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November 24, 2016

The Pros and Cons of High Risk Merchant Accounts

Every business must open a merchant account before processing credit card payments from its customers. Acquiring banks offer high risk and low risk merchant accounts depending on the perceived risks in a business. Many banks avoid high risk credit card processing because of the potential threats to their stability. The major threats associated with high risk merchant account are chargebacks. Most businesses require high risk merchant accounts when expanding their operations to other countries. The benefits and drawbacks of these accounts are outlined below.

Pros of High Risk Merchant Accounts

Chargebacks do not threaten a company’s survival: Businesses that operate traditional merchant accounts may go out of business if they exceed their chargeback threshold. Acquiring banks terminate merchant accounts that exceed the set chargeback-to-transaction ratio. Banks rarely terminate high risk merchant accounts for excessive chargebacks.

Opportunity to expand operations to other countries: A high risk merchant account allows a business to receive payments from clients in different countries and in different currencies. A business can process card-not-present transactions. Such payments and transactions are impossible with traditional merchant accounts, which limit the potential of companies to expand to global markets.

Limitless payments from clients: High risk credit card processor accounts do not have the revenue cap present in low risk merchant accounts. Businesses with high risk accounts can receive recurring payments from their clients, which guarantees a steady cash flow. In addition, a business can sell any good or service with a high-risk merchant account. Banks limit the type of goods and services that businesses can offer with traditional merchant accounts.

Cons of High Risk Merchant Accounts

High processing fees: Banks charge a higher fee for high risk credit card processing than for traditional credit cards. The cost of setting up a high risk merchant account is higher than the cost of opening a low risk account. The processing fee when using traditional merchant accounts is between 1.5% and 2% while the processing fee for high risk merchant accounts is between 3.5% and 4.5%. The high processing fees may lead to losses in businesses with low revenues.

Revenue reserves affect cash flow: Banks require businesses to maintain a merchant reserve account when processing high risk payments. The reserve is a percentage of the company’s sales through its merchant account. Businesses do not earn any interest on the revenue reserve. An acquiring bank may use the reserve revenue to process chargebacks when a business cannot reimburse chargebacks from its regular merchant account. The reserved revenue is released gradually to the regular account after 180 days. This delay may cause major cash flow issues in a business.

High chargebacks fees: Banks charge chargebacks fees on all merchant accounts. However, the fee is higher for high risk merchant accounts. The fee is even higher for high risk payment processors that exceed their chargeback threshold. The excess fees increase costs and hence reduce the profits that a business earns.


High risk merchant accounts are beneficial to companies that intend to expand their ecommerce transactions to different countries. In most cases, the benefits outweigh the drawbacks when a venture is profitable. However, business owners must consider the excess processing and chargebacks fee that banks charge for high risk credit card processing.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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