High risk merchant account - explained
So what is it that causes a merchant account to be considered high risk? A common question and while the answer may seems straight forward it’s actually a little more involved than you may think. Every merchant service provider will have underwriters with slightly different guidelines for business classification. That being said below is a list of the most common criteria that is evaluated to determine the “riskiness” of a business.
Level of Chargebacks
A chargeback is when a customer calls their credit card issuing bank to complain about a charge on their statement. The level of chargeback’s for the business must be either, less than 1% of the total sales for the month and/or less that 100 chargeback occurrences. If either level is breached the business will be considered high risk.
Instances of Credit Card Fraud
Certain business types and industries have a higher level of fraud and fraud attempts. Industries such as on-line betting have high fraud instances and are classified as high risk. Additionally, it’s possible for a business to be approved as a low risk business only to have there account re-classified later if fraud attempts are not managed according to the guidelines outlined in the merchant service contract.
Product or Service Paid in Advance
If your business provides future dated products or services in which the customer must pay in advance, this business model is usually classified as high risk. It has been documented that this business model increases the occurrence of chargeback’s and therefore creates more risk for the processor. Air travel, subscription services and membership services typically fall into this category.
Target Market Location
Any business with a target market located outside of the United States will be considered high risk. When processing international credit card payments it is difficult for a domestic merchant account to perform an address lookup for the credit card being charged. The address lookup is a basic fraud prevention measure. Without the ability to perform address lookups the business account will be classified as high risk.
The manner in which a business acquires sales and leads will be considered when classifying the business. Businesses that use aggressive sales tactics, over exaggerate results, use outbound telemarketing, multi-level marketing or fulfillment through a third party will be considered high risk.
Merchant account classifications will always take into consideration how the business intends to accept credit cards. Any business that is not swiping the customer’s credit card through a terminal will undergo more scrutiny. Additionally, any home based internet business will be classified as high risk.