Understanding a High Risk Merchant Account
Any businesses that are considered to be high risk or operating in such field are advised to create a high risk merchant account, which is basically a payment processing agreement tailored to their specific needs. In most instances, what these merchants do is pay for a higher fee to acquire merchant service that adds on their business expenses which impact their profitability as well as ROI. This is felt mostly by companies and businesses that operations were reclassified in high risk industries and were not yet ready to deal with the costs involved in operating as a high risk merchant.
There are companies that specialize specifically with high risk merchants by providing competitive rates, lower reserve rates and/or faster payouts. Of course, these are meticulously studied in an effort to increase interest.
Businesses in different industries are considered high risk primarily because of the nature of business they’re in, the methods that they apply and a number of other aspects. To give you an example, all adult businesses are deemed to be high risk operation as are auto rentals, travel agencies, legal offline as well as online gambling, collections agencies, bail bonds and several other offline and online businesses. Because working with and processing payments for such companies are riskier for the financial institutions and banks, it obliged them to sign up for a high risk merchant account. So in comparison to the typical merchant accounts, this carries different fee schedule.
As for the merchant account, it’s actually a bank account but in this case, it serves as a line of credit that has allowed the merchant or an individual or a company to receive payments from debit as well as credit cards used by customers. The bank that’s providing the merchant account is the acquiring bank while banks that are issuing the card used by consumers are simply the issuing bank. Another essential component of processing cycle is gateway. All information involved in the transaction is handled here.
Acquiring bank might be offering payment processing contract or perhaps, the merchant might have to open a high risk merchant account w/a high risk payment processor. This payment processor will collect funds and then, reroute it to the account of acquiring bank.
With regards to high risk merchant account, there could be more risks involved in the integrity of the funds and at the same time, the possibility that the bank is financially responsible for any problems that arise. Thus, high risk merchant accounts normally put in place additional security measures like delayed merchant settlements wherein the bank will hold the fund for a longer period of time to offset risks of fraud transactions.