When applying for a merchant account, they ask you to provide your business and tax information and even agree to a credit check. If something in your application shows you might be a high-risk merchant, they may do one of two things. Either they refuse to give you a merchant account or provide a merchant account with high rates. The high rates are usually to cover the likelihood of fraud or chargebacks.
Please note that every payment processor has varying standards for what they consider “high risk.” So because one payment processor thinks you are high risk doesn’t mean Payment cloud will. However, if you are given a high-risk merchant account, here is what to expect.
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Long term contracts
If your business is considered high-risk, your payment processor will try to get you to sign a long-term contract. This is because they want you to keep paying the high rates, even if you manage to lower the risk over time.
Chargeback fees are charged on your merchant account in case of a chargeback. Essentially, if you have a high-risk merchant account, your chargeback fees will be higher than low-risk merchants.
Early termination fees
If it reaches a time and you want out of your contract before the expiration date, they may require you to pay early termination fees. The fees they will charge will depend on the terms you settle with your payment processor.
Liquidated damages clause- In addition to early termination fees, the payment processor may also include a liquidated damages clause in your contract. The contract specifies that there will be additional fees if you fail to honor the contract.
Some payment processors may want to keep an additional share of your credit card sales as protection against fraud and chargebacks. There are three types of reserves that payment processors may need:
Rolling reserve – with this type of reserve, the payment processor will withhold a share of your daily sales for a specified time then eventually release the money back to you.
Up-front reserve – as the name suggests, an up-front reserve is money you will place in escrow at the beginning of your contract and will not be returned until the entire value of the reserve is met in payment processing fees.
Capped/fixed reserve – This means that the payment processor will withhold an additional percentage of every transaction you make until the reserve reaches the amount you’ve agreed in the contract.
Account freezes or terminations
If your merchant account becomes riskier with time, you might experience account freezes where you can’t accept any credit or debit card transactions. If the issues with your account continue, your payment processor will terminate your merchant account.
This issue is prevalent with payment service providers like Stripe and Square. These types of payment processors offer one large merchant account shared by all their clients. If one client becomes riskier than the rest, it’s in their interest to remove it from the account rather than increase the price for its other customers.