Low Risk vs. High Risk Merchant Accounts

Imagine that you’re a well-established music distributor, and an unknown artist comes to you and asks if you can distribute 10,000 copies of his first album. Would you do it?

He may be the next Bruno Mars or Ed Sheeran, and it may be a great venture for you. But is that likely? To decide if this is a reasonable business risk, you’ll have to consider a few different factors, like how long he has been in the industry, whether he has plenty of fans to vouch for him, and what his reputation is like. You might want to offer to just distribute 2,000 copies instead.

The same kind of thing goes on every day in the payments world. When a new business starts up, banks and payment providers have to decide whether or not it’s a good idea to open a merchant account and process payments for them. If they’re not sure, they may charge higher rates, or decline to work with the business in question. It all depends on the level of risk the company is willing to bear.

Self-Check: Are You Classified as a High Risk Merchant?

People don’t usually like taking risks. Neither do most service providers, whether they’re music distributors or payment providers. So, how do you know if a bank or payment provider would take a chance on you? How can you tell if you’re looking for a low or high risk merchant account? It’s nothing to do with whether you’re a trustworthy person and everything to do with the type of business you run.

How many of these factors apply to you?

  • The industry my company is in has a high chargeback ratio (e.g. Internet electronic services), and/or my company is in one of these industries
  • My company is new and hasn’t developed a solid reputation yet
  • My company is not financially stable (i.e. it doesn’t generate stable streams of revenue)
  • I, the owner, don’t have a good credit score
  • Most of my customers buy months in advance and the product or service is consumed much later (such as an airline or ticket vendor)

If you answered yes for more than one, you’re likely classified as a high risk merchant by service providers. That being said, the difference between high risk and low risk isn’t always black and white. That’s why at Bambora, we don’t automatically reject merchants in industries that are usually considered high risk. More on this later.

Why You Don’t Want to Be High Risk

Top payment providers will underwrite the account—so if the business fails, they lose as well. It doesn’t make sense for them to work with high risk businesses.

Some service providers specialize in high risk merchant accounts, but they have to charge higher fees and offer terms and conditions that are less advantageous for their customers. They’re also not underwriting the risk, so you aren’t protected. If you’re a high risk business, you can expect to:

  • Pay higher fees and additional charges
  • Choose from fewer and less favourable service options

Is it Possible to Become a Low Risk Merchant?

Like we mentioned above, most of the factors that make you a high risk business aren’t things you can change—like the industry you’re in, or the way customers use your products. That said, you can make a difference on some of the other factors. If you think you might be a high risk merchant, do what you can to reduce risk before you bring your application to the underwriters’ attention, and go through your financial statements, business model, and credit scores.

Regardless of your official classification, there are steps you can take to lower your risk:

  • Reduce your risk of chargebacks with strong fraud prevention tactics, like Bambora’s 3D Secure Service
  • Focus on generating stable streams of revenue instead of occasional streams of large revenues
  • Demonstrate your ability to keep up with high trading volumes

Our onboarding team has been boarding businesses with merchant accounts for over 17 years. Although you may be high risk on paper, we have come to understand that it doesn’t always mean you are a high risk merchant. Summer camps are a great example of businesses that are high risk on paper, but are actually considered relatively low risk in our books.

Even if you’re high risk on paper, it’s worth checking to see if we’ll be able to set you up to accept payments. Your journey to becoming the next star in your industry has only begun and Bambora will be here to help you along the way.

Learn more about opening a merchant account through Bambora.

Photo: NakoPhotography / Shutterstock Inc


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