Modern businesses need the ability to accept credit cards from their customers in order to stay competitive. When contacting a payment processor about opening a new merchant account, one of the first things you'll need to do is undergo a merchant risk assessment.
Credit card processing risk categorization is a very complex matter. There are many variables, including the merchant’s time in business, products the merchant offers, the business model, and a range of other factors.
Why Payment Processors Assess Risk
Businesses collecting credit card payments are sometimes doing so in advance of the product or service actually being delivered. This means that you, as the merchant, are essentially requesting a line of credit from the payment processor. If for whatever reason, the customer declines the charges for the goods or services and you don't have enough money in your account to cover the refund, the merchant account provider is responsible for cost of the chargeback. Profit margins in the payment industry are pretty low, so payment processors monitor risk factors very carefully.
Your Track Record Matters
How long you’ve been in business is an important factor in assessing your risk rating. In particular, payment processors will be interested in your debt to equity ratio. Typically a new business has an unfavorable ratio at first. This will not keep you from obtaining a merchant account, but it may affect your risk rating. Also, if you've ever been denied merchant account service before, this may put your company in a higher risk category. On the other hand, if you have a long history of accepting credit card payments without any problems that can mitigate some of the other risk factors.
Your Industry Matters
Some industries are considered inherently riskier than others. Restaurants are historically seen as a very low risk, for example. Some common high-risk industries include:
- Travel Agencies: These kinds of businesses are vulnerable because they have a high rate of chargebacks due to cancellations. Travel industries are particularly risky because there are many important variables beyond their control, such as bad weather or last minute changes by their clients.
- Adult Industries: Adult themed entertainment or goods are often susceptible to chargebacks by customers who feel remorse and then deny the charges. Often the customers will claim that their credit card was stolen, which leads to a reversal of charges.
- Foreign Sales: Sales to foreign countries are often considered higher risk because of the difficulties of international sales and shipping. It is also important to consider the risk of scams with foreign transactions.
- High-Value Charges: High-end purchases or any business where charges are likely to be over $1,000 are statistically more susceptible to chargebacks and disputed claims. A typical example would be a jewelry store.
- Charitable Organizations: Charities are often seen as higher risk by payment processors. Because donors aren't actually buying a service or product, chargebacks can be more common.
- Subscription-Based Services: Regular subscription services are often susceptible to cancellation without prior notice, making this kind of business model higher risk.
- Insurance Agencies: Similar to subscription-based services, this kind of company is also at a higher risk because of the possibility of cancellation.
- Advertising Services: These businesses often bill on an annual or quarterly cycle. Any time your business relies on payment guarantees in advance, banks will often assess a higher risk rating.
What if Your Business is High Risk?
None of the conditions above means that your business will not be able to accept credit card payments. Processing services are still viable options for you, and just because you've been rejected for a merchant account before doesn't mean you won't be able to get one. Payment processors may require additional background information or financial reports, but you should be able to take credit cards just like any other company. Sometimes merchant services providers will request higher processing rates because of the risk, or may even ask for a reserve on your processing. Being completely open with your business plan and financials are a good way to build trust with a potential processor.
When looking for a processor with whom to open your high risk merchant account, do your research ahead of time to find a processor with an established track record who will have a better understanding of your risk factors. Processors who understand the unique challenges of your business model and how to manage risks appropriately will be able to give you the best rates and most relevant customer service.