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High Risk vs Low Risk Merchant Accounts

In order for your SME to be competitive, you need to be able to offer your customers a range of payment options. In an increasingly cashless market, more and more consumers prefer to use their credit cards, debit cards and e-wallets to pay for their goods and services. 47% of UK consumers don’t even carry cash with them when they go out.

In order to accept these payments, you need a merchant account. But there’s no such thing as a simple merchant account. Banks and financial institutions divide merchant accounts into high risk and low risk. Here we’ll explore the difference between high and low risk merchant accounts and what it means for your business.

Merchant accounts explained

Merchant accounts are business accounts used for processing credit and debit card payments. If you want to accept card payments, you’ll need to get a merchant account from a bank or an independent Payment Service Provider (PSP). They enable you to facilitate both card present transactions with a POS processing machine and card not present (CNP) transactions online or over the phone.

What is a high-risk merchant account?

The financial services industry has become markedly more risk-averse since the financial crisis of 2007–2008. Whenever a business applies for a merchant account, the financial institution they approach needs to determine the level of risk that they represent.

Banks and PSPs sort businesses that apply for merchant accounts into high and low risk, and tailor their offerings accordingly.

A high-risk merchant account is an account for a business that represents a higher risk of chargebacks. These accounts are underwritten by the banks themselves, and their higher fees are used to help offset their risk.

What is a chargeback?

A chargeback is where credit card, debit card or direct debit funds are returned to the buyer. For instance, if you run a SaaS company, you may offer a month’s free trial to new customers, after which they are charged at the usual rate.

Some customers may sign up for a free trial and forget to cancel before the trial period ends. When they are charged, most will accept the charge and cancel later. A few, however, may request that the merchant issue a chargeback to credit the funds back into their account.

While this is relatively rare, it can erode your profit margins and make you a less appealing prospect to merchant account providers.

Am I a high-risk merchant?

A bank or PSP may consider you a high-risk merchant if:

  • Your business or industry typically has a high chargeback ratio (e.g. SaaS)

  • You deal in a lot of high-value transactions or you have a high volume of sales

  • You are a new start-up that hasn’t yet built a strong reputation

  • You, as an individual, have a poor credit score

  • Many of your customers buy your products far in advance of consumption (e.g. event of plane tickets)

  • You accept multiple currencies and / or sell to countries with historically high levels of fraud.

What is a low-risk merchant?

Lower risk merchants tend to be able to command lower fees and have a better selection of account products to choose from.

A low-risk merchant is one that:

  • Trades in fairly modest volumes

  • Has consistent revenue streams all year round

  • Deals in mostly low-value transactions

  • Only accepts one currency

  • Only deals with customers in its native country or with countries seen as low-risk

  • Is proactive about reducing its risk of chargebacks and fraud prevention.

We can help

If you’re interested in finding out more about high and low risk merchant accounts, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.

Over 70,000 businesses use GoCardless to get paid on time. Learn more about how you can improve payment processing at your business today.

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