Low & High-Risk Merchant Accounts Explained
While comparing merchant account providers, you may have noticed the terms “low risk” and “high risk” popping up from time to time. A payment processor will always assess your level of risk before providing you with a merchant account. This assessment will determine the kinds of rates you have to pay, and it may even limit your merchant account options.
What Are Low-Risk Merchant Accounts?
Low-risk merchant accounts, also known as regular merchant accounts, are those that facilitate credit and debit card payments for merchants for a small fee. After these transactions are settled to the merchant account and any fees and refunds are taken out, the remaining amount is settled in full to the merchant’s business bank account.
What Are High-Risk Merchant Accounts?
High-risk merchant accounts are merchant accounts designed specifically for high-risk merchants (more on this below). High-risk accounts typically come with higher credit card processing fees and restrictions that don’t apply to low-risk merchant accounts, such as caps on the merchant’s monthly processing volume or the requirement to maintain a rolling reserve.
How Low-Risk and High-Risk Merchant Accounts Differ
The following are some of the key differences between low-risk and high-risk merchant accounts:
| Low-Risk Merchant Account | High-Risk Merchant Account |
| Low or no monthly account fees | Higher monthly account fees |
| Lower per-transaction fees | Higher per-transaction fees |
| Generally no rolling reserve | A percentage of each transaction held back as a rolling reserve |
| Shorter contract lengths or no contract requirement | Longer contract lengths (as much as three years and possibly more) |
| Possibly no early termination fee | Fees for cancelling and/or early termination |
| Fewer card processing limits | Strict monthly card processing limits |
If a high-risk merchant account is your only option, it is still usually better than not being able to accept credit and debit card payments at all.
What Are Low-Risk Industries?
Examples of traditionally low-risk industries include:
- Automotive/auto parts
- Food services
- Health and beauty
- Hospitality
- Household goods
- Office supplies
- Online apparel
- Pet supplies
- Professional services (doctors, attorneys, architects, etc…)
A low-risk merchant account is one that has a low statistical likelihood of costing the bank money or attracting rampant fraud. As such, the payment processor considers it a smart—or at least a safe—financial investment.
What Are High-Risk Industries?
Examples of high-risk businesses include:
- Adult entertainment
- Brokerage firms
- Cannabis
- Dating services
- Life coaching and personal development
- Online gambling
- Tech support
- Telemarketing
- Timeshares
- Travel agencies
Banks and traditional payment processors often deny high-risk merchant accounts for the same reason that lending institutions deny loans to risky borrowers: Because the client may ultimately end up costing the bank money. If a merchant services provider does grant services to a high-risk business, it will usually impose much higher fees to help mitigate the risk.
What Makes Some Industries High Risk?
Some industries have a higher-than-average percentage of customer disputes and are therefore deemed high risk. If your business is part of such an industry, you may be subject to higher transaction fees and greater restrictions.
You might also be required to maintain a merchant account reserve, which works like a security deposit. If you neglect to pay any required fees or penalties, the money is taken from the reserve and your merchant account is terminated.
But how do you know if your industry is high risk in the first place?
An industry is considered high risk if it has a high chargeback ratio, a significant degree of fraud, or a legally problematic product or service line.
Chargebacks
A chargeback occurs when a customer demands a refund from the bank. For example, if a customer pays for your three-week personal growth course and then feels ripped off when they don’t achieve enlightenment, they might complain to their bank. They might demand a refund even if your personal growth business is legitimate. The bank will usually refund the money and then hold you accountable for the full cost plus fees and penalties.
Chargebacks are inevitable in most industries, but a high chargeback ratio is a huge red flag to payment processors. If your business has too many chargebacks, this can lead payment processors to suspect that either:
- You’re cheating your customers (e.g. a tech support scam)
- You’re operating a business that attracts dishonest or dissatisfied customers (e.g. online gambling)
Either way, it’s bad news for the payment processor. That’s why they monitor chargeback ratios (the percentage of transactions that result in chargebacks). A chargeback ratio that consistently sits at or above 1% is considered high risk. Even if your business is part of a low-risk industry, you will still be flagged as a high-risk merchant if your chargebacks remain high.
Fraud
Industries with high levels of fraud are automatically deemed high risk. That’s because dishonest businesses attract excessive chargebacks, lawsuits, and complaints. They can jeopardise the reputation of the merchant services provider, and they often disappear without a trace—leaving the merchant provider on the hook for all acquired debt.
Unfortunately, many honest and reputable businesses are treated as high risk simply because of the industry in which they operate. Tech support is a perfect example. Most tech support businesses are upstanding and legitimate, but because tech support fraud is still rampant (the FBI received complaints from around 19,000 victims of tech-support scams between January and June 2023), all tech support businesses endure a higher level of scrutiny.
Legal Concerns
Some industries, like cannabis, pornography, and online gambling, are subject to wildly varying international laws. This can create significant liabilities for the payment processor. Consider the marijuana industry in the U.S. as an example. Because the state and national laws are often at odds, legal cannabis is still predominantly a cash business. As a result, these businesses are often the subject of crime and are even shut down by the authorities on occasion. It’s a volatile enterprise.
And then there are cases in which a business is just ethically problematic—such as an online retailer that sells imitation Gucci bags. A reputable payment processor is unlikely to risk its reputation and legal standing by partnering with such an enterprise.
What Makes Some Industries Low Risk?
An industry is considered low risk if it yields a consistent return on investment for the payment processor. In other words, the merchant services provider can confidently extend service knowing that—statistically speaking—it won’t be bombarded with chargebacks or complaints and that the merchant is unlikely to disappear with unpaid fees.
It’s not enough to be part of a low-risk industry, though. Your business’s level of risk is dictated by three additional factors:
- The strength of your business
- Your monthly sales volume
- Your chargeback rate
So even if you’re in a high-risk industry, you may be able to secure lower merchant fees if you can demonstrate strength in the other three areas.
The Strength of Your Business
When assessing your business, a merchant services provider may consider factors like your credit score and the number of years you have been in operation. New businesses or business owners with a bad credit score are sometimes held to a higher level of scrutiny than those with a proven legacy.
Your Monthly Sales Volume
The more money your customers spend, the more the bank risks. If your monthly sales are at or below the €20,000 figure, you should have no trouble remaining in the low-risk category—at least for this piece of criteria. The number of transactions is also important. If your average sale exceeds €50, you may be deemed higher risk.
Your Chargeback Rate
Once again, it’s not enough to belong to an industry with a low average chargeback rate. To keep your rates low, you must ensure that your chargeback ratio remains low to zero. Otherwise, your merchant account may be placed in a higher-risk category or terminated altogether.
How to Know if Your Business Qualifies for Low or High-Risk Merchant Accounts
Your industry is the most important factor in determining your level of risk. Certain industry descriptors—like adult entertainment, gambling, and tech support—will automatically flag you as high risk.
If your industry is low- to medium-risk, the next step is to honestly assess the strength of your business.
| Low Risk | High Risk |
| Established business | Newly formed or penalised business |
| Chargebacks below 1% | Chargebacks above 1% |
| Average monthly sales below €20,000 | Average monthly sales above €20,000 |
| Average ticket size below €50 | Average ticket size above €50 |
Ideally, you want to be in the low-risk category. After all, low-risk businesses:
- Pay the lowest merchant fees
- Have access to more merchant features like point-of-sale solutions
- Have access to more payment methods, currencies, and countries
- Have the best chance of being approved by their preferred merchant provider
- Typically aren’t required to open a merchant account reserve
If, despite your best efforts, you find yourself in the high-risk category, you still have options. Your next step is to find a payment processing provider that supports high-risk merchant accounts. More importantly, you want a merchant provider that will afford you their full services without charging you an exorbitant amount of money.
Show That Your Business is Low Risk
High-risk merchant services are a fact of life for businesses in certain industries and can be a temporary solution for businesses that are new, have a large ticket size, or have worked up a high chargeback ratio. While a high-risk merchant account comes with higher fees and stricter regulations, it ultimately allows you to take card payments rather than being forced to deal only in cash.
When applying to merchant account providers, gather as much evidence as you can to show the strength of your business, your chargeback ratio (which is hopefully low), your monthly sales volume, and your trustworthiness. Providers will take all of these factors into consideration during the underwriting process and hopefully offer you a competitive rate.
