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High-Risk vs. Low-Risk Merchant Accounts: Understanding The Difference

By Brandy Hadden | December 18th, 2023


As we know, a quick and efficient onboarding process for merchants to accept payments is paramount for an Independent Software Vendor (ISV). During onboarding, the ISV’s payment processing partner reviews merchant account applications, complying with the U.S. government’s Know Your Customer (KYC) requirements by collecting business documentation, banking information, and identity verification from the merchant.

The seamlessness of this process partially depends on whether or not a merchant is deemed to be “high-risk.” Merchants who receive this designation often have to provide more documentation, giving way to a longer onboarding period, and may be subject to higher fees, as well.

What is a high-risk business?

In the merchant onboarding process, payment technology companies judge the merchant account by how much risk the company will take on when it processes transactions. Several factors come into play when assessing a merchant account’s risk.

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Chargeback Frequency

A chargeback is when a customer requests a refund on a purchase by going directly to their card provider (instead of their point of purchase). When this happens, the merchants are charged fees, which are burdensome on the payment providers. If the merchant is in an industry that has a high chargeback ratio (such as the adult industry, gaming/gambling, ecommerce, businesses with primarily high-priced items, or multi-level marketing companies), the merchant will be classified as high-risk. Sometimes, these verticals are classified as “specialty industries,” instead of the term high-risk, because of a negative connotation with the high-risk label.

Fraud Likelihood

Certain business models are exposed to a higher risk of fraud. For instance, any card-not-present transaction is at an increased risk, whether the payment is made with a credit card, debit card, mobile wallet, or other payment method. So, if the merchant is primarily CNP, such as an ecommerce retailer, they will incur this designation. Additionally, businesses that have a large amount of future deliveries (such as independent contractors or businesses primarily in trade industries) are also at a higher level of risk.

International Base

If the merchant is based offshore and looking to open a merchant account in the United States, the burden that comes with making sure all business aspects follow the applicable international regulations to process payments is enough for the payment processor to deem the account high-risk.

Reputation and Regulation Management

With certain industry reputations come increased regulations. Verticals such as telehealth, pharmaceutical, CBD, firearms, adult, and gaming all have increased regulations, such as age restrictions and mandatory licenses — these increase the business’s risk. Additionally, some verticals such as these require the payment provider to employ Enhanced Due Diligence (EDD) during the onboarding process, which typically comes in the form of a questionnaire tailored to the type of business.

Low Credit Score

Apart from business operations, if the merchant has a record of not paying bills on time and poor credit as a result, their account could be deemed high-risk.

How does onboarding a high-risk business differ from a low-risk business?

Ideally, merchants are boarded as seamlessly as possible using tools like a Merchant Boarding API, which automates this process and integrates it directly into the ISV’s software, making it as easy as possible for the merchant to submit their application. A typical onboarding includes a merchant application review, identity verification, and a merchant history review (all of which would fall into an auto-approval), followed by manual, additional steps if necessary for a merchant who could be high-risk.

Preliminary account information such as the MCC code for the business type as well as sales volume are collected early, which are typically a good indicator of whether or not the merchant will be able to be auto approved.

A merchant who is doing business in a low-risk vertical (one that does not require that EDD questionnaire), who has a monthly volume under 200,000 (barring a lot of high-ticket inventory), and with a brick-and-mortar location, is likely to speed through this onboarding proceeding. Any variation could kick the process out for more manual checks and balances to protect all parties involved. The payment provider’s underwriting team takes the lead on this, along with its compliance team.

Low risk merchant account
As previously mentioned, many high-risk merchant accounts will need to provide more information during the onboarding. In addition to the KYC regulations, payment providers typically will also require that EDD review.

For a complete underwrite, the payment provider needs to collect business ownership verification and years of operation, along with bank statements and processing statements. The depth of these documents isn’t necessarily the same across the board, and can depend on the type of high-risk business the merchant has. A contractor with long delivery times might have to submit more proof of ownership, whereas a merchant with a low FICO score would need to provide more bank statements.

What is a low-risk business?

Low-risk businesses have stable financial results that reduce the probability that they will experience financial losses. These businesses are typically not in verticals that are dependent on market trends that fluctuate frequently. Other factors, such as having a brick-and-mortar location, also tend to be hallmarks of low-risk businesses that aren't as likely to experience financial insecurity.

Conclusion

Regardless of whether a company falls into the low- or high-risk category, partnering with a payments provider that has the merchant services to manage merchant onboarding programmatically with the support available to take on additional processing is a win-win for all involved. To learn more about applying for a merchant processing account, contact our Sales Engineering team.


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