When businesses venture into the world of payment processing, choosing the right merchant account is critical. For many, the decision boils down to two categories: high-risk merchant account and standard accounts. While both serve the purpose of enabling businesses to accept credit and debit card payments, there are significant differences between the two.
What Are Standard Merchant Accounts?
Standard merchant accounts are designed for businesses deemed “low-risk” by payment processors. These businesses typically operate in industries with predictable cash flow, low chargeback rates, and minimal fraud risk. Examples include restaurants, retail stores, and professional services like legal or accounting firms.
With a standard account, businesses often benefit from:
- Lower processing fees.
- Easier approvals during the application process.
- Fewer compliance requirements from payment processors.
However, not all businesses qualify for a standard account. That’s where high-risk merchant accounts come into play.
What Are High-Risk Merchant Accounts?
High-risk merchant accounts cater to businesses in industries or situations that processors consider risky. This “high-risk” label can stem from factors such as:
- Operating in industries prone to fraud or chargebacks (e.g., adult content, gaming, or travel services).
- Processing high transaction volumes.
- Having a poor business credit history or operating in international markets.
While high-risk accounts offer the advantage of enabling businesses in constrained industries to process payments, they come with added challenges, such as:
- Higher transaction fees.
- Longer application and approval processes.
- Rolling reserves, where processors hold back a percentage of funds to mitigate risk.
Key Differences Between High-Risk and Standard Accounts
1. Approval Processes
Standard merchant accounts typically have straightforward approval processes with minimal documentation required. High-risk accounts, on the other hand, involve stringent due diligence. Payment processors may examine business financials, chargeback histories, and the nature of the business itself.
2. Fees
While standard accounts often enjoy low, flat-rate transaction fees, high-risk accounts are subject to higher fees. This might include higher per-transaction fees, setup charges, or monthly maintenance costs to offset the increased liability processors face with high-risk businesses.
3. Chargebacks
Chargeback rates also dictate how businesses are classified. Industries that frequently see a higher percentage of chargebacks are automatically labeled high-risk. While chargebacks are costly for any business, they are significantly more impactful for high-risk accounts.
4. Flexibility
High-risk merchants often operate in global markets or niche spaces requiring customized payment solutions. Standard accounts cater more to businesses with straightforward operations and domestic audiences.
When Is a High-Risk Account Necessary?
High-risk merchant accounts are not inherently negative and are essential for businesses in industries like travel, subscription services, e-commerce, and CBD sales. They enable operations that might otherwise struggle to secure payment options. Recognizing the need for these accounts is critical for industries trying to reach a wider customer base while addressing the nuances of higher risk.
Final Thoughts
Understanding the differences between high-risk and standard merchant accounts can help businesses make smarter decisions tailored to their unique needs. If you’re venturing into a high-risk industry, working with an experienced processor can help you manage fees, reduce chargebacks, and keep your business running smoothly. Ultimately, both account types serve their purposes within specific contexts, but careful research and the right partners are essential for long-term success.