Category Archives: Business

What is a High-Risk Merchant Account, and How Does it Work?

The pandemic has changed the preferred payment method for most customers. Gone are the days when cash was used as the primary and most common form of payment. Today, the payment landscape has witnessed a drastic transformation. From cash to cashless, the industry has changed a lot. Nowadays, customers want businesses to accept various payment options so they can pick the payment channel that suits their needs.

Credit cards, for instance, have grown in popularity lately and are a preferred mode of payment for a vast majority of customers buying things online, in-store, and over the phone. To cater to this ever-increasing demand for electronic payments, businesses need a merchant account that facilitates credit card processing. The question is, what is a high-risk merchant account, and what does it mean for SMBs and large-scale organizations looking to streamline their payment ecosystem?

Understanding High-Risk Merchant Account

Merchants are categorized into high-risk, medium-risk, and low-risk categories based on the industry they operate in, their processing history, credit score, and how established their business is. If you work in a sector associated with legal restrictions, social controversies, and the risk of high chargeback, acquiring banks or payment processors might label you as a high-risk business. Your transaction size and volume also determine your risk level.

A furniture shop, for instance, might sell legally acceptable products, but due to the nature and size of the transactions conducted at these stores, they might be considered risky. Sadly, merchant service providers are often reluctant to accept the merchant account application of businesses that fall into the high-risk category. Banks do not want to bear the liability of clearing chargeback or facing legal issues if a business shuts down or engages in an illegitimate transaction. This limits merchants’ options when it comes to choosing a reliable payment processor. Even if a merchant service provider accepts a high-risk business, they will most likely impose strict conditions and reserve requirements to offset the risk associated with these merchants.

Understanding high-risk merchant accounts, how they work, and the guidelines for getting your merchant account application approved by a reputable payment processor is crucial to facilitating a seamless payment experience for your customers. In this post, we’ve explained everything you should know about high-risk merchants and how they can find a payment processor.

What Makes You a High-Risk Merchant?

There are no specific criteria for categorizing a business as high or low risk. It depends on the payment processor you choose and their evaluation criteria. Some processors reject the applications of high-risk merchants straight away, while others are willing to work with them only if they can provide detailed documentation and meet the reserve requirements. Eventually, the payment processor will decide whether to accept or reject a merchant’s account application based on their internal evaluation criteria. Typically, some industries are considered risky because of the nature of the business, the risk of a high chargeback ratio, and other factors. Here are a few:

Tobacco and cigarettes
Alcohol
Gambling
Adult content
Debt collection and credit repair agencies
Furniture
Hunting equipment suppliers
Guns and weapon
Pawn shops
Non-profit organizations
Tech support
Vape and e-cigarettes
Travel companies
Multi-level marketing
Fantasy sports
Cannabis
Electronics
Accounting
Bail bonds
Insurance

In addition to these, subscription-based service providers fall into the high-risk category. Note that the industry type is not the only deciding factor here. You might be running a simple retail store but still be classified as high-risk because of poor processing history or a high chargeback ratio. Here are a few other factors that can make you a high-risk merchant.

High-Ticket Transactions

Businesses processing high-ticket or large-sized transactions are at an increased risk of experiencing fraud, as attackers often target such merchants. There’s no fixed threshold for high-ticket transactions, but most payment processors might consider your business risky if the average transaction size at your store is above $500.

High Chargeback Ratio

Chargeback arises when a customer issues a request for the reversal of the credit card transaction. This happens when a customer is dissatisfied with the product, or someone steals their credit card and misuses it to process a transaction. Simply put, if a customer believes they are charged for a product or service they didn’t buy or use, they might issue a chargeback.

The merchant is supposed to issue a refund. Excessive chargeback can put your company in a financial loss, which might put your payment processor at risk. If your business shuts down due to bankruptcy or for other reasons and you have a pending chargeback, your payment processor will have to clear that. That’s why merchants with a high chargeback ratio are classified as high-risk.

Startups

A newly started business with no processing history is also labeled as high-risk. Since the payment processor cannot collect data about the business’s processing history, it can’t evaluate your credibility and will thus consider you a high-risk business. Likewise, if you have a poor processing history, a low credit score, or have been previously put on the MATCH list by another payment processor, you will most likely face difficulty finding a payment processor because of the risk involved.

International Sales

Do you operate globally, or are most of your customers based in different parts of the world? Businesses operating internationally are classified as high-risk, as the economic dynamics can change unexpectedly in international countries, putting your business at stake. Frequent changes in currency value and changing customer demand can also significantly affect your revenues.

Legal Controversies

Some businesses are associated with legal controversies, such as age restrictions. If you deal in products that can be bought by only licensed professionals or people above a specific age, the payment processors will put you in the high-risk category. If you fail to meet the legal regulations, you will end up with a significant penalty. In the worst cases, the government might close your business because of the risk involved.

How High-Risk Merchant Accounts Work

As mentioned earlier, most payment processors will state upfront that they do not work with high-risk merchants. Those who do accept merchants in this category implement strict regulations that eventually lead to merchant account termination or frozen funds.

The task of finding a reliable payment processor gets even more difficult when you have a bad processing history or your previous acquiring bank canceled your account because of compliance, legal, financial, and other issues. Some even put you on the MATCH list, an electronic record consisting of the list of the merchants operating in the high-risk industry. While there are processors offering competitive rates and flexible terms for high-risk merchants, they will want to evaluate your profile to ensure that they won’t get stuck with financial and legal issues later. This explains the hefty upfront reserve requirement and the strict regulations.

High-risk merchant accounts, as the name suggests, cater to high-risk businesses. Each payment processor has a specific criterion for selecting merchants based on their predetermined parameters. They post the list of the industries they work with, as well as other eligibility requirements, such as the minimal credit score or the chargeback ratio. If you meet their selection criteria, they will most likely set up your merchant account. Usually, payment processors that have partnered with popular banks and financial institutions and have a team to conduct thorough investigations are capable of bearing more risk and are thus willing to work with merchants across different high-risk industries.

As far as merchant operations are concerned, a high-risk merchant operates the same way as other merchants. They can link their eCommerce store with the payment gateway and get a virtual terminal to process over-the-phone payments and POS hardware for in-store transactions. All credit card payments made either in-store or online are verified by their payment processors and go through different stages, i.e., credit card networks and issuing banks, before they are processed. The payments are processed in batches and are deposited into the merchant’s account on the same day, the next day, or within a few business days, depending on how fast the bank processes your credit card transactions.

The only difference between a high and low-risk merchant account is the level of restrictions each merchant has to face. A high-risk merchant might have to sign up for an account that comes with a slightly higher processing fee than their low-risk counterparts. Plus, they are supposed to follow good processing practices to ensure their merchant account doesn’t get terminated because of financial or legal issues.

Pros and Cons of Getting a High-Risk Merchant Account

You might wonder if a high-risk merchant account comes with any perks. Contrary to popular belief, these merchants do not just experience the downsides of being labeled as high-risk. In fact, having a high-risk merchant account comes with many pros. Below, we’ve listed the pros and cons of such accounts.

Pros

Process High-Volume Transactions: Your payment processor might label you as high-risk because of your high processing volume. If they accept your merchant application, you will be approved for high-volume and large-sized transactions, making it easier to conduct multiple credit card transactions and accept high-ticket purchases without the fear of getting your account terminated. So, if you have a high processing volume, it’s best to get a high-risk merchant account to increase your credit card processing limit.

High Chargeback Threshold: Low-risk merchant account providers do not accept a high chargeback rate. If you receive multiple chargebacks, you will most likely have your account terminated. However, a high-risk merchant service provider understands that their merchants are at an increased risk of chargeback because of the nature of their business, types of transactions, and other factors. So, they will offer a higher chargeback threshold.

Personalized Solution: Most high-risk merchant service providers do not disclose their processing fees and other charges on their websites. That’s because they quote a customized price based on your industry type, risk level, processing volume, and other factors. You can even negotiate the processing fee with the processor. Unlike low-risk merchants, a merchant in the high-risk industry gets payment solutions and processing rates tailored to their business requirements.

Robust Security: Another major perk of working with a high-risk merchant is the access to advanced security. These merchant service providers implement robust security protocols, including end-to-end encryption, tokenization, MFA, secure payment gateways, and more, to ensure maximum security for the merchant and their customers. Since high-risk merchants are more likely to experience fraudulent transactions and security breaches, payment processors will implement advanced security tools to minimize this risk.

Cons

High Processing Fee: Since the payment provider bears an increased risk, they are likely to implement a higher processing fee for high-risk merchants. If a low-risk merchant pays 2.6% +10 cents per transaction, for instance, the same provider will charge 3.5% + 10 cents or more to high-risk merchants. So, it’s obvious that you will pay a little higher in processing fees if you carry the high-risk label.

Reserve Requirements: High-risk merchant accounts come with reserve requirements. It can be the upfront reserve, i.e., the amount you are supposed to deposit prior to getting your merchant account approved, or the rolling reserve, which is the percentage of your earnings deposited into a separate escrow account every month. Sometimes, the reserve requirements include 100% of the monthly transaction volume you are approved for. That means if a payment processor has approved your merchant account for credit card transactions of $20,000 per month, you need to keep $20,000 in the reserve account to set up your account.

Lengthy Approval Process: A low-risk merchant doesn’t have to submit as many documents as their high-risk counterparts. The latter involves a considerably higher level of risk, making them prone to chargeback, security issues, compliance issues, and legal matters. So, the processor will want to evaluate everything that shows your credibility before accepting your application. Besides, the approval time is quite long for such merchants. You can expect the processor to take 3-5 business days and longer to set up your high-risk merchant account.

Tips for Finding the Best High-Risk Merchant Account Provider

Despite your risk status, it’s possible to find a merchant service provider offering services to high-risk merchants. And you don’t have to give up on the perks, like low processing rates, advanced security, and minimal reserve requirements. We’ve listed a few tips for finding a reliable and secure payment processor for your high-risk business.

Visit their Website

You’ll find most of the information about the payment processor on their official website. This includes their processing rates, payment terms, contract details, restrictions, miscellaneous fees, and so on. As the competition is growing in the payment industry, you will easily find payment processors that are transparent about their pricing structure and have disclosed all details about processing on their websites. Even if they haven’t mentioned the pricing details, the least you can find is whether or not they work with high-risk merchants and the types of industries they serve.

However, don’t rely on their website alone. You should also consider other sources of information, such as Better Business Bureau (BBB) and Consumer Affairs, to find customer reviews about different processors.

Read the Conditions Carefully

Each processor has unique application criteria and eligibility requirements for high-risk merchants. The details are either mentioned on the website or sent to the applicant after they submit their application. These terms and conditions state the processing fee, contract length, early termination fee, chargeback threshold, industries excluded, hardware offered, chargeback fees, etc. If you have any queries, reach out to the processor’s support department for clarification.

Compare Different Processors

You can find two different payment processors offering the same terms and contracts but at different processing rates. It’s always better to compare these processors and choose the provider that offers the best rates with flexible contract terms. A few crucial things you must check when comparing payment processors are the processing rates, all kinds of fees, contract length, hardware offered, payment gateway, security features, and reserve requirements.

FAQs

Is it possible to get instant approval for a high-risk merchant account?

It depends. In most cases, high-risk merchants do not get quick approval, as merchant service providers expect detailed documentation and proof of credibility before they set up their merchant accounts.

Which payment gateway should high-risk merchants use?

Usually, your payment processor will take care of the payment gateways. They integrate the gateway into your eCommerce website to facilitate secure payment processing for online transactions. Now, the type of gateways they support can vary from processor to processor. Most work with Authorize.net, NMI gateway, and USAePay. Some even have their proprietary gateways.

Which payment processor is the best for high-risk merchants?

PaymentCloud, Host Merchant Services, and Durango are a few high-risk merchant service providers that offer services to merchants in high-risk industries.

Travel Agency Merchant Account

From an economic standpoint, the travel industry is doing great. While there’s a lot of scope for startup travel agencies and those with an established tourism business, the industry comes with its share of risks. One of these is being labeled as high-risk by payment processors, therefore making it difficult to get a travel agency merchant account. Many industries are considered risky, not because of their operations but the nature of the industry. The travel and tourism industry is one of them.

The high risk of chargeback and financial losses makes this business vulnerable to fraud, which makes it difficult for them to find a reliable payment processor who can handle their credit card payments. If you have a travel business and are looking for a payment processor or switching your existing merchant account, you are in the right place. In this post, we’ll show you what merchant service providers offer to travel agents, why this industry is considered high-risk, what you can do to remove the high-risk label, and a list of the popular payment processors that work with travel agencies. So, keep reading.

Do Travel Agents Need a Travel Agency Merchant Account?

With the travel industry conducting its routine business operations online and accepting transactions through credit cards, a merchant account has become a necessity, more now than ever.

To accept electronic and card payments, you need to work with a processor who specializes in this area and understands the travel industry inside and out. They should be able to handle all your credit card transactions effortlessly. The job of a processor isn’t confined to verifying credit cards and accepting payments from customers. They need to comply with the industrial norms, regulatory requirements, and the latest trends in the industry to ensure a smooth transaction experience for the merchant and their customers.

These processors or acquiring banks communicate with the merchant’s issuing bank, credit card networks, and other financial institutions to process card and digital payments securely. So, if you are wondering whether or not a travel merchant account is worth it, here are the reasons you should consider applying for a merchant account.

Flexible Payment Options: A payment processor offers a broad range of payment methods, allowing customers to choose their preferred option and pay through a convenient mode of payment. They can pay you in-store, online, or through mobile payments—whatever works for them. Most importantly, a processor accepts all major credit and debit cards, processes these payments in batches, and transfers them to your merchant account.

Global Expansion: As a travel agency, you will want to expand your business globally and work with customers from all over the world to grow your brand. It’s obvious you will need a processor who supports multiple currencies, understands the legal requirements and travel standards in international countries, and provides your international customers with multiple payment options. With the right payment processor, you don’t have to worry about currency conversions or international credit card processing. They will do it all for you.

Robust Security: Travel merchant account providers integrate and offer robust security tools to ensure a secure transaction experience for merchants and customers. As mentioned previously, they are familiar with the PCI DSS requirements and common regulations related to the travel business in different countries. Each credit card payment goes through a rigorous screening process before it’s approved. They implement encryption technology to encrypt customers’ credit card information, ensuring that no unauthorized party is able to read or interpret sensitive data.

Improved Cash Flow Management: Some processors offer next-day or same-day funding, meaning they process all your credit card transactions within 24 hours of the payment. This amount is transferred to your merchant account immediately, thus improving your cash flow. That said, same-day funding often comes with an additional fee (a small percentage of the transaction amount).

Customized Payment Solutions: Some travel businesses work on a subscription-based model and implement recurring billing plans for customers who have enabled automatic payments on specific dates. You can find a travel merchant account that supports recurring billing and other customized payment solutions, such as buy-now-pay-later schemes, for a smooth transaction experience.

Customer Satisfaction: Working with a payment processor will help you achieve customer satisfaction, as people trust businesses that partner with secure processing solution providers. Offering a wide range of payment solutions designed specifically to cater to customers’ unique needs will ensure they leave your door fully satisfied, which, in turn, increases customer loyalty.

Detailed Reports: Payment processors do a lot more than processing your credit card payments. They generate detailed reports that give you insights into your payment processing journey, types of payment methods your customers prefer the most, chargeback ratio, refund requests, and so on. Based on this, you can enhance your customer service and improve security protocols to provide your users with a safe processing journey.

Challenges Faced by High-Risk Travel Merchants

The travel industry isn’t associated with serious legal issues, age restrictions, and other controversies. So, what makes it a high-risk field? For starters, people tend to book flights, accommodation, and entire trips weeks and months ahead to secure affordable rates. Besides, booking early guarantees the availability of seats and rooms.

However, there’s always a chance they might cancel the trip later and demand a refund. If you are a travel agency, refunds for hotels, flights, trains, and other pre-booked things can be challenging and costly. Your customer might demand a full refund, which might result in a financial loss for your business, as airlines and hotels do not offer 100% refund for cancellation, especially if the customer decides to cancel the trip close to the reservation date. Here are some other challenges that make the travel industry risky from the processor’s standpoint.

High Chargeback Ratio

When a customer cancels a plan and demands a refund, they want the 100% paid amount to be returned. That’s not practically possible. While some customers might understand the charges associated with last-minute cancellations, not everyone does.

These customers are likely to file a chargeback, i.e., request the banks to reverse the transaction, as they have not used the service they paid for. The increased risk of chargeback makes the travel industry a high-risk field. This creates a significant risk for the processor, as well. A spike in your chargeback ratio can result in a substantial loss for the merchant, and your processor might have to bear the liability. So, chargeback is the biggest red flag associated with a travel business. It’s also the most common reason why a processor might turn down your merchant application.

High-Ticket Sales

Another factor that makes a business appear high-risk to a payment processor is high-ticket sales. If you deal in goods and services that involve a large-sized transaction, you will fall into the high-risk category, as these businesses are highly vulnerable to fraud, security breaches, high chargeback, and financial risks. The travel industry is no different. Individuals and businesses hire travel agencies to book their entire trip, including airline tickets, hotels, restaurants, and even cabs from/to the airport. The high-ticket sales increase the risk of chargeback and financial loss if the customer decides to cancel at the last minute.

Fraudulent Transactions

With such a large amount involved in each transaction, there’s an increased risk of fraudulent activities in this business. A fraudster could steal the credit card or other payment details from the customer and use it to pay for the reservations. If you don’t have advanced security tools and a rigorous screening process in place, you might miss such security breaches and end up with a chargeback. Besides, it leads to reputational risks. Customers are less likely to trust a travel agency with a high chargeback ratio or frequent customer complaints.

Business Closure

Bankruptcy or a financial liability can result in a travel agency closing its business. If a travel agency shuts down or is declared bankrupt, the payment processor will be held responsible for repaying the customers who had completed their reservations and paid in advance. To mitigate the risk, processors require travel agencies to maintain a rolling or upfront reserve, i.e., a percentage of their income in a separate account. This amount can be used to refund the customers in the case of sudden business closure.

Lastly, a travel agency bears significant financial risk, as it does not sell its own goods and services. It relies on airlines, hotels, and other third-party service providers to earn money through a commission-based model. All these factors make travel businesses risky. That said, you can still find a reliable payment processor willing to work with you.

Best Payment Processors for Travel Agencies

Ideally, you will look for a processor who quotes a reasonable processing fee, has a transparent pricing policy, and offers a flexible contract. We’ve researched the top processors who serve travel businesses and offer all the mentioned perks, plus many additional features. Let’s take a look.

Corepay

Key Features

Competitive pricing for all types of businesses in the travel industry starts at 2.95% per transaction.
Quick and easy approval process. They guarantee approval of your merchant account within 24-72 hours of application.
They have a proprietary gateway called Solidgate, designed specifically for high-risk merchants, including the travel industry. The gateway processes high-volume and high-ticket transactions securely and effortlessly.
Corepay works globally and accepts multiple currencies, allowing travel businesses to expand to the international markets.
Corepay follows PCI Level-1 security protocols when it comes to eCommerce transactions. The company conducts regular auditing to keep its gateway and other payment systems up-to-date with the latest compliance and security protocols.
No account setup, application, or early termination fee
Supports mobile payments
Support service is available round-the-clock

Available for travel merchants based in the US and other parts of the world, Corepay is one of the best and most secure payment processors for your travel business. The processor knows the travel industry inside and out, including the compliance regulations in this sector. In addition to the security guarantee, Corepay offers competitive pricing and has waived the account setup and termination fee to ensure a seamless and cost-effective user experience for all travel merchants.

Soar Payments

Key Features

Get a PAX A920 Smart Terminal
It supports most third-party payment gateways for secure and seamless eCommerce transactions. Examples include USAePay, NMI, and Authorize.net.
Advanced anti-fraud and chargeback detection programs offer maximum security to all high-risk merchants.
Processing rates are not disclosed on the website, but like other payment processors, SoarPay charges variable processing rates based on your risk status and processing history.
No account setup or application fee, although a termination fee is applicable to those canceling the contract before the term is up.
They have a US-based customer support department with friendly and professional representatives.
Instant Quote system will help you find the processing rates for your business.

If you have faced rejection from most merchant account service providers, Soar Payments could be your ideal option. The company specializes in working with high-risk merchants, especially those who can’t get a reliable payment processor because of their high-risk label or no processing history. Soar Payments provides you with a POS terminal, a card reader, a payment gateway, and mobile payment options, allowing travel merchants to process all kinds of in-store and online payments efficiently. Not only that, but Soar Payments works with Chargeback.com to provide the best protection against chargeback, especially friendly fraud.

SMB Global

Key Features

Offer international merchant accounts
EMV-enabled payment terminals
Supports Authorize.net and NMI gateway for eCommerce transactions
Supports more than 175 shopping carts, which can be directly integrated into the payment gateway, offering a seamless user experience.
A robust chargeback prevention program
It’s one of the few payment processors that accepts high-risk merchants in nearly every category, industry type, and processing history. If you are in the travel business, you can expect quick approval from SMB Global, even with irregular transaction volume, high-ticket transactions, and excessive chargebacks.

Designed for high-risk merchants, mainly those expanding their business to the global markets, SMB Global is an ideal payment processor for the travel industry and other high-risk merchants. Since they especially serve high-risk merchants, you can expect the company to offer a pricing policy and contract terms that align with your requirements. They do not impose a rolling reserve, which is quite rare for a payment processor serving a high-risk business.

Host Merchant Services

Key Features

They offer a quick and easy approval process for all merchants, including travel businesses. Host Merchant Services has a 98% approval rate for high-risk businesses.
Get a free EMV-compliant credit card terminal.
Their support service is available 24/7 and 365 days a year. So, no matter what it is, you can count on them for quick support.
They offer fast funding with credit card payments transferred to your merchant account within 24-48 hours of processing.
They offer an advanced chargeback detection and prevention program.
Support all payment options, including ACH transfers, e-checks, debit and credit cards, mobile payments, digital wallets, etc.
Host Merchant has implemented a reserve requirement.

Host Merchant is another payment processor that works with travel businesses of all kinds, including those who book airline tickets and cruises and those who plan the entire trip for customers. Host Merchant complies with the PCI DSS standards to guarantee maximum security from fraudsters. They offer a virtual payment gateway that allows you to accept payments over the phone. Moreover, they have a transparent pricing policy with processing rates and interchange fees for high-risk merchants disclosed in clear terms.

Conclusion

Whether you are an independent travel agent or run a travel insurance business, a business operating in the travel and tourism industry needs a merchant account to accept credit/debit cards and other forms of payment. The above-listed payment processors can help you process all forms of online payments securely and seamlessly.

FAQs

Does every travel agency need a merchant account?

Yes, not just travel agencies but all travel and tourism-related businesses, such as travel insurance companies, are supposed to have a merchant account to accept credit/debit card payments.

What fees do I have to pay for a travel merchant account?

Every payment processor charges a processing fee based on your transaction size, volume, and the processing plan you choose. Depending on the acquiring bank you choose, you will also be charged a monthly account fee, a termination fee, a payment gateway fee, a PCI compliance fee, setup and application fees, and more.

What do I need to get a merchant account for my travel business?

This depends on the eligibility criteria set forth by your payment processor. Typically, you need the bank statement, your credit history, and business documentation (license, certificate, articles of incorporation, proof of address).

How soon can I start accepting credit card payments?

It depends on how fast your merchant service provider accepts your merchant application. Since a travel agency falls into the high-risk category, it’s normal for the processor to take a few business days to review your business documentation and processing history before setting up your merchant account. Once you get approval from the processor, you can start accepting card payments immediately.

Vape Merchant Account

The growing popularity of the vaping industry has encouraged many individuals to set up their vape stores, both online and retail. As exciting as launching your vaping business sounds, it comes with its share of risks. One of which is the difficulty of getting approved for a vape merchant account. Every business, whether retail or online, needs a merchant account to process credit card transactions. And vaping store is no exception. However, getting a merchant account for your vaping business is not as easy as it sounds.

The industry is labeled as high-risk because of the controversies associated with the vaping market. That’s because cigarettes, vape devices, tobacco, and all kinds of smoking products are considered risky. The health risks associated with these products make the businesses that manufacture, distribute, sell, or market this line of products risky.

If you operate a vape store, chances are most traditional payment processors, such as Stripe and PayPal, will straight away reject your merchant account application or cancel an existing account. So, does that mean you have to operate without a merchant account? Fortunately, no! There are payment processing companies that serve the high-risk industry, including those producing and selling vape accessories. Keep reading to learn how to find the right payment processor for your business and how to improve your odds of getting approved for a merchant account.

A Brief About Modern Vaping

Vaping is advertised as an alternative to smoking. It’s seen as a way to quit smoking without having to give up on your cravings. It involves vaping devices and a liquid solution that consists of nicotine and different flavors with chemicals.

People inhale the solution through a vaping device to satisfy their craving for cigarettes. Since vaping devices are not as unhealthy or harmful as cigarettes, these are considered a comparatively safer option for heavy smokers. Those who have tried every possible way to quit smoking but failed will find vaping devices quite effective. The question is, how did this industry flourish?

Vaping is relatively new in the e-cigarette industry, although its roots date back to ancient Egypt. You may have heard of Shisha, vape herbs, and hot stones. These were commonly used in ancient times. Vaping, specifically, entered the industry in 1927 when Joseph Robinson came up with the smokeless cigarette concept. He launched the first-ever vaping device that allowed people to enjoy their smoking sessions without the use of tobacco.

However, it wasn’t until 2004 that e-cigarettes gained popularity all over the world. A Chinese Pharmacist, Hon Lik, introduced a modern vaping device that would vaporize the liquid solution. The device looked just like conventional cigarettes but was harmless, as no tobacco was used in the liquid solution.

Inspired by his father’s death due to lung cancer, Hon Lik invented a device that became popular in China and gradually gained attention from smokers all over the world. As the concept became popular, professionals started focusing on creating compact yet efficient vaping devices with unique flavors and advanced functionalities. Soon, vaping products with refillable tanks and a long battery life started emerging. Earlier, vaping devices were a single-use product that worked just like regular cigarettes. Today, we see a vaping pen, e-cigarettes, and other accessories that give you an exceptional vaping experience.

Why is Vaping Considered a High-Risk Industry?

If vaping is an alternative to cigarettes and a safer choice, then why are businesses that deal in these products classified as high-risk? Vape devices have undoubtedly attracted the attention of millions of people who are curious about smokeless cigarettes. However, it comes with heavy regulations, legal concerns, and health risks that make it a risky industry. Below, we’ve listed a few common reasons why vaping is considered a high-risk business.

FDA Regulations

The FDA has not authorized most vaping products. Selling these products means you are working in an unregulated market. Now, banks and payment processors won’t approve your merchant application if you sell unregulated products. Most processors will not want to get involved with a merchant that sells products that can later become controversial or cause problems with the FDA regulations. So, they will refuse to work with such merchants.

Health Concerns

As mentioned earlier, vaping products are sold as a safer alternative to cigarettes. Of course, they are better than smoking cigarettes as they don’t contain tobacco, but are they safe in general? Although the long-term health risks associated with the vaping industry are not yet fully known, vaping has been associated with lung injuries and cardiovascular issues. Vaping might be tobacco-free, but people are still reluctant to buy these products because of health concerns.

High Chargeback Ratio

There’s also an increased risk of chargeback in the vaping business. A customer might simply issue a chargeback because they are not satisfied with the vaping pen, the flavor, or the overall experience using the device. A simple reason, such as dissatisfaction with the vaping product, is enough for the customer to file a chargeback and win it. This makes the vaping industry risky since no payment processor or bank would like to work with a company that’s prone to increased chargeback risk.

Legal Status

Vaping regulations vary from country to country, but most have implemented age-related restrictions on vaping products. Some countries have banned the product altogether, while others have made it mandatory for the seller to verify the buyer’s age before accepting their order. Now, verifying age online can be tricky. Someone below 18 can use their parents’ credit cards to buy vapes online without getting caught. This can lead to legal penalties for the merchant who sells vaping products without confirming the age.

Financial Issues

The vaping industry doesn’t just face legal and health concerns, but these businesses have to deal with financial uncertainty. The industry is highly competitive, and with customers’ preferences changing frequently and new trends emerging every now and then, it’s difficult to keep up with the market fluctuations. This can significantly affect small businesses.

Why Do You Need a Vape Merchant Account?

It’s possible to run a vaping business without a merchant account. However, it will limit your ability to process credit card transactions. Every business needs a merchant account to process credit card transactions, and the vaping industry is no different. There are many perks of having a merchant account for your vaping store. Let’s check out a few.

Secure Payment Processing

When you sign up for a merchant account with a reputable payment processor, you get a payment gateway integrated into your eCommerce, a hardware system for processing in-person credit card transactions, a virtual terminal, a card reader, and other secure processing solutions. These devices facilitate secure and seamless transactions. Moreover, most processors offer robust security solutions, such as fraud detection programs, chargeback protection and management, address verification, and other security protocols that ensure secure payment processing for your business.

Industry Expertise

Payment processors that cater to high-risk businesses, especially the vaping industry, know the industry inside and out. They are familiar with regulatory compliance and all legal regulations associated with e-cigarettes. They know where vaping is banned and what limitations the government has imposed on using these products. They are also aware of the industry’s social controversies and economic status. Working with these merchants will ensure that you get solutions tailored to your specific requirements.

Good Approval Rates

Contrary to popular belief, getting a merchant account for your vaping business is absolutely possible. In fact, you can find a provider offering services that match your industry and credit card processing requirements. Many payment processors cater to high-risk businesses. Take PaymentCloud, Host Merchant Service Provider, Soar Payments, and National Processing, for example.

These are highly reliable payment processors known for their transparent pricing structure and seamless customer experience. They have a high merchant application approval rate. Plus, they take a few hours to 2-3 business days to accept your application and set up your merchant account. Some providers even offer a dedicated representative who walks you through the entire setup process. Once you have configured the payment process in your retail and online stores, you can start accepting credit card payments right away.

Top Merchant Accounts for Vaping Businesses

Many processors are willing to work with e-cigarette and vaping businesses. We’ve rounded up the best payment processors for a vape merchant account.

PaymentCloud

If lack of payment transparency isn’t a concern for you, then PaymentCloud is your best choice for a vape merchant account. Offering an excellent approval rate, the company is one of the leading payment processing service providers that accept multiple cards and different payment methods.

Unlike Stripe and Square, PaymentCloud caters to businesses dealing in vaping accessories and e-cigarettes. Whether you are a manufacturer, a distributor, or a retailer of these products, rest assured that PaymentCloud is your one-stop destination for seamless payment processing. They guarantee no payout freezes or unannounced account termination. Here’s what they offer:

A vast range of hardware options, including a full-fledged EMV-enabled POS terminal, a payment gateway for eCommerce transactions, tablet POS, PIN Pad, mobile processing apps, and more.
A dedicated account manager who assists you throughout the POS configuration process. You can contact the manager should you face any issue with payment processing or a technical error with the hardware.
Integrate your shopping cart directly into your website. PaymentCloud supports Magento, Shopify, Volusion, Opencart, 3Dcart, and WooCommerce.
Free to setup

The company has, however, not disclosed its pricing for high-risk merchants. You need to contact them to get a custom quote. They do claim to offer the most competitive pricing on the market, though.

Host Merchant Services

Vape stores processing transactions over $20,000 a month should consider signing up with Host Merchant Services —the best payment processor for all types and sizes of businesses. Although the company isn’t a high-risk specialist, it accepts merchant applications from high-risk businesses that prove their credibility and have a good processing history. This includes businesses in the vaping industry. The good news is if you meet their eligibility criteria, you might even qualify for a free EMV terminal. Here’s what Host Merchant offers:

Free application and setup and no compliance fees
Get the Host Merchant’s native gateway, Transaction Express, to process your eCommerce transaction seamlessly. It also offers POS systems designed for both online and physical setups.
Compatible with most shopping carts, including Shopify and WooCommerce
Supports recurring billing for vaping stores that work on a subscription-based model
Offers a virtual terminal to process payments over the phone

Host Merchant Services is a great choice if a dedicated customer support team, flexible pricing, advanced POS systems, and a functional gateway are your priorities. The company strives to provide all its merchants with state-of-the-art technology to process all kinds of transactions. The only downside is a long-term contract for high-risk merchants.

Soar Payments

A relatively new payment processor in the industry, Soar Payments offers competitive pricing and excellent terms for high-risk merchants. So, if you are in the vaping business and have been rejected for a merchant account from payment processors, consider Soar Payments. They offer mobile payment solutions, a card terminal, a payment gateway, and eCommerce payment solutions to help you process all kinds of credit card transactions. Here’s what you get from signing up for a merchant account with Soar Payments:

Get advanced payment solutions, including a full-fledged POS terminal, card reader, payment gateway, etc.
They work with Chargeback Armor, ensuring maximum protection from friendly fraud and other chargeback-related issues.
Works with popular payment gateways, including Authorize.net and NMI gateway.
Accept applications from vaping companies that sell products outside their native country. If you work internationally or have customers paying you in international currencies, Soar Payments is your best option for a merchant account.

Soar Payments might impose a monthly rolling reserve for high-risk merchants to offset the risk. So, if you can meet the reserve requirement, Soar Payments is the most suitable option for your business.

Durango Merchant Services

Whether you are a US-based vape store or are serving internationally, Durango Merchant Services is your best choice if you are classified as a high-risk merchant and are struggling to find a reliable payment processor. The company has become a leading high-risk merchant service provider with an extensive range of features and its proprietary gateway (Durango Pay).

It supports currency conversion options and accepts all major credit/debit cards, plus other contactless payments. The company hasn’t mentioned its pricing. You need to get in touch with their support representative to get a custom quote based on the services you offer. Here’s why you should work with Durango if you run a vape store:

Durango’s native payment gateway supports recurring billing and international currencies and allows customers to easily switch to a third-party gateway.
It supports merchants based in and outside the US.
Bluetooth-enabled mobile card reader with an iProcess app that supports mobile payments.
Offers excellent fraud detection programs
Get a dedicated customer support representative offering full-time support

Durango claims to offer competitive pricing, even for high-risk merchants. For more details, contact their support team.

How to Choose the Best Processor for Your Vaping Business?

A merchant account for a vaping business offers security and seamless card processing services, ensuring an uninterrupted transaction experience for your customers. Whether you are processing card-present or card-not-present transactions, the above-listed high-risk merchant accounts are your best options for secure and seamless payment processing services. Before you choose a payment processor, research their credibility and get a quote.

The best processor for your business depends on your preference, budget, and requirements. For instance, some businesses need a processor that offers international credit card processing and accepts multiple currencies, while others want a processing service that comes with an advanced fraud detection and chargeback management program. Understand your needs, research different processors, compare their services, and choose a provider who suits your unique requirements.

Conclusion

Are you planning to set up your vaping business? Or, have you been running a vaping store where you sell vaping kits, vape liquids, and other e-cigarette accessories? You must start looking for a payment processor who serves high-risk businesses and understands the vaping industry. Having a merchant account ensures that you can accept credit/debit card payments easily. However, do not settle for a random merchant service provider.

Research their expertise, reputation, and processing history before applying for a merchant account. Your options are not limited. You can find a processor that offers reasonable processing rates, a flexible contract, multiple hardware options, and all the tools to ensure secure and fast credit card processing. So, choose wisely.

FAQs

Which processor is the best for a vape merchant account?

PaymentCloud and Host Merchant are the best options for vape stores.

Do payment processors accept vape merchants?

Yes, high-risk payment processors accept the application of vape merchants.

What if I want to switch payment processors?

Contact your existing processor and end your contract with them. Then, you can start researching reliable payment processors for your vape store.

Collection Agency Merchant Accounts, Debt Collection Merchant Accounts

Starting your business as a collection agency can be quite overwhelming. Most payment processors consider the industry to be high-risk. This explains why most merchant service providers and banks are reluctant to work with debt collection agencies. Getting approved for a merchant account is already quite a challenge for businesses in this industry. It gets trickier if you are new in the business and have no processing history to prove your credibility to the processor.

If you think you can work without a payment processor, that would mean losing your prospects to your competitors, as most of them prefer credit card transactions. Processing such transactions requires a merchant account with a reliable payment processor. So, how do you ensure a smooth and seamless payment processing experience for your customers despite the risk status? Is there a merchant service provider who works with debt collection agencies? If so, are they reliable? We are going to answer all your questions in this post.

So, are you a collection agency? Whether you are a newcomer looking for a merchant account or an established business with a good processing history looking to switch your payment service provider, this post has you covered. Let’s take a look at the tips for getting a merchant account for your high-risk debt collection business.

What is a Collection Agency?

A vast majority of Americans pay their bills with borrowed money. They get loans from traditional banks or use credit cards to pay for most of the luxury stuff. However, with the use of credit cards and other borrowed payment methods on the rise, it’s normal for people to miss out on these payments. Banks and private lenders often hire debt collection agencies to recover their money from such debtors.

Simply put, a collection agency is a business that chases debtors who have overdue bills. The job of a collection agency is quite risky, as they are supposed to recover money from lenders who might be financially struggling, have gone bankrupt, or have defaulted on the payment. Obtaining their information and using legal ways to get the money back is not only tedious but can be overwhelming.

These agencies charge a fixed percentage of the recovered money to the creditors. In other words, the company or the bank that hires a collection agency to recover their outstanding bills will have to pay a portion of the recovered amount (around 25-30 percent) to these agencies.

Why Are Collection Agencies Considered High-Risk?

Banks often look at collection agencies as high-risk merchants because of the nature of the business, the high chargeback ratio, and the possibility of legal issues. There are quite a few reasons that make these agencies high-risk. Let’s explore them.

Reputational Risks

A debt collection agency specializes in recovering money that banks, financial institutions, and private moneylenders have been unable to recover. These agencies are usually seen as the last resort to getting the pending bills paid.

When the bank has tried all possible ways to get the lender to repay the outstanding amount but failed, they will turn to a collection agency for a quick recovery. These companies might use illegal, unethical, and wrong ways of debt recovery. That’s why they are associated with reputational risks. Even if you run a legal collection agency business and use legitimate ways to collect money from debtors, the nature of your business brings a certain level of reputational risk.

Financial Risk

A collection agency also experiences financial risk. It’s never certain whether the agency will be able to collect money from the debtor. If the debtor is declared bankrupt or is financially struggling to the point that they can’t make timely payments or repay the outstanding amount in full, the collection agency won’t make any income. That’s because these agencies are paid only when they successfully collect the amount in question. It’s a highly volatile industry. Even the best collection agency might struggle to recover the unpaid bills from debtors.

Security Risk

Debt collection agencies are supposed to implement the best security protocols to prevent data breaches. They hold the debtors’ sensitive and confidential information, which is why it’s important that they have the best technology in place to mitigate the risk of security violations. Because they have a considerable volume of sensitive data, they are often the target of cybercriminals. If a breach occurs, the agency would lose trust and experience reputational damage.

Legal Issues

Another reason why debt collection agencies are considered high-risk is the possibility of legal issues in their operations. A collection agency might use fair practices to collect the outstanding amount from debtors, but if the debtor feels threatened or harassed by these agencies, they can file a complaint against them. Banks that work with collection agencies will also be exposed to legal risks. Besides, there’s a chance these professionals might unknowingly use illegal ways to recover money from debtors. This can put them out of business and cause a significant legal penalty.

In addition, some debtors might pay the collection agency their overdue bills through credit cards only to issue a chargeback later. Just to get a short relief from continuous pressure, these debtors might use other unethical tricks to repay the debt. Filing a chargeback might result in a significant loss for the collection agency as well as the creditor. Even if they successfully dispute the chargeback, they might end up paying fees or wasting time in fighting the chargeback.

All in all, a collection agency, no matter how reputable or established the organization is, will be seen as a risky business. A merchant service provider or a processing bank will have a rigorous screening of the merchant application for such merchants. Some banks will reject your merchant account application straight away, while others might charge a hefty processing fee and implement an upfront reserve requirement. In either case, the collection agency has to struggle to have their merchant account approved.

How to Get a Merchant Account for Your Collection Agency?

Getting a merchant account for a collection agency can be tricky. As mentioned previously, the process gets even more challenging if you don’t have a reliable payment processing history to show your trustworthiness.

That said, many high-risk merchant service providers are willing to offer services to collection agencies, given that they meet their eligibility criteria. Make sure you go through their terms and conditions and each clause in the contract thoroughly before finalizing the service. The last thing you want is to open a merchant account with a payment processor who imposes a hefty termination fee for early termination or a processor who charges a considerable amount of hidden fee every month.

Here’s what to consider when selecting your payment processor:

Fast Application Approval

The riskier the business appears, the longer the merchant account approval process gets. From the payment processor’s perspective, working with a collection agency means bearing risk. We’ve discussed the reputational, financial, legal, and other types of risks that your industry is associated with.

So, it’s obvious that a processor will evaluate your records and have a rigorous application approval process in place to ensure they are working with a reliable collection agency. That said, it shouldn’t take them more than a week to approve your account application. Look for someone who offers fast approval and helps you set up your merchant account and start accepting credit card payments right away.

High Approval Rate

While researching, check the payment processor’s merchant account approval rate. Some processors have an approval rate as high as 98% for high-risk merchants. Host Merchant Services and PaymentCloud, for example, are the best in the industry for debt collection agencies and other high-risk merchants. With the highest application approval rate and a simple application process, they accept most merchants.

Minimal Reserve

Banks and payment processors protect themselves from the risk of working with a high-risk merchant by implementing a reserve requirement. Reserve serves as a safeguard that protects the processor in the event of a financial loss, a sudden surge in the merchant’s chargeback ratio, a sudden business closure, and an unexpected fraudulent transaction. Basically, all types of financial losses are covered by the reserve.

Should anything unusual occur, your processor can have peace of mind knowing that there’s sufficient to reserve to compensate for the loss. However, the merchant is supposed to hold a reserve balance, which can be up to 100% of their approved transaction volume. If you keep a rolling reserve, you will be required to keep a small percentage of your monthly income (5-20 percent) aside for the reserve balance. No need to worry, as it’s still your money and will be credited back to your merchant account over time. However, if you don’t have sufficient funds for the reserve, you can always compare payment processors based on their reserve requirements.

Reasonable Processing Rates

Most payment processors serving the high-risk industry do not disclose their processing rates. You get a custom quote based on your industry type, processing volume, and other factors. Simply put, the processor will evaluate your processing history and consider your risk factor before quoting a processing fee.

A business with a high chargeback ratio and a poor processing history will be quoted a high processing fee, as that’s how the processor will offset their risk of working with you. However, it’s important to research and compare the processing rates offered by different processors. You might find someone offering excellent services with premium support and advanced security tools at comparatively lower rates than their competitors.

No Hidden Fees

A payment processor can implement fees other than the standard processing rate. This fee is disclosed in the contract. You must go over the contract clauses, especially the fee section, to understand what you’ll be paying every month. Now, not all processors charge the miscellaneous fee, but if they do, you must calculate and compare it with other processors before signing up for their processing plan.

A reliable payment processor will disclose their fee structure when quoting the processing rate. They will offer 100% transparency in pricing to ensure that you don’t get a surprising bill. Here are the types of fees a payment processor might charge:

Payment Gateway fees
PCI compliance fees
Transaction fee
Chargeback and refund fee
Integration fee
Batch processing fee
Monthly fees
Account termination fees

Review their fee requirements to ensure you won’t be paying any unnecessary fees.

Fast Funding

Payment processors use batch processing to transfer approved credit card transactions to your merchant account at once. How soon your income is reflected in your bank account varies depending on your bank’s processing time.

Some processors might take 3-4 business days to transfer credit card payments to your account, while others offer next-day or same-day funding options. The sooner the payment is processed, the better your cash flow. If you can’t wait for days for your payments to be transferred, you can find a processor who offers next-day funding to high-risk merchants.

Hardware Options

Banks usually work with third-party point-of-sale system providers to offer retailers the best-in-class hardware equipment. If you have a retail setup, you must ask your processor about your hardware options and choose the one that offers everything you need to process all kinds of payments at your brick-and-mortar and online store.

The hardware includes a full-fledged POS station, a portable card reader, a receipt printer, a barcode scanner, a cash register, and so on. Some also offer free EMV terminals. You must compare the hardware options and prices to ensure you are getting the best.

Complete Processing

A collection agency that works internationally must choose a payment processor that accepts international transactions and offers a broad range of payment methods. When comparing payment processors, check the accepted payment methods. They should accept all major credit/debit cards and other forms of payment, such as ACH transfers, eChecks, digital wallets, and more. Some processors also accept cryptocurrency transactions. The more payment options you get, the better.

Excellent Support

Ideally, you should look for a merchant service provider that offers 24/7 support. However, not every payment processor is available outside business hours. Some offer support during business hours, while others have outsourced the support department to IT service providers, thus ensuring round-the-clock support service. Reaching out to support might be a little problematic if you hire an international payment processor who operates according to their region’s time zone.

In addition to the support hours, you should research and evaluate the professionalism of their support team, their qualification, experience, and how well they handle technical and non-technical issues. You don’t want to work with a processor who’s unavailable when your POS system has broken down, and you are unable to process credit card payments. Likewise, if anything goes wrong with your payment gateway or other credit card processing terminals, having the issue resolved as soon as possible will be your priority. So, look for a team that offers prompt support and is always available to assist you.

Some payment processors use FAQs and knowledge bases to allow customers to resolve their general issues quickly without the professional’s assistance. Check what level of support service they offer and what communication channels they have. Do they offer support via email, live chat, ticketing system, phone, and other channels? The more, the merrier.

Chargeback Assistance

One of the common challenges that a collection agency faces is the increased risk of a high chargeback ratio. As mentioned earlier, there’s a possibility a debtor might repay their outstanding bills or the debt owed to the bank using their credit cards, and they might issue a chargeback later.

If these chargeback requests are not addressed, the debtor might win the chargeback and get all their repaid amount back. This can result in a significant financial loss for the collection agency. To mitigate these risks, high-risk merchant accounts that serve collection agencies integrate the best chargeback management and protection plans into their security system. Processors use state-of-the-art technology that can detect suspicious activities, alert the merchant, and help fight illegitimate chargeback requests. This helps prevent friendly fraud. Look for a payment processor who has a robust chargeback protection plan in place.

FAQs

Why does a collection agency need a merchant account?

Some debtors prefer paying their outstanding bills through credit cards. A collection agency should set up a merchant account to be able to process credit card transactions.

How can a collection agency improve its chances of getting approved for a merchant account?

Getting a merchant account is more difficult for a collection agency than it is for regular merchants. Because they are classified as high-risk businesses, it’s important for them to maintain a good processing history and improve their credit score to get a merchant account.

Do collection agencies need to pay a high processing fee?

In some cases, a collection agency pays higher than the regular processing fee because of the risk they carry. There might be additional fees, such as monthly processing fees or chargeback fees, to mitigate the financial risk associated with this industry.

What are Upfront Reserve?

Finding a reputable payment processor who charges a reasonable processing fee and offers secure and reliable credit card processing services is challenging for a high-risk business. One of the most frustrating requirements is the upfront reserve. So, what exactly is it? Why do you need it? Keep reading to learn more about upfront reserves for a merchant account and why they are needed.

A business categorized as high-risk, whether because of the high chargeback ratio or the industry it operates in, is supposed to deposit an upfront reserve for a merchant account. Although it’s not mandatory for all, most high-risk merchant service providers require businesses to keep a small portion of their earnings aside for security reasons. This reserve protects the payment processor and the business from the risk of unforeseen events, such as chargebacks or fraudulent activity that results in a significant financial loss.

Note that payment processors have varying reserve requirements. While some might not need an upfront reserve, others keep a significant part of your income in reserve. Rest assured that this money won’t go anywhere. They will keep it for a small duration and eventually deposit it into your bank account.

How Much Upfront Reserve is Required?

The total amount kept aside for upfront reserve varies depending on your monthly credit card processing volume. Your payment processor will discuss the reserve requirements before approving your application. They mention how long they will keep the reserve. An upfront reserve is usually 50-100 percent of the monthly processing volume you are approved for. For instance, if your merchant service provider has approved you for $30,000 per month, you will be required to keep anywhere between $15,000 and $30,000 in the upfront reserve.

It’s only fair for the acquiring banks and your merchant service provider to keep this money aside as a security for unpredictable financial losses. For instance, if your chargeback ratio spikes or your business has to shut down due to a legal issue or a major financial loss, the merchant service provider can use the reserve amount to recover the loss. It gives them a sense of security. However, from the merchant’s perspective, the upfront reserve negatively affects the cash flow.

Who Needs a Merchant Account Reserve?

A payment processor can ask each merchant, irrespective of their risk level, to deposit an upfront reserve, but the vast majority of them require this for high-risk merchants. As mentioned previously, upfront reserve serves as a way for the merchant service provider to protect themselves and the business from unexpected liability.

A high-risk merchant is more likely to experience constant chargeback requests and refund requests. Due to the nature of the business and its high processing volume, they are also at an increased risk of fraudulent transactions. To mitigate the risk of financial loss, these payment processors hold a reserve that works as a safeguard against financial, legal, and other issues. Here’s how it helps the merchant service provider.

Protection From Chargeback: A customer is likely to issue a chargeback request if they notice an unusual transaction on their credit card statement. Sometimes, these chargeback requests result from a friendly fraud where a customer issues a chargeback against a company without a valid reason. Either way, paying the chargeback fee can put a great deal of financial stress on the business, which is why payment processors ask high-risk merchants to put a portion of their income aside to prevent the risk of financial loss from chargebacks.

Fraud Prevention: A fraudster usually targets a high-risk merchant, as these companies process high-ticket and high-volume transactions. For instance, a subscription-based service provider or a jewelry store is more likely to experience fraud than a regular grocery store. Sometimes, a fraudulent transaction can put a merchant out of business and make the payment processor susceptible to financial loss. To deal with such fraudulent activities, merchants are required to hold an upfront reserve.

Business Failure: A business operating in a legally controversial industry, such as those offering gambling services, adult content, prescription and non-prescription drugs, and weapons, is at risk of sudden closure. Payment processors who work with these merchants will likely require an upfront reserve to ensure protection against financial loss from a sudden business failure. They use this reserve to deal with unresolved chargebacks.

Overall, the main purpose of keeping an upfront reserve is to protect the merchant service provider from financial loss due to chargeback, fraudulent transactions, sudden business failure, legal controversies, and other risky transactions. Not only does the reserve reassure the processor that they will be covered in the event of a financial loss, but it encourages the merchant to engage in fair business practices.

They are more likely to implement advanced fraud detection tools and best-in-class security protocols to avoid fraudulent transactions. They might also take measures to lower the chargeback ratio and improve their customer service. The payment processor can reduce the upfront reserve amount if the high-risk merchant proves their credibility and maintains a good credit card processing history.

How Upfront Reserves Work

Reserve accounts hold a predetermined sum of money to cover any financial liabilities. The type of reserve might vary, but they all have the same purpose—to protect your payment processors from unexpected financial loss. Upfront reserve, as the name suggests, is collected as soon as you open your merchant account with a payment processor. In some cases, your processor might put your transaction money into the reserve account as you generate income from credit card processing. The transaction funds go into your reserve account until the balance requirements are met.

Note that upfront reserve (or any kind of reserve for that matter) is not a fee. These are temporarily held into a separate yet inaccessible bank account just to offset the risk of financial liability associated with your business. The amount will be transferred back to your bank account within a specific timeframe. Additionally, upfront reserves are a great way to increase your monthly credit card processing volume. For instance, if you are currently approved for a monthly processing volume of $50,000, a good processing history can help you increase it to $100,000 and more. However, you need to add $50,000 to your reserve account in that case.

As mentioned before, there are two ways to maintain your upfront reserve. You will be asked to pay the entire reserve amount at once, i.e., at the time of opening your merchant account, or do it incrementally. If you are a startup with no processing history or you fall into the high-risk category, you will most likely need to keep your funds in the reserve as you make income from credit card payments.

In other words, your merchant can agree to keep your full income aside in the reserve account until they meet the predetermined dollar amount. Suppose you are approved for a processing volume of $20,000 a month and have signed up for an upfront reserve. You have not paid the entire amount in advance and would rather have your income from the credit card sales deposited into your reserve account. In that case, your merchant will hold all your profits until the reserve balance reaches $20,000. Once it’s done, you will get your money back.

The reserve account is like an escrow account. The amount is held in a non-interest-bearing bank and is transferred to your merchant account once the reserve requirements are met. Since this account is linked to your merchant account, you can check the balance anytime you want.

How is the Money From the Upfront Reserve Transferred to Your Merchant Account?

Now that you have deposited the required amount in your reserve account, you might wonder when you will get it back. As mentioned earlier, you need to have a solid payment processing history to set up the incremental reserve release. You can work with your payment processor to determine the duration in which the reserve will be credited back to your account.

They will decide the stages in which the full amount is transferred to your merchant account. For instance, if you have a good processing history and receive no chargeback, your payment processor might transfer 20% of your reserve balance to your account. If you urgently need money, you can talk to your account manager, who will further discuss the reserve release requirements with your payment processor. They will either speed up the release process or transfer the entire reserve balance to your merchant account.

It’s important to read the merchant agreement carefully to know the duration by which your reserve funds will be released. In some cases, the payment processor permanently holds the reserve and releases it only when you end the contract with them. There’s a possibility that your upfront reserve, which is 100% of your approved monthly sales volume, can be held aside for 5-10 years, or as long as you have an open merchant account with your payment processor. To mitigate the risk of chargeback-related financial loss, your processor might keep the funds for up to 120 days after your account closing. That’s because the time limit to issue a chargeback is four months from the purchase date.

Who Needs an Upfront Reserve Account?

This depends on the payment processor you choose and their reserve requirements. However, in most cases, merchants with a high-risk level need to deposit money into the reserve account to offset the risk.

If you are a high-risk merchant, you will most likely need to fund your merchant reserve account no matter which payment processor you choose. Although the percentage of the upfront reserve and the duration until which the reserve will be held might vary from processor to processor, most of them implement an upfront or rolling reserve for high-risk merchants. This starts from the day you are allowed to process credit card payments with your processor to the end of your agreement.

Sometimes, the merchant isn’t asked to keep an upfront reserve, but if they are unable to prove their credibility or their risk level increases in the future, the payment service provider might ask them to keep a reserve to mitigate the risk of financial loss. Here’s what makes you a high-risk merchant, making you highly likely to deposit an upfront reserve:

A poor or no payment processing history
A poor credit score
A business that sells controversial and risky products, such as firearms, cannabis, adult content, gambling services, furniture, precious jewelry, and other high-end products.
High monthly processing volume
Large average transaction size
Selling in international countries, especially areas that are highly prone to fraudulent activities
Operating in an industry that has a history of high chargeback ratio

Note that the reserve requirements aren’t a one-time thing. This will most likely last for the entire duration of your agreement with the processor. You will get the entire reserve amount back once your contract ends, and you decide to continue with another payment processor. However, that’s only when you have no chargebacks, refunds, or pending transactions.

Different Types of Merchant Account Reserves

Not every payment processor has the same criteria for holding your money in the reserve account. The up-front reserve is held at the beginning of the agreement and is released in a fixed percentage every month. Here are some other options for merchant reserve accounts:

Rolling Reserve

The most common type of merchant reserve is the rolling reserve. Instead of keeping a lump sum aside at the time of merchant account opening, your processor will keep a fixed percentage of your income aside every month to meet the rolling reserve balance.

This can be between 5 and 15 percent of your income or more, depending on the processor you choose and your risk level. Suppose your agreement states that 10% of your income from credit card processing will be deposited into the reserve account for the next five months. Your processor will hold 10% of your income in the reserve and transfer the rest to your merchant account. They will continue this for five months. They will start releasing the money in the same ratio as they held your reserve after the predetermined period.

Your processor will keep depositing the reserve until your agreement. Unlike upfront reserves, there’s no cap on the amount your rolling reserve account can hold. It depends on your monthly sales and processing volume.

Capped Reserve

The capped reserve is similar to the rolling reserve. The payment processor withholds a specific percentage of your income into the reserve account. The difference between the two lies in the limit. The capped reserve has a limit past which the processor can’t withhold the money. No matter your monthly sales volume, the reserve amount is withheld up to the limit. This reserve will stay with your payment processor till the end of your agreement.

Suppose your monthly sales volume is $20,000, and the capped reserve is $10,000. Your agreement says 10% of your income will be withheld into your reserve account, which makes it $2000 per month. This will be transferred to your reserve account until the limit, i.e., $10,000, is reached.

In addition to these reserve types, payment processors might have their own special reserve accounts and varying procedures to hold merchant’s money. PayPal, Stripe, and nearly every payment processor have a reserve requirement that’s based on the processor’s security and other requirements.

Managing Your Upfront Reserve

You can’t avoid upfront reserves, but there are ways to manage your hard-earned money in the reserve and get it back. Here’s how you can manage your merchant reserve:

Understand the terms of your merchant reserve agreement. Know how much reserve is required, when it will be released, and other conditions related to the reserve requirement.
Improve your processing history to negotiate the reserve terms with your payment processor.
Manage your chargeback and respond to customer disputes promptly.
Try negotiating your merchant reserve conditions with your processor.
Ask your processor to lower the reserve percentage or the duration for withholding the reserve. If you have good financial standing and a decent processing history, they might consider your offer.
Monitor latest trends in reserve management.
Look for a reliable payment processor with a transparent pricing policy and reasonable reserve requirements.

Conclusion

No matter the level of financial strain they put on your business, upfront reserves are a great tool for high-risk merchants facing difficulty getting approved for a merchant account. It shows your acquiring bank the financial responsibility you are willing to take. Besides, keeping a portion of your income aside for unforeseen events is always a good idea, as it helps you deal with financial issues later.

Your business won’t take a financial hit if you have an upfront reserve with your payment processor. Likewise, it’s a protection tool for your payment processor. They are more likely to offer you the best service if they are assured of protection from chargebacks, fraud, and other financial losses.

Regulatory Compliance for High-Risk Businesses

Regulatory compliance is a critical aspect of operating a high-risk business. High-risk industries, such as financial services, healthcare, gambling, and adult entertainment, are subject to stringent regulatory requirements. These regulations aim to protect consumers, prevent money laundering, ensure fair competition, and maintain the integrity of the industry. However, navigating the complex landscape of regulatory compliance can be challenging for high-risk merchants.

This article will provide an overview of regulatory requirements for high-risk industries, discuss the unique challenges faced by high-risk merchants, explore compliance challenges and solutions, emphasize the importance of staying updated on regulatory changes, and highlight the implications of non-compliance for high-risk businesses. Additionally, strategies for achieving and maintaining regulatory compliance will be discussed, along with frequently asked questions about regulatory compliance for high-risk businesses.

What is Regulatory Compliance?

Regulatory compliance refers to the process by which businesses adhere to laws, regulations, guidelines, and specifications relevant to their operations. For high-risk businesses, compliance is not just about following rules; it’s about ensuring transparency, integrity, and the protection of consumer interests.

Why is it Crucial for High-Risk Businesses?

For high-risk industries, the stakes of non-compliance are particularly high, including hefty fines, legal repercussions, damage to reputation, and the potential revocation of licenses to operate. Moreover, compliance helps in building trust with customers, partners, and regulators, which is fundamental for long-term success.

Overview of Regulatory Requirements for High-Risk Industries

High-risk industries, such as financial services, healthcare, gambling, adult entertainment, cryptocurrency, and firearms, are subject to stringent regulations due to the potential for financial crimes, consumer harm, or societal concerns associated with their operations. These industries must comply with a wide range of regulations, including but not limited to:

Anti-Money Laundering (AML) Regulations: High-risk businesses are required to implement robust AML programs to prevent money laundering and terrorist financing. These programs include customer due diligence, transaction monitoring, and reporting suspicious activities to regulatory authorities.
Know Your Customer (KYC) Regulations: High-risk businesses must verify the identity of their customers to prevent fraud, money laundering, and other illicit activities. KYC procedures involve collecting and verifying customer information, such as identification documents and proof of address.
Data Privacy and Security Regulations: High-risk businesses that handle sensitive customer data, such as healthcare providers and financial institutions, must comply with data privacy and security regulations, such as the Health Insurance Portability and Accountability Act (HIPAA) and the General Data Protection Regulation (GDPR).
Licensing and Permitting Requirements: Certain high-risk industries, such as gambling and firearms, require specific licenses and permits to operate legally. These licenses often come with additional compliance obligations, such as regular audits and reporting.
Consumer Protection Regulations: High-risk businesses must comply with consumer protection laws to ensure fair and transparent practices. These regulations may include restrictions on advertising, disclosure requirements, and dispute resolution mechanisms.

Understanding the specific regulations applicable to each industry is crucial for high-risk merchants to operate legally and ethically.

Understanding the Unique Challenges Faced by High-Risk Merchants

High-risk merchants face unique compliance challenges due to the nature of their businesses. These challenges include:

Complex Regulatory Frameworks: High-risk industries are often subject to multiple layers of regulations from various regulatory bodies, such as government agencies, industry associations, and self-regulatory organizations. Navigating these complex frameworks can be overwhelming for high-risk merchants.
Evolving Compliance Standards: Regulatory requirements and industry standards are constantly evolving. High-risk merchants must stay updated on these changes to ensure ongoing compliance. Failure to do so can result in severe consequences, including legal penalties, reputational damage, and loss of customer trust.
Robust Risk Management Systems: High-risk businesses must have robust risk management systems in place to identify, assess, and mitigate compliance risks. This includes conducting regular risk assessments, implementing internal controls, and monitoring compliance activities.

To overcome these challenges, high-risk merchants must implement comprehensive compliance programs, conduct regular risk assessments, and leverage technology solutions to streamline compliance processes.

Regulatory Compliance Challenges and Solutions for High-Risk Merchants

Compliance challenges for high-risk merchants can be addressed through various solutions:

Comprehensive Compliance Programs: High-risk merchants should establish a robust compliance program that includes policies, procedures, and internal controls tailored to their specific industry and risk profile. This program should be well-documented, outlining compliance requirements and expectations for employees.
Regular Risk Assessments: High-risk merchants should conduct regular risk assessments to identify and address compliance gaps. These assessments should evaluate the effectiveness of existing controls, identify emerging risks, and prioritize remediation efforts.
Training and Education: Regular training and education for employees on compliance requirements and expectations are essential. This ensures that employees are aware of their compliance obligations and understand the potential consequences of non-compliance.
Technology Solutions: Leveraging technology solutions can streamline compliance processes and ensure accuracy and efficiency. Compliance management software can centralize compliance-related data, automate reporting, and provide real-time monitoring of compliance activities. This reduces the burden on high-risk merchants’ operations and reduces the risk of human error.

By implementing these solutions, high-risk merchants can overcome compliance challenges and ensure ongoing compliance with regulatory requirements.

The Importance of Staying Updated on Regulatory Changes

Regulatory Compliance landscapes are constantly evolving, with new laws, regulations, and industry standards being introduced regularly. High-risk merchants must stay updated on these changes to ensure ongoing compliance. Failure to do so can result in severe consequences, including legal penalties, reputational damage, and loss of customer trust.

Staying updated on regulatory changes can be achieved through the following strategies:

Regular Monitoring: High-risk merchants should regularly monitor regulatory updates from relevant regulatory bodies, industry associations, and legal publications. This can be done through subscribing to newsletters, following industry news, and engaging with industry associations.
Engaging with Industry Associations: Joining industry associations and participating in industry events can provide high-risk merchants with valuable insights into regulatory changes and compliance best practices. These associations often offer resources, training programs, and networking opportunities to help high-risk merchants stay ahead of compliance requirements.
Seeking Legal Counsel: High-risk merchants should consider seeking legal counsel to ensure they are aware of and compliant with all relevant regulations. Legal professionals specializing in the specific industry can provide guidance on compliance requirements and help navigate complex regulatory frameworks.

By staying updated on regulatory compliance changes, high-risk merchants can proactively adapt their compliance programs and mitigate the risks associated with non-compliance.

Implications of Non-Compliance for High-Risk Businesses

Non-compliance with regulatory compliance requirements can have significant implications for high-risk businesses. These implications can be categorized into legal and financial ramifications, as well as reputation and customer trust.

Consequences of Non-Compliance: Legal and Financial Ramifications

High-risk businesses that fail to comply with regulatory compliance requirements may face severe legal and financial consequences. Regulatory authorities have the power to impose substantial fines, penalties, and sanctions on non-compliant businesses. These penalties can range from monetary fines to license revocation or suspension. In some cases, non-compliance can result in criminal charges, leading to imprisonment for business owners or executives.

Financial implications of non-compliance can be equally severe. Non-compliance can disrupt business operations, resulting in revenue loss and potential bankruptcy. Legal battles to resolve non-compliance issues can be costly, with expenses including legal fees, settlements, and potential damages awarded to affected parties.

Reputation and Customer Trust: The Hidden Costs of Non-Compliance

Non-compliance not only affects a high-risk business’s legal and financial standing but also damages its reputation and erodes customer trust. Consumers expect businesses to operate ethically and responsibly, and any association with non-compliance can lead to a loss of trust. Negative publicity, customer complaints, and social media backlash can further harm a business’s reputation, making it challenging to regain customer confidence and attract new clients.

The hidden costs of non-compliance, such as reputational damage and loss of customer trust, can have long-term implications for high-risk businesses. Rebuilding a tarnished reputation can be a time-consuming and costly process, requiring significant efforts in public relations, customer outreach, and transparency.

Strategies for Achieving and Maintaining Regulatory Compliance

High-risk merchants can adopt several strategies to achieve and maintain regulatory compliance. These strategies include building a robust compliance program, leveraging technology and automation, and conducting regular risk assessments and audits.

Building a Robust Compliance Program: Best Practices for High-Risk Businesses

To build a robust compliance program, high-risk businesses should follow best practices:

Appoint a Dedicated Compliance Officer or Team: High-risk businesses should appoint a dedicated compliance officer or team responsible for overseeing compliance efforts. This ensures accountability and provides a centralized point of contact for compliance-related matters.
Document Policies, Procedures, and Controls: The compliance program should be well-documented, outlining policies, procedures, and controls to ensure consistency and accountability. This documentation should be easily accessible to employees and regularly updated to reflect changes in regulations or industry standards.
Regular Training and Education: High-risk businesses should provide regular training and education for employees on compliance requirements and expectations. This ensures that employees are aware of their compliance obligations and understand the potential consequences of non-compliance.
Conduct Periodic Internal and External Audits: Periodic internal and external audits can help identify areas for improvement and ensure ongoing compliance. These audits should evaluate the effectiveness of the compliance program, identify compliance gaps, and provide recommendations for remediation.

By following these best practices, high-risk businesses can establish a strong compliance foundation and ensure ongoing compliance with regulatory compliance requirements.

Leveraging Technology and Automation for Efficient Compliance Management

Technology and automation can significantly enhance compliance management for high-risk businesses. Compliance management software can centralize compliance-related data, automate reporting, and provide real-time monitoring of compliance activities. This streamlines processes, reduces human error, and ensures accuracy and timeliness in compliance reporting.

Additionally, leveraging artificial intelligence and machine learning can help identify patterns and anomalies, enabling proactive risk management and fraud detection. These technologies can analyze large volumes of data, identify potential compliance issues, and provide insights for decision-making.

By leveraging technology and automation, high-risk businesses can streamline compliance processes, reduce the burden on their operations, and ensure accuracy and efficiency in compliance management.

Frequently Asked Questions

Q 1: What industries are considered high-risk and subject to stringent regulations?

High-risk industries include financial services, healthcare, gambling, adult entertainment, cryptocurrency, and firearms. These industries are subject to stringent regulations due to the potential for financial crimes, consumer harm, or societal concerns associated with their operations.

Q 2: How can high-risk merchants ensure compliance without compromising their operations?

High-risk merchants can ensure compliance by implementing a comprehensive compliance program, conducting regular risk assessments, and staying updated on regulatory changes. They should also leverage technology solutions to streamline compliance processes and automate reporting, reducing the burden on their operations.

Q 3: What are the consequences of non-compliance for high-risk businesses?

Non-compliance can result in severe consequences for high-risk businesses, including legal penalties, fines, sanctions, license revocation, and reputational damage. It can also lead to loss of customer trust, revenue loss, and difficulty in attracting new customers, ultimately impacting the long-term viability of the business.

Conclusion

Regulatory compliance is a critical aspect of operating a high-risk business. Understanding the unique challenges faced by high-risk merchants and implementing effective compliance strategies are essential for long-term success. Staying updated on regulatory changes and implications is crucial to ensure ongoing compliance and mitigate the risks associated with non-compliance. By prioritizing compliance and leveraging technology solutions, high-risk businesses can navigate the complex regulatory compliance landscape and maintain their legal and ethical standing in their respective industries.