High risk merchant accounts are often not clearly defined when it comes to merchant services. More often than not, high risk companies assert that they fall in the same category as most other companies accepting credit cards. The reality is that there are only three different types of businesses that can accept credit cards legally: low risk, mid-level risk and high risk. The level of risk is determined by the product or service being sold, not the industry in which it operates.
A high risk merchant account is one that issues credit to consumers for purchase of untraceable goods and services, such as prepaid phone cards, pornography, drug paraphernalia and so on. Other examples include mail order brides, on-line dating services, home businesses and so forth. High risk merchant accounts are considered “high risk” because of the high potential for fraud committed by consumers using stolen credit cards or fake credit cards to make a purchase.
Purchases made with a stolen or invalid card generally cannot be traced back to the consumer making the buy. This is due to the fact that many high risk merchants do not require a legitimate copy of the person’s identification. In such cases, it can be months before the credit card issuer realizes that a fraudulent purchase has taken place and by then the consumer who made the buy may be long gone.
To illustrate just how risky issuing credit to consumers can be, consider the fact that high risk merchant accounts are often 10 times more likely to become victims of credit card fraud than low risk merchant accounts. Furthermore, if merchants fail to follow strict FTC guidelines regarding proper identification and authorization procedures during purchase, they could find themselves at the receiving end of a federal investigation.
For a long time, high risk merchants were unable to secure merchant accounts through traditional banks and merchant services providers. In fact, the only way these companies could obtain credit card processing was from oversized regional bureaus that charged exorbitant fees for their high risk merchant services. Oftentimes these companies ended up paying thousands of dollars just to get approved for a card processing account.
Thanks to the emergence of high risk merchant account providers, many companies now have access to affordable credit card processing services. These companies work with high risk merchants by underwriting their sales transactions and assuming all the associated risks in exchange for much smaller fees than those charged by traditional bureaus.
