What is a “High Risk” Merchant Account?

In the adult payment processing industry, merchants are generally viewed to be “risky” or a “high risk merchant”, which can create complications when applying for a merchant account. Depending on the underwriting guidelines of each payment processor, a merchant can have a different perceived risk level between each processor. Most payment processors focus on general retail and eCommerce business models. Fortunately for merchants higher risk industries there are payment processors that specialize in medium to high risk businesses, including adult merchants. In this post we will try to help explain what is a high risk merchant account and how they work.

A business could be considered high risk for a number of reasons. This could vary from the financial history of the business or the business owner to the location of the business. Businesses or business owners with low credit or a history of payment processing issues could make a merchant higher risk. Businesses located outside of the USA (offshore) will also make them a higher risk. The most frequent reason for a high risk classification is the business model itself. Operating a business, such as adult, will not work with a majority of the payment processor’s underwriting guidelines after assessing their risk potential.

Merchants in adult and other high risk industries unfortunately do not have many options when it comes to finding payment processors. These higher risk payment processors tend to operate with higher fees than most retail and eCommerce processors. Merchants generally have to accept these terms and operate with the higher fees if they want to continue processing payments. During the application process, merchants should research every processor and determine if their funds are safe. Many of these higher risk payment processors have a history of closing accounts and not paying merchants. Know the companies you are dealing with and check with current merchants to see their opinions before applying for a high risk merchant account.

Another element that is important for merchants pay attention to are the fees, terms and conditions associated with the merchant accounts. Many times these processors with not only charge high transaction fees, but also have application fees and may collect a reserve. Application fees, or sometimes charged after the account is approved as a set up fee, can usually be negotiated down since they are generally a junk fee. Many times the broker is marking up this fee and just padding their pocket. Another fee, the reserve, is something put in place by the processor to insure that the merchant can cover chargebacks and other fees associated with the account. Reserves can either be collected and held or they can be set up as a rolling reserve, where funds are held for 6 months then released on a monthly basis while new fees are being collected. These funds are usually based on a % of total sales – and that number is commonly 10%.

Merchants looking for an adult merchant account need to understand what they face when searching for a payment processor. One thing is that their fees will be higher than most other e commerce businesses. Established adult websites have leverage when applying, but merchants will have to show they have good monthly volume. Adult merchants though should always pay attention to all the fees associated with their account and try to negotiate some of the setup or application fees. Though reserves might be required to approve the account, these can also be discussed with the processor and from time to time negotiated lowered. The final point for merchants to remember is to research the payment processor. Make sure you are working with a trustworthy company that will pay consistently. We hope that this post has helped clarify what a high risk merchant account is and what a merchant should know before processing payments.