High Risk Merchant Accounts
A high risk merchant account is a merchant account or payment processing agreement that is crafted
to fit a business that is viewed as high risk or is operating in an industry that has been deemed
as such. Businesses holding high risk merchant accounts usually need to pay higher fees for their
services. These fees can add to their cost of business, affecting profitability and ROI. Some
companies specialize in high risk merchant accounts by often offering competitive rates, faster
payouts and/or lower reserve rates.
Businesses in a variety of industries can be labeled as high risk because of the nature of their
industry, the way in which they operate or a variety of other factors. Examples of businesses
that would use high risk merchant accounts are all adult businesses, travel agencies,
auto rentals, collection agencies, legal offline and online gambling, and bail bonds.
These businesses are obliged to sign up for a high risk merchant account from banks and
financial institutions because of the higher risks that are associated with working with
and processing payments.
A high risk merchant account is a bank account, but works more like a line of credit
that allows the company or individual (the merchant) to receive payments from credit
and debit cards used by their customers. The bank that provides the high risk merchant
account is called the 'acquring bank' and the bank that issued the consumer's credit card
is called the issuing bank.
The acquiring bank may offer a payment processing contract, or the merchant may need
to open a high risk merchant account with a high risk payment processor who collects
the funds and routes them to the account at the acquiring bank. With a high risk merchant
account there are additional concerns about the integrity of the funds and the possibility
that the bank may be financially responsible in the case of any problems. It is for this
reason that high risk merchant accounts often have additional safeguards in place such
as delayed merchant settlements where the bank holds the funds for a slightly longer period
to offset the risk of fraudulent transactions. Another safeguard that the financial
institution might use is reserve account. It is a special account at the acquiring
bank where a portion of the net settlement amount is held for a period usually between
30 and 180 days. In this scenario the account may or may not be interest bearing, and
the monies from this account are returned to the merchant on the standard payout schedule,
once the reserved time has passed.
When a merchant applies for a high risk merchant account with a bank, payment processor,
or other merchant account provider there are many factors to consider before settling
on a particular merchant provider. It is possible to negotiate lower rates, and one
should always request multiple quotes before choosing which high risk merchant account
provider to use for their processing needs.
