A high-risk merchant account is a specialised financial service designed for businesses that traditional banks and payment processors consider risky. These accounts enable such businesses to accept card payments despite their perceived risk level. The primary purpose of such an account is to facilitate transactions for companies that might otherwise struggle to process payments, ensuring they can operate and grow despite industry challenges.
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What Is a High-Risk Merchant Account?
A high-risk merchant account is a type of bank account that allows businesses to accept credit and debit card payments, even if they are deemed high-risk by a previous payment service provider or processor. This solution is crucial for companies that have been rejected by standard payment gateway providers in India due to their risk profile.
Your business might be classified as high-risk for various reasons, including your financial history, the nature of your industry, or specific business practices. Common factors that lead to using high-risk accounts include:
- High chargeback rates
- Large processing volumes
- Frequent cross-border transactions
- Being a new merchant with a limited history
- Low credit scores
- Selling products or services for future delivery
- Operating in industries prone to fraud
Types of Businesses Commonly Considered High Risk
- Adult entertainment
- Travel, including airlines, cruises, and vacation planners
- Dating
- Gambling
- Cannabidiol (CBD)
- Debt collection
- Smokes and vaping
- Cryptocurrency
- Pharmaceuticals
- Military contractors and arms dealers
- Environment and waste management
- Event ticket brokers
- Real estate investing
- Telemarketing sales
How High-Risk Merchant Accounts Work?
A high-risk merchant account operates similarly to standard accounts but with additional safeguards. When you set up these high-risk accounts, you’ll partner with a specialised payment processor who understands your industry’s risks. They’ll provide the necessary tools to accept card payments, including a payment gateway for online transactions.
Here’s a basic overview of the transaction flow:
- Your customer initiates a purchase by entering their card details at your point-of-sale system or website.
- Your payment gateway securely transmits the transaction details to the acquirer (acquiring bank).
- The acquirer identifies the card network (Visa, Mastercard, Discover, or American Express) and routes the transaction accordingly.
- The card network’s payment switch forwards the request to the issuing bank.
- The issuing bank runs fraud checks and verifies available funds or credit.
- If approved, the issuing bank sends confirmation back through the network to your payment gateway and acquiring bank.
- You receive payment approval, and the transaction is completed.
Your high-risk payment processor plays a crucial role in managing risk. They’ll monitor your transactions for suspicious activity and implement fraud prevention measures. If a chargeback occurs, the processor will handle the dispute, potentially advocating on your behalf. They may also offer chargeback prevention tools and advice to help you reduce risk and maintain a healthy account.
What Factors Determine if a Merchant Is High Risk?
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Industry Reputation: Many industries are pre-labelled as high-risk due to frequent refunds, chargebacks, or frauds.
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Chargeback Rates: Chargeback refers to the situation where a consumer disputes a transaction. The business that frequently encounters such a situation is treated as a liability.
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High-Ticket Sales: Businesses that often deal with high-value transactions are at more risk of fraud and chargeback.
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Subscription-Based Services: Businesses that accept subscription or recurring payments are categorised as high-risk merchant services due to their increased vulnerability to chargebacks.
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Regulatory Risks: Companies that are heavily subject or regulated to changing legal environments are also considered in this category because of potential compliance and legal risks.
While there are factors, there are ways to mitigate these risks. Some of them are:
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Mitigate Chargeback: Businesses must implement a strong prevention strategy to alert them of potential chargeback.
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Identify and Prevent Fraud: Businesses must use advanced artificial intelligence (AI) and machine learning (ML) technologies to identify and prevent fraud before it occurs.
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Monitor Transactions: Advanced monitoring techniques should be implemented to regularly analyse transaction speed, anomalies, and frequencies in real-time.
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Customer Communication: Have a direct way of communicating with customers to send updates and notifications about their transactions.
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Recording: Ensure that detailed recordings of transactions, dispute communications, and more are maintained.
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Be Compliant: Carefully monitor and keep track of regulatory changes to be compliant.
Reasons a Merchant May Be Considered High-Risk
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High Transaction Volume: Processing large transactions can raise red flags for financial institutions. High volumes increase the potential for chargebacks and fraud, making it more challenging to monitor and manage risk effectively. This can strain resources and potentially lead to significant financial losses if issues arise.
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Accepting International Payments: Cross-border transactions introduce complexities like currency fluctuations, differing regulations, and increased fraud risk. These factors can make it more difficult for processors to verify transactions and manage potential disputes.
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New Merchant: Newly established businesses lack a financial track record, making it hard for processors to assess their reliability and stability. Without historical data, it’s challenging to predict the business’s ability to handle financial obligations and potential disputes.
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High-Risk Industry: Certain sectors such as online gaming, adult entertainment, or cryptocurrency, are inherently considered high-risk. These industries often face regulatory scrutiny, legal ambiguities, or higher rates of chargebacks and fraud. For example, online gaming may have complex licensing requirements, while adult entertainment can face moral objections and higher instances of disputed charges.
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Low Credit Score: A merchant’s poor credit history suggests financial instability, increasing the perceived risk for payment processors and financial institutions.
Difference Between High-Risk and Low-Risk Merchant Accounts
Parameters |
Low-Risk Merchant Account |
High-Risk Merchant Account |
Account Fees |
No or low |
High |
Transaction Fees |
Low per transaction |
High per transaction |
Rolling reserve |
No rolling reserve |
Some percentage of each transaction as a rolling reserve |
Contract |
Shorter or no contract |
Three years or more contract length |
Termination fee |
No early termination fee |
Fee for early cancellation or termination |
Processing limits |
Less card processing limits |
Stringent monthly card processing limits |
These differences significantly impact business operations. High-risk accounts offer essential services to businesses in challenging industries but come with higher costs and stricter terms. Low-risk accounts provide flexibility and lower fees but may not be available to all businesses. Your account type will affect your cash flow, pricing strategies, and overall financial management.
Does a High-Risk Merchant Need a Payment Processor?
If you operate a high-risk business, you’ll likely need a high-risk payment gateway to process online credit card transactions. It’s important to note that payment gateways themselves don’t classify as high-risk or low-risk. Instead, they work with high-risk providers to facilitate transactions for businesses in high-risk industries.
The payment gateway for high-risk businesses is very crucial. They act as intermediaries between your business, customers, and financial institutions, enabling you to accept card payments despite your high-risk status. Without a specialised processor, you might find it challenging or impossible to process card transactions, severely limiting your ability to operate and grow your business.
Specialised high-risk processors play a vital role in facilitating secure transactions. They implement robust fraud prevention measures, manage chargebacks effectively, and navigate the complex regulatory landscape of high-risk industries. These processors understand the unique challenges you face and provide tailored solutions to help you maintain a healthy payment ecosystem while minimising risk for all parties involved.
Pros and Cons of High-Risk Merchant Account Payment Processor
While you need these processors for your day-to-day payment transactions, you must be aware of their pros and cons.
Listed below are the pros of using high-risk payment processors:
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These providers are willing to work with companies with whom traditional providers and bankers do not work.
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High-risk businesses can get customised solutions according to their needs and requirements, such as flexible transaction limits and multi-currency support.
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They prioritise security measures, like encryption of sensitive data, PCI DSS compliance, and robust fraud prevention tools.
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By linking with foreign payment networks and supporting various currencies, they make international transactions easier.
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Dedicated customer service and account management catered to the requirements of high-risk enterprises are frequently offered by these processors.
Cons of these service providers:
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Since there is an increased risk associated with high-risk businesses, these providers may charge higher fees.
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High-risk companies may have to undergo stringent monitoring and underwriting processes.
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There is also an increased possibility of account freezes and holds.
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There will be limited options for getting a high-risk merchant processing account compared to a regular account.
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A company’s reputation may be impacted by its choice of a high-risk payment provider, particularly in sectors where customer perception is crucial.
How to Choose a Payment Gateway Provider?
Choosing a high-risk account service provider is a crucial step for high-risk businesses searching for ways to maximise their financial operations.
Listed below are a few factors that you can consider while choosing a service provider:
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Fee Structure: Being a high-risk merchant, you will be charged a high fee. Therefore, you must look for a vendor who is transparent about its fee structure.
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Contract Term: Many vendors ask for a lengthy contract term or stringent cancellations. It would help if you looked for a vendor who is flexible and is ready to adapt to business needs.
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Experience: It is necessary to look for a vendor with experience and reputation handling high-risk businesses.
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Customer Support: You must look for a provider with robust customer support, such as 24/7 communication on the phone or chat.
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Payment Gateway: Always check whether the provider’s payment processing options are compatible with your business.
How Does Razorpay Help a High-Risk Merchant?
1) Industry-Specific Understanding
We at Razorpay recognise these challenges and have developed expertise in serving merchants across various high-risk sectors. Our underwriting process is tailored to consider the unique risk factors associated with your industry, ensuring a fair evaluation of your business.
2) Streamlined Account Access
We simplify the application process for high-risk merchants, offering a more straightforward path to account approval compared to traditional processors. We’ve streamlined our vetting procedures to expedite account setup while maintaining necessary risk assessments, helping you start processing payments sooner.
3) Risk Management Solutions
To protect your business and customers, we employ robust risk management tools and fraud prevention measures specifically designed for high-risk industries. These include advanced transaction monitoring, machine learning-based fraud detection, and customisable risk rules that adapt to your specific business model and industry challenges.
4) Growth and Scalability
Our payment processing solutions are built to support the growth of high-risk businesses. We offer features like secure international payments, enabling you to expand your customer base globally. For subscription-based businesses, our recurring billing options streamline revenue collection, fostering sustainable growth.
5) Compliance and Security
We prioritise compliance and security, adhering to all relevant regulations for high-risk industries. We maintain PCI DSS Level 1 certification, the highest standard in payment data security. Additionally, we stay current with industry-specific regulations, helping ensure your business remains compliant as you process payments.
Conclusion
A high-risk merchant account is vital for businesses unable to secure standard payment solutions due to their risk profile. These accounts enable acceptance of credit and debit card payments in industries prone to high chargebacks, large transaction volumes, or regulatory scrutiny.
By partnering with specialised payment processors like Razorpay, high-risk merchants gain access to tailored solutions that include secure payment gateways and robust fraud prevention tools.
Frequently Asked Questions (FAQs)
1. What is a high-risk merchant fee?
A high-risk merchant account fee is an additional charge imposed by payment processors on businesses deemed to carry higher financial risks, such as those in industries prone to frequent chargebacks or legal uncertainties. These fees compensate for the increased risk of potential losses faced by processors when handling transactions for such merchants.
2. What are high-risk transactions?
High-risk transactions are financial activities that payment processors and banks consider more likely to result in chargebacks, fraud, or legal issues.
3. Which is an example of a high-risk industry?
Some examples of high-risk industries are casino and online gaming, adult entertainment, dating sites, cryptocurrency, etc.
4. What are the steps businesses can take if categorised as high-risk?
High-risk businesses may raise their standing by decreasing chargebacks, improving fraud protection, preserving financial stability, guaranteeing compliance, and offering first-rate customer service.
5. I can’t find a traditional processor. Do I still need a payment processor if I’m high-risk?
Yes, a payment processor is still necessary for high-risk enterprises. Specialised high-risk processors promote corporate growth by facilitating safe transactions and providing essential services.
6. How much do high-risk merchant accounts cost?
High-risk merchant accounts in India generally have higher costs due to the increased risk involved. These costs include setup fees, monthly maintenance fees, and higher transaction fees. Providers often require a rolling reserve, holding a percentage of transaction amounts to cover potential chargebacks. Chargeback fees are also higher for high-risk accounts.
7. What should I look for when choosing a high-risk payment processor?
Some things to consider when choosing the processor are their understanding of high-risk business, legal and regulatory compliance, transaction fees, fraud prevention and risk management, and growth and scalability.
8. Can I get instantly approved for a high-risk merchant account?
Instant approval for a high-risk merchant account is uncommon due to the heightened scrutiny and risk assessment. High-risk accounts undergo a thorough evaluation, considering factors like industry type, business stability, credit history, and compliance.
9. Do businesses need a high-risk payment gateway?
To securely process transactions, lower fraud, manage chargebacks, and guarantee compliance with industry standards specific to their risk profile, high-risk enterprises do indeed require a high-risk payment gateway.