It’s the holidays and you’re stoked. The dude in the big red suit puts a gift under the tree but now you can’t open it.
That’s what it can be like to be a small business owner when it comes to high-risk merchant processing.
Square Does Scrooge
A lucrative day for one Florida high-impact glass installer took a frustrating turn when Square put a hold on a $40k sale. An average order for this business was $25k, and this deviation triggered the payment processor to put a hold on the sale.
This type of hold can lead to all kinds of headaches for a small business owner like this window installer who eventually became an Ethical Pay Pro client. If you can’t get your funds when paid, how do you buy materials to complete the job or pay your employees? If the hold lasts longer than a month, do you panic and take out a business loan with an exorbitant interest rate?
Most people associate holds by a credit card processor with high-risk industries. What about this business?
Holds can be placed on virtually anyone. High-risk companies DO face higher processing rates, fees, and additional terms and conditions that a processor’s other clients do not.
When you think of high-risk industries, the usual suspects may come to mind — alcohol and tobacco sales, cannabis dispensaries, vape shops, and gun stores. But those aren’t the only businesses that fit the description. Even the glass installer can carry a high-risk rating and run into payment issues with the wrong payment processor.
If you wan to eliminate or mitigate holds, work with a payment processor consultant like Ethical Pay Pro. We specialize in high-risk merchant processing and improve the way you get paid. Tap here for a free consultation.
High-Risk Merchant Processing
Credit card processing is how businesses, or merchants, accept credit cards, debit cards, and mobile payments. A credit card processor, or merchant service provider, will equip your business with what it needs to start making money.
Physical stores will require the use of a credit card terminal Point of Sale (POS) or Bluetooth phone dongle and the accompanying hardware and software. A POS system works in conjunction with the payment networks of your processing company so that you can accept payments. Internet-based shops and businesses require a payment gateway to accept debit and credit card payments online.
Accepting payments online and over the phone does come with a higher interchange rate, or “swipe fee.” This is a rate set by credit card companies that each business must pay every time a customer uses a credit or debit card to make a purchase.
“Card not present” payments also come with a higher interchange rate as the business owner is not utilizing the smart chip technology to tokenize or protect the information. These payments have a higher incidence of fraud, as the card could be stolen. The user doesn’t have to show up in person, possibly show identification and be surveilled by video cameras.
Most businesses have their pick of credit card processors and could do well with any number of them. High-risk merchant processing, on the other hand, comes with more stringent regulations and higher fees. Choosing the right processor can save time and energy while optimizing your business expenses.
A high-risk merchant account is any business that poses a higher risk of fraud or liability to the financial institution. Most commonly, they operate within a high-risk industry or carry a more serious threat of financial failure.
Many businesses operating in high-risk industries have a history of refunds and chargebacks. A chargeback is a payment dispute that occurs when a cardholder opposes a charge and requests that the bank reverses the sale. A customer can typically dispute a transaction and file a chargeback up to 180 days after making a purchase, depending on the card brand and issuing bank.
Another reason why a business might be considered high-risk is if they are from a certain industry or have an unusual ticket size (our glass installer client described above) or an extended delivery time. Travel, airlines and hotel companies would fall in this category as well as e-commerce firms with shipping times over 30 days and originating from abroad.
Every processor has its own criteria for deciding whether to decline a business or unable to process its payments. Being rated as high-risk by one credit card processor does not mean that the business will be rated high-risk by all of them. Some high-risk companies will be treated as low risk without rolling reserves implemented where the processor holds 10% of first day credit and debit card sales and returns it 180 days later on a rolling basis.
How Credit Card Processing Works
Credit cards are the most commonly used form of payment in the United States. In 2019, they accounted for nearly 40% of all point of sale payments. Debit cards were the second most common payment method, followed by cash.
The move away from cash has been underway for years and partly a generational change.
Because we have become so reliant on cashless payments, it’s easy to think that when we hand over our credit card information that everything just works, as if by magic. But a lot is going on behind the scenes to process those payments quickly and securely.
- The process begins when a customer initiates a payment using their credit or debit card, either in-person or as a “card present” transaction through a POS system or online or over the phone (“card not present” transactions).
- The credit card processor receives the payment information and works as an intermediary to send it to the credit card network. They are also responsible for ensuring that all transactions are secure, complying with the Payment Card Industry Data Security Standards (PCI DSS), a set of criteria created to reduce credit card fraud.
- The credit card network then sends the payment information to the customer’s bank, which verifies that there are sufficient funds in the account or credit available to complete the transaction. The bank runs a security check to ensure that the purchase is legitimate and then approves or denies the transaction.
- If approved, funds move from the customer’s bank into the merchant’s account, entering the credit card settlement process.
- The settlement of a credit card payment can take up to several days, depending on the network. If you have ever looked at your account shortly after making a purchase, you may have noticed a “pending” signifier next to the charge. Once a settlement has concluded, the transfer of funds and the credit card process is complete.
What May Cause a Payment Processor to Hold a Transaction
There are various reasons why a payment processor might put a hold on a transaction:
A deviation from standard business practices
A major goal of the financial industry is predictability. When a business opens a merchant account, a processor will ask for their average expected transaction volume, as well as the value of a typical transaction. If a business deviates from their standard practice, they should alert their payment processor whose risk department may hold funds (typically 1-2 days) and ask for confirmation of purchase.
What might seem very positive for a business, like a particularly big sale, could send up a red flag to financial institutions that have something to lose. Cautious of suspicious activity, the payment processor will place a temporary hold on the funds until they can review it.
Frequent travelers know to call their bank before traveling to another state or country. Because they will use their credit cards away from home, in a way that deviates from their established routine, they know their credit card company could view this as suspicious activity and put a hold on their account.
High-risk merchant processing acts very much the same way. As your brand becomes more successful, a conversation with your merchant processor about your growing business can go a long way. Telling them that they can expect an unusually high sale to come through or increased activity on your account can help prevent a potential hold on the money your business earns.
Some processors hold funds for 24-48 hours or even as many as 30-180 days. If you are business owner, this SHOULD scare you. A payment processor consultant like Ethical Pay Pro can help you find the best payment processor for your industry and lessen or eliminate holds.
The glass installer cited above tired of Square holding their funds and we were able to help. If you are a business deemed high-risk or otherwise, tap here for a free consultation where we can discuss how to improve the way you get paid.
Big Ticket Items Can Be Big Problems
Businesses that sell high-ticket items, like electronics, jewelry, and furniture, are at an increased risk of fraud, theft, and an uncertain financial future. One notable reason for this is the rate of chargebacks that occur within these types of businesses. It isn’t necessarily the retailer or industry’s fault, either.
One of the reasons why high-ticket businesses experience a higher rate of chargebacks is simply because people are more likely to have buyers’ remorse after they have spent a significant amount of money on something.
Businesses that sell expensive goods are also more vulnerable to fraud. Cybercriminals target merchants that sell high-end items. These criminals use stolen credit cards to purchase luxury items and then have them reshipped overseas. This theft leaves the business, credit card companies, processor, and banks responsible for the cost of the lost product as well as refunding the unauthorized credit card charges.
To mitigate this type of fraud, a brand may opt to implement additional security measures at the point of sale. These can include avoiding sales from countries well-known for engaging in fraud and other red flags.
While criminal fraud is one way that retailers lose money, “friendly fraud” is a driving force behind chargebacks. In these cases, a customer purchases an item, receives it, but claims that it either never arrived or was damaged when it did.
When a seller encounters too many chargebacks, their business can become financially unstable. Excessive chargebacks also indicate the business may not be delivering on their offer. In this case, the processor may be held liable if the business is funded and the transaction needs to be reversed.
For this reason, a credit card processor may put a hold on transactions they can’t guarantee will be covered.
High-ticket goods and services that are at risk of excessive chargebacks, fraud, and theft include:
- Concert tickets
- Designer fashion
- Luxury goods
To minimize the risk of an account or transaction hold, high-ticket retailers should employ tactics to counter the threat of excessive chargebacks.
A clear and easy-to-understand return policy is vital for any business selling a product. One reason why a retailer may be experiencing a high number of chargebacks is that it is more convenient to contact the bank than go through the merchant’s refund process. If your return policy is confusing or your refund process puts too much burden on the customer, they will dispute the charge with their bank instead.
Some businesses have a high-risk rating solely because of the industry in which they operate. It won’t matter to most card processors how a company is structured or how it conducts its daily operations. If it exists within an industry already deemed volatile by financial institutions, it very well could be filed as high-risk.
Some of the most common industries affected by sweeping merchant regulations, higher processing rates, and additional fees include:
The gun industry is an inherently high-risk industry. Many of the most popular credit card processors do not allow the sale of firearms, ammunition, gun parts, or accessories. For businesses looking to sell firearms or operate gun ranges or instructional safety classes, a Federal Firearms License (FFL) and gun-friendly merchant services are the first steps to getting your business running.
An FFL grants gun businesses access to firearms at manufacturer’s costs and the ability to sell from a storefront, at gun shows, and online.
Gun-friendly merchant processing does exist. Some of these processors specialize in the gun industry. Because of this, they are able to offer competitive interchange rates and lower fees than you would get from traditional high-risk merchant processors.
As more states across the U.S. Legalize recreational marijuana, sales of pipes, glassware, and other smoking accessories are on the rise. In fact, business is booming for the industry. As more people look to buy their smoking accessories online, websites are searching for alternative ways to process these sales.
Processing the sale of water pipes, vaporizers, bowls, rolling papers, grinders, and other accessories can be tricky. Many newcomers to the industry may be unaware that they are operating high-risk businesses. The federal prohibition status on the cannabis industry, and the changing laws from state-to-state, makes this murky water for credit card processors.
Smoking accessory websites and head shops require high-risk merchant processing and a payment gateway that is friendly to their industry.
Dietary supplements, vitamins, and herbal products are all part of the nutraceutical industry. These products generally supplement the diet while providing added health benefits, including the prevention and treatment of disease. Because nutraceuticals are not tested and regulated like pharmaceuticals, the buying and selling of these products carry an added risk.
The nutraceutical industry has seen massive growth over the last decade as more people strive to transition into healthier lifestyles. Today, it is a $117 billion industry, while the global wellness market brings in an estimated $4.2 trillion per year. Over 75% of Americans have purchased nutraceutical products, making this a huge market.
Businesses looking to snag a piece of this highly lucrative pie should work with a credit card processor with ample experience in this ever-evolving industry. Because of the large number of chargebacks on these kinds of products, the nutraceutical industry is high-risk.
Why Stripe and PayPal are Problematic for High-Risk Industries
Stripe and PayPal are payment facilitators that don’t work like standard payment processors and gateways. Many small and new businesses might try to use their merchant solutions based on name recognition alone. But the evolving terms of service and problematic policies of these companies make them ineffectual for high-risk businesses.
For those in more regulated industries, Stripe and PayPal can actually pose significant risks to the future of your business. For e-commerce websites and mobile apps, Stripe is the merchant of record. They allow instant signups with little verification process. This convenience is a bonus for business owners. However, if said business owner has a credit or debit card transaction that deviates from the norm, Stripe’s standard is to hold funds for 30-180 days while the payment processing platform verifies and investigates the transaction.
When you have your own merchant account, your business is underwritten and verified so while it allowed more flexibility, when a transaction is held for review, often you’ll be waiting 1-2 days instead of 2-3 months.
When you open a merchant account with a high-risk credit card processor, your business undergoes a pre-approval underwriting process. This is a form of risk assessment by the processor. By disclosing the particulars of your business and the products you sell, they can process your payments quickly and efficiently while minimizing frustrating holds or freezes on your account.
PayPal and Stripe do not engage in an involved underwriting process. The upside to these companies for new businesses is that you can sign up for a merchant account and get started quickly. Unfortunately, when issues arise (and they will), there are few options to deal with them.
It is crucial to read the fine print of a merchant processor agreement before you commit. PayPal and Stripe both prohibit the sale of certain items, like firearms. If you are a high-risk business selling “prohibited” items, they are well within their rights to place a freeze on your account or even shut it down completely.
Finding the Right Payment Processor in a High-Risk Industry
It is vital for businesses in volatile industries to choose appropriate high-risk merchant processing. When selecting a payment processor, look for a company that won’t pigeon-hole your business with a list of one-size-fits-all solutions.
When your business undergoes a thorough underwriting process with a qualified processor, they can help you get paid faster and pay fewer fees for operating your business.
A payment processor consultant like Ethical Pay Pro, who specialize in high-risk merchant processing, can suggest a reliable processor for your unique business needs. For example, let’s say you sell tobacco online and not face-to-face in a shop. That requires a Mastercard registration that will cost your business a $500 fee, plus an annual fee of $500 every year.
You may think that you have to accept Mastercard as a form of payment and pay the necessary fees. It’s the cost of doing business, right? If you are working with Bank of America, or any one of the other 4,000 major banks, they would tell you the same thing. That is because they work with First Data, the largest merchant services acquirer in the industry.
These financial institutions have a vested interest in the forms of payment that your business accepts. They want your online tobacco shop to accept Mastercard because they want to see the money from those transactions.
The right financial consultant like Ethical Pay Pro can help you navigate the fine print of high-risk merchant processing and optimize your business expenses. They might suggest a payment processor that is fine with boarding a new merchant without the addition of Mastercard. If you would like a consultant that specializes in high-risk merchant processing, tap here for a consultation.
If you’re a small business in high-risk industry or even a “normal” one like our window installer client, it helps to shop specialty rather than big brand name one-size-fits-all payment solution like Square, Stripe or PayPal.
Shop Etsy rather than scouring the Walmart discount bin during the holidays and make sure you’re able to open all those gifts under the tree.