Low-Risk vs High-Risk Merchant Account: Understanding The Difference

 

Businesses are categorized into two main categories “low risk and high risk” but many of you might be still wondering about the difference between these two. Right? But no need to be perplexed anymore as we have come up with this insightful blog about low risk & high risk merchant solutions. So without further ado let’s read on.

Running a business is exciting until it comes to dive into the world of payments. Understanding the world of online payments can feel like a confusing puzzle.  Especially when it comes to merchant accounts, the options can seem endless. Do you need a low-risk or a high-risk account? What is the difference, anyway?  Whether you are a seasoned entrepreneur or just starting, understanding the risk factors can save you time, money, and a whole lot of frustration. So, get ready with your coffee cup and unlock the valuable aspects of differences between these two.

What is High Risk Merchant Account?

A high risk merchant account is a specialized financial service tailored to businesses deemed to have a higher risk of chargebacks, fraud, or regulatory issues. Industries such as adult entertainment, online gambling, pharmaceuticals, and travel are often categorized as high-risk due to factors like high risk payment processing, transaction volumes, recurring billing, or a history of chargebacks.

 

For example- An example of a business that might require a high-risk merchant account is an online gambling platform. Due to the nature of the industry, which involves high transaction volumes, frequent chargebacks, and regulatory scrutiny, traditional banks may consider it too risky to process payments for such businesses. As a result, online casinos and betting websites often seek out specialized high-risk merchant account providers that can accommodate their unique needs and mitigate the associated risks.

What is Low Risk Merchant Account?

A low risk merchant account is held by businesses considered to pose minimal risk to banks and payment processors. These businesses typically operate in industries with low chargeback rates, stable revenue streams, and lower likelihood of fraudulent activity.

 

For example: An example of a business that typically qualifies for a low risk merchant account is a local grocery store. These stores have a steady stream of customers, low instances of chargebacks, and sell essential goods that people regularly need. Since grocery stores operate in a stable industry with predictable revenue, banks and payment processors view them as low risk merchants. As a result, they can benefit from lower processing fees and fewer restrictions compared to businesses in high risk industries.

Factors Determining The Difference Between Merchant Risk Categorization:

Identifying a high-risk merchant account can be sometimes a bit confusing task for you. Hence, below are the 5 key factors involved in a high risk payment processing.

1. Industry Type:

   - Low Risk: Businesses operating in stable industries with low instances of chargebacks, such as retail stores, grocery stores, and utility providers.

   - High Risk: Industries prone to chargebacks and regulatory scrutiny, such as adult entertainment, online gaming, and cryptocurrency.

2. Chargeback History:

   - Low Risk: Merchants with a history of minimal chargebacks, indicating satisfied customers and reliable transactions.

   - High Risk: Merchants with a high frequency of chargebacks, suggesting potential issues with product quality, customer dissatisfaction, or fraudulent activity.

3. Transaction Volume:

   - Low Risk: Businesses with consistent and moderate transaction volumes, demonstrating stability and reliability in processing payments.

   - High Risk: Merchants with irregular or exceptionally high transaction volumes, which may indicate a higher likelihood of fraudulent transactions or financial instability.

4. Credit History:

   - Low Risk: Merchants with a strong credit history and financial stability, indicating a lower risk of defaulting on payments or going out of business.

   - High Risk: Merchants with poor credit scores or a history of bankruptcy, indicating financial instability and a higher likelihood of defaulting on payment obligations.

5. Product or Service Offerings:

   - Low Risk: Merchants offering commonly accepted goods or services with low dispute rates, such as clothing, electronics, or household items.

   - High Risk: Merchants offering products or services associated with higher dispute rates or legal restrictions, such as tobacco, adult content, or travel services.

Conclusion:

In a gist, understanding the distinction between low-risk and high risk merchant accounts is crucial for businesses navigating the complexities of high risk payments. While low-risk accounts are typically associated with stable industries and minimal chargeback rates, high-risk accounts cater to businesses with higher chargeback risks, such as online gaming or adult entertainment. We hope that this blog has given you a clear understanding of the differences which will help you to make informed decisions to streamline the payment processes and mitigate potential risks effectively.