and identity theft by scammers|
|Alcohol and Tobacco sales||Age limitations on purchase can impact regular cashflows depending on the business size|
|Dietary supplements and herbal products||Potentially unstable cash flow|
|IT and technical support||Very high risk as many companies have in-house teams. Consulting and freelance work is unstable and never permanent|
|Adult products and entertainments||High risk of fraud|
|Online auctions||Very high risk of chargebacks and refunds, as well as potential fraud issues|
|File sharing||Another grey business area with associated risks of fraud and illegality from users of the service|
|ISP and web hosting services||High risk of people not finishing contracts which can affect cashflow|
Is Your Business High Risk?
Besides industry, there are a number of other factors that can determine how high risk a merchant account provider might see your business. You should always bear the following in mind when seeking a merchant account.
A business’ track record is one of the key determining factors of success and reliability. The longer you have survived, the more you can prove yourself to merchant account providers. Younger companies, such as start ups, will generally be classed as high risk due to potentially unstable financing or a high volume of credit card processing that outweighs cash in the bank.
Unless you have been trading for at least one year it is likely to be very difficult to find a UK based merchant account and you might need to use an alternative payment processor such as PayPal or even an overseas merchant account. However, you should undertake some careful research before embarking on that route.
Credit rating of owners and directors
Your business credit rating will also be considered as will be the credit ratings of the business principals. You should ensure that these are as good as possible before you apply for an account.
Best UK High Risk Merchant Account Providers
High risk merchants with a reasonable trading history that have been in business for at least a year are generally able to obtain merchant accounts from mainstream providers such as:
You’ll need to bear in mind though that they will charge different transaction fees for different risk sectors, perhaps 10% or more for very high risk sectors.
Industry-specific high risk merchant account providers
Some providers specialise in providing merchant accounts in specific high risk sectors. For instance Web Merchant offers adult-material merchant accounts with fees from 5-8% per transaction, and gambling merchant accounts from as little at 2.9%.
How Do You Get A High Risk Merchant Account With Bad Credit?
To apply for a high risk merchant account you will need to go through the same checks as if applying for a standard account. You will need to submit your trading history, a detailed business plan, and agree to business and personal credit checks. The more solid your business, the better prices you should be able to negotiate.
However, sometimes your business may not have the credit-rating to get the merchant account you want. But don’t let this stop you. If you are prepared to shop around and put in an effort bit of effort you’ll be able to secure a merchant account.
The following tips will help:
Double Check Your Credit Records
Finding errors in credit reports isn’t unusual, in fact in 2012, the Wall Street Journal found that almost 25% of all US small businesses found errors in their tax reports. Who’s to say the same isn’t applicable to the UK?
So double check your records and if you do find something amiss, then there are procedures you can follow to correct these mistakes.
Provide An Explanation
It is in the interest of merchant account providers to have as many clients as possible. After all, this is how they make money.
If you can justify and explain how you’ve ended up in bad credit, as well as explain how you’ll avoid getting into that situation again in the future, then you’ll find many merchant account providers in the UK will be open to talking with you.
What Does The Future Hold?
High risk merchant account providers will look more favourably on your business if you can show solid financial projections for the future. This will help convince providers that you will have the cashflow be able to meet your commitments.
It’s not unheard of for high risk merchant account providers to ask for a guarantee from one of the owners or directors of a business, particularly limited companies. This alleviates a degree of risk and shows a solid commitment to the business’ future success.
Compare Merchant Accounts
As with any kind of bank account, it is always worth shopping around to see what options you have.
Best Merchant Accounts is ideally placed to help you compare the best UK merchant accounts for free. All you need to do is fill in the form at the top of this page.
High Risk Merchant Account Fees
Fees for these high risk merchant accounts will always be higher than standard accounts. While you might expect to see card processing fees of around 1.2-2.5% for a standard account, you’re probably looking at paying around 4.5% as a high risk merchant.
Some high risk merchant accounts are more expensive and fees as high as 7.5% and above are not unusual.
Very high risk sectors could attract fees of 10% or more on each transaction, it really depends on your specific circumstances.
In addition to processing fees, there are other costs to consider.
Unsurprisingly, monthly charges will more than likely be higher as the merchant account provider has to cover themselves as they are taking a risk on your business. Likewise, high risk merchant accounts tends to be subject to higher start-up charges.
Many high risk account providers require a rolling deposit over a six month period. This might be as high as 10 percent of revenue each month, and it will all be retained until the end of the sixth month period before it will be settled.
For instance, if your card sales are £10,000 a month, then by the end of six months your provider will be retaining £6,000.
Another cost to check is the chargeback fee, which can be considerably higher for high risk accounts. MasterCard and Visa charge additional fees for certain business sectors; for the adult sector these are around £760 per year.
Most high risk merchants with at least a year’s trading history are able to obtain a UK merchant account. Some high risk providers claim that they accept over 90 percent of applicants.
If your business is successful and you can demonstrate that your proportion of chargebacks is low, it should be possible to renegotiate your contract after a year to reduce your fees, or possibly switch providers.
The bottom line is that your fees will be higher, and possibly considerably higher than standard merchant accounts. You should also anticipate the possibility of having to fund a rolling deposit. As there could be providers that specialise in your specific sector, it is important to shop around and compare quotes if you want to get the best rates.
Next Steps: Comparing Merchant Account Deals
At BMA we work with the UK’s leading merchant account providers to help you find the right merchant account for your business.
Our partners work with companies in all of the industries listed above, so if you aren’t sure which merchant service is right for your business then get in touch.
Simply fill in the form at the top of this article and we’ll be in touch to discuss some more details with you. Once we know your situation we can match you up to the providers most likely able to help you.
The best part is: We won’t charge you a penny! Our service is completely free and could even help you save money on your next merchant account.