A high-risk merchant account and a low-risk merchant account are two options to choose from when you need a payment processing method. In most cases, businesses select the latter while the former is imposed on those, which are deemed “high risk” by financial institutions. In this article, we aim to present the differences between these two and explain them to you. Are you interested? Then read on.
What is a High-Risk Merchant Account?
A high-risk merchant account is a type of business bank account designated for businesses that are deemed high-risk by financial institutions. This categorization can depend on many factors, such as:
- poor credit score
- long-term contracts
- recurring or subscription sales
- sales in high-risk countries
- bankruptcy of fraud risk
- high returns or chargebacks
- highly regulated products (or those illegal in certain areas)
- card-not-present transactions
We must also mention that new businesses are usually deemed high-risk. This is because it is difficult to determine many of these factors in their cases, as there is no previous history to base the judgment on.
What is a Low-Risk Merchant Account?
Conversely, a low-risk merchant account caters to businesses perceived as having a lower risk of chargebacks and fraud. These typically include companies:
- with steady transaction volumes
- with low average transaction values
- in more steady industries
Comparing High-Risk and Low-Risk Merchant Accounts
Let’s take a look now at the differences between a high-risk merchant account and its low-risk counterpart in practice. For that, we will analyze the aspects that you are probably most interested in.
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- Fee structure and rates – High-risk merchant accounts typically face higher fees than low-risk ones. This includes increased transaction fees, monthly account fees, and potentially higher chargeback fees. Low-risk accounts, on the other hand, benefit from more competitive pricing due to their perceived stability.
- Chargeback policies – Chargebacks are a critical concern in the world of merchant accounts. High-risk accounts often have stricter chargeback policies, with banks closely monitoring these activities, though in many cases, they have a higher tolerance for these rates than low-risk accounts.
- Contract terms and account stability – The contract terms for high-risk accounts often include longer commitment periods, stricter conditions, and penalties for early termination. They also undergo controls from the banks more frequently. While all of that sounds like a big disadvantage, remember that it’s a double-edged sword – payment processors are less likely to ban and stop running a high-risk merchant account than a low-risk one.
- Payment processing time – Due to their nature, low-risk merchant accounts get the money transferred faster than high-risk ones. It is so because the latter have various additional security measures imposed which makes the whole payment processing process longer.
The Takeaway
We hope we’ve dispelled any doubts you had about the differences between a low-risk and a high-risk merchant account. The world of online payment is much wider, this is but a small piece of the intricacies of payment processing, yet a piece that lets you build your business consciously, knowing what to expect.
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