What IS High Risk??
The flat truth: I find the term “High Risk” moderately offensive at best. But it’s the term the credit card processing industry uses to define a certain cluster of businesses. What’s confusing about this term is that many businesses out there don’t seem high risk at all. For example, if I ask 10 small business owners if furniture stores and travel companies are “high risk”, there’s a good chance that all 10 people would respond with “no”. But when you understand what the underwriters are looking for, that mentality changes. The more you understand about this, the more control you’ll have over your own business (more on that in the next section – or click here for a quick video).
You can ask yourself one question to help determine whether you’re “high risk”:
Is it likely that more than 1% of your customers / clients would buy your product, then dispute the charge with their credit card company?
We’re not talking about returns, refunds or void sales – we’re talking about people who call their credit card company (Chase, Bank of America, Capital One, etc) and tell them that they didn’t receive what they expected to receive – so they don’t feel they should pay for it.
The major card brand associations (Visa, MasterCard, Discover, Amex, JCB) have a definitive rule here: if more than 1% of your sales result in a “chargeback” then you’re “high risk”. And sadly – 1% is in fact the “not-so-magic number”.
In addition to the 1% rule, it’s worth noting a couple other things that could put your business in the “high risk” category. I’ll explain in more detail in the section on Underwriting, but if your business does any of the following, you’re likely “high risk”:
- Has significant spikes in volume
- Has recurring billing (any form of continuity)
- Most sales are performed without a human contacting the buyer
- Doesn’t control the marketing for the product (largely affiliate driven)
- Sells regulated merchandise (think legalized marijuana)
- Delivers products or services 30+ days after accepting payment
The importance of THE RIGHT merchant accounts
For a corner store, a bar, a restaurant, or the like; the processor they use is not a “make or break” decision for their business. Each processor has their own unique features and services, but by in large they will all function adequately for those business types. So for them, “the right merchant account” isn’t that important. When you operate a “High Risk” business (any kind of eCommerce, seminars, information products, MLM, travel, coaching, etc), having the right merchant account can be the difference between making money or not making money.
Your processor has complete control over your account. Even if you’re working with a reputable company, here’s what you need to look out for:
- Having your merchant account frozen (you can accept cards, but no money is deposited into your bank account)
- Having your account closed all together without notice
- Having a reserve imposed without notice (a portion of your sales can be held for a period of time – to be determined by your processor)
No matter who you work with to accept credit cards, you will be required to sign some sort of contract. The terms of that contract will vary, but either in fine print or tucked away on a website somewhere, there are always terms that give the processor the right to hold your funds, adjust your rates and fees, close your account and both deposit and deduct funds – all without notice. As scary as that sounds for a merchant, from a processor’s perspective it’s the only sure fire way to give them enough control to protect themselves.
If you couldn’t accept credit cards for the next month, how would that impact your business?
What if 10% of your sales disappeared from your cash flow? How about 15-20%? Do you have an extra 10-20% margin you’re okay with getting rid of?
Let’s say you spend a big chunk of cash on marketing and as soon as the first few orders hit you can no longer accept credit cards – how will that impact your business?
Or you schedule a product launch with a many affiliates – and you’re paying out 50% in commissions and 40% to create, and fulfill the product… what happens to your business and your relationships if you suddenly have a 15% reserve after the first day?
There’s no way to guarantee that these things will never happen – but there’s A LOT you can do to avoid these situations. That starts with using the right processors.