You go into a bank thinking that you can easily apply for a merchant account that will allow you to process credit card payments more conveniently. Then you quickly learn that you are considered a high-risk business and finding a credit card processor won’t be as easy as you think.
But why exactly are you tagged as high-risk? Here are three common reasons a business is considered a high-risk merchant account.
More often than not, a financial institution will tag you as high risk because of the product you’re selling or the industry that you’re in. All types of businesses are categorized into a Standard Industrial Classification, or SIC code.
High-risk industries can be anything from healthcare to telemarketing. If you belong to a high-risk industry, there’s a good chance that some payment processors would reject your application. You may also be tagged as high risk if you are selling a high-risk product. CBD is one of the most popular high-risk products because it’s not legal in some states and there are still no studies that prove its medicinal benefits. Adult entertainment is another common high-risk merchant because it attracts fraud and scams, not to mention that this type of business is still taboo in some areas.
We all have to deal with chargebacks at some point, but when your chargeback rates are consistently high, payment processors would take it as a sign that you are losing money and that you may not be serving your customers well, and will therefore consider your business high risk. Most financial institutions will not approve merchants with chargeback rates of more than 2%.
In some instances, you will be given a chance to defend your chargeback rate by showing that you have a higher payment processing volume and that most of these chargebacks were friendly fraud.
There are also instances when your product or service is really more prone to chargebacks. For instance, if you offer subscription services, you might struggle to find a good payment processor just because you’re at a higher risk for chargebacks.
Finally, while your credit history doesn’t fully reflect your capability to manage credit card payments, it will weigh heavily in an underwriter’s decision if you are applying for a merchant account. For banks, a bad credit score could mean a lack of responsibility in handling finances, but it’s not the only factor that would be considered when evaluating your application.
Before you apply for a merchant account, it’s best to monitor your credit score and always be mindful of your debt. If you have any unpaid dues, take care of them now and don’t put yourself in any more debt in the future. Remember that a good credit score has its benefits. While you can still get approved for a merchant account even if you have a bad credit score, the process may be longer and the fees will be a lot higher than if you have good standing.