For an online business, online payment processing is a must. To accept online payments, you will need to open a merchant account with a merchant account provider, but the merchant account providers do not open a merchant account for every business. They have certain conditions that need to be met in order to open an account.
Also, some businesses are considered high risk and this is where high risk merchant account comes into picture. Before you apply for a high risk merchant account, here is something you need to understand about the risk involved in online card processing.
Risk Involved in Card Processing
First and foremost, you need to understand that every single card holder who buys a product or service from your website can dispute the transaction within a period of 180 days. They just need to contact their card issuing bank and ask for a chargeback. However, the payment provider needs to settle all the processed transactions in just a couple of days after the transaction took place.
In simple terms, the payment provider has to give money to the merchant, but they are at risk for many months as cardholders can simply ask for their money back. The providers need to ensure that the merchant is able to repay the negative balance in such a situation. A number of factors are used by merchant processors to determine the risk for a particular type of business and this is the reason, certain businesses are categorized as high-risk accounts by the providers.
High-Risk Category
Certain businesses are categorized as high-risk. Some of these categories include bankruptcy attorneys, fantasy sports websites, gambling or gaming, loan modification services, life coaching, replica products, telemarketing services, vacation planners, supplement sales, pawn shops, business opportunities, auctions, debt collection services and psychic services among others. This is not an exhaustive list and only an indicative list.
A business may also be considered high risk if it has a history of chargebacks or high number of returns. Credit score also plays an important role and if the credit score isn’t good, the business may be deemed high-risk. Similarly, if a business takes cards over the phone, it is considered a high-risk business. Lack of previous history of credit card processing also makes the business an uncertain risk and merchant account providers may brand it as a high-risk account.
Different high risk merchant account providers use a variety of criteria to determine the risk status of each applicant. Based on their risk appetite, they may or may not approve an applicant.
Applying for a High Risk Merchant Account
Before you even think of applying for a high risk merchant account, you will need to set up a legal business entity. You can open either a limited liability company or a corporation. Once this legal business entity has been established, you will need to apply for a federal tax identification number. Once everything is set up, you will need to open up business account with a bank. Different banks have different requirements for opening a business account.
It is important that you do this as quickly as possible as you will need to provide an imprinted voided check to the merchant account provider while applying for a merchant account. This imprinted check is needed as the merchant processor will conduct their own due diligence to ensure that the name on the application form matches the name on the bank account.
You also need to ensure that your website is ready to process cards. Make sure your website has updated privacy policy, terms and conditions and you also need to ensure that the WHOIS information for your website matches your legal business entity. You will need to provide the proof of domain ownership.
Once your website is set up, you may apply for a merchant account. The application form usually requires you to provide name of owners of the company, their date of birth, Social Security numbers, address, phone number as well as the federal tax identification number among other things.
Along with the application, you will have to provide supporting documents including articles of incorporation, photo ID, federal tax certification number and certain other things as required by the merchant account processor. Once everything is submitted, the provider will review the application along with supporting documents.
Tips for Success
While it’s true that only certain merchant account processors allow high-risk businesses to open an account, it does not mean that you should apply to any merchant account provider without doing your own due diligence. Keep in mind that this industry is known for some predatory merchant service providers who take advantage of new businesses that are unable to get merchant account with the traditional providers. However, they charge highly inflated rates and take advantage of unsuspecting business owners. Make sure you do not apply to such a merchant account provider. You should research their reputation and their business practices before applying for an account.
It’s also important that you do not hide any kind of practices, services or products while applying for a merchant account. Keep in mind that it will come back to haunt you at a later date. A merchant services provider can shut down your account at any time in case they figure out that you hid something from them while applying for a merchant account.
You should also ensure that only a single application is made. Submitting multiple applications is not seen as a good practice as they will decline all the applications as an antifraud measure.
Before you apply for the high risk merchant account, it is important that you have all the required documents in place including your business license, voided check, personal details of the owners, at least 3 to 6 months of business bank statements, utility bills that are not more than three months old, marketing material, business model with a descriptive overview, personal bank statements for new businesses and other such things.
Before you sign up, it’s important that you carefully read the contract and ask the merchant account provider as many questions as you need to understand everything in the contract. Do not sign anything without understanding the features of the account, termination fees associated with the account, restrictions as well as limitations. It is also recommended to avoid merchant account processors that have preset limits. If your business exceeds these preset limits, you will need to pay heavy penalties and it will cut down on your profit margins.
Overall, these are some of the important factors you need to take into account while applying for high risk merchant account. While it’s true that you do not have as many options when you are applying for a high-risk account, but it does not mean that you need to sign up with the first merchant account provider without doing your due diligence. So, do your research and follow the above-mentioned tips to get the best rates possible for your merchant account.
