A merchant account is essential if you are running a business. It is a type of commercial bank account that allows business owners to accept payments via credit and debit cards.
Merchant accounts prove to be an essential part of businesses in today’s day and age, where people are going cashless and using plastic money in the form of debit and credit cards, is on the rise.
It also allows business owners to accept payment in other electronic forms for instance via e-wallets.
Not having a merchant account might affect your business in adverse ways as most customers pay via credit card. So, not accepting credit cards can hurt the business in more ways than one.
The difference between high-risk and low-risk merchant accounts is that a merchant account is labeled high-risk because they are likely to have a high number of returns, charge-back requests, and refund requests.
How Does a Merchant Bank Account Work?
Business owners need to choose an account service provider that benefits them. They need to choose a provider that delivers an array of services and has the least added fees.
For this, merchant acquiring bank plays an important role in the electronic payment process and are important for efficient and faster processing and settlement of payments.
The services that are provided by the merchant bank include all the financial tools, software, and other things you might need to establish and continue with a merchant account.
When a customer chooses a credit card, debit card, or an electronic method to pay for a product or service, the money is first deposited to a merchant account and then is transferred to the business bank account.
This transfer from the merchant account to the business account is done on either a daily or a weekly basis.
There is also a certain amount of fees that are charged by the provider. The provider associates a transaction to a particular amount and charges that amount on every transaction.
So, before getting a merchant account, the business owner should look carefully into these charges and then make a decision on a merchant provider. Some amount of additional fees may include setup fees, monthly maintenance fees, and transaction fees.
A business owner or a company can either have a dedicated merchant account or an aggregated merchant account depending upon the transactions that are made on a daily basis. It also depends on the volume of sales and the size of the company.
High-Risk Merchant Account
High-risk merchant accounts are accounts that are made for businesses that are considered to be of high risk. High-risk businesses are prone to more chargebacks and refund requests.
Because of this, the fee charged for merchant services is higher. There are several factors that might make your business qualify as a high-risk merchant account. These factors include industry type, processing history, country of incorporation, etc.
A company or a business is considered to be of high-risk if the chargeback ratio is greater than 1%, monthly sales value is more than $20000 and the product or services of the company are provided to countries that have high levels of fraud.
Low-Risk Merchant Account
Low-risk merchant accounts are accounts that are provided to businesses or companies that are of low-risk. They are prone to fewer chargebacks or refunds. The fee charged for the account is also less.
A company or a business should have a monthly sales value of less than $20,000, the product or service provided by the company should be low-risk, and they do not have many returns, and they sell in countries that are low fraud risk, for it to be deemed as a low-risk merchant.
Difference Between a High-Risk Merchant Account and a Low-Risk Merchant Account
| High-Risk Merchant Account | Low-Risk Merchant Account |
| Usually given to new businesses due to the age of the business. | Old businesses and companies can get low-risk merchant accounts of other factors are fulfilled. |
| They deal with multiple currencies which means that their service/product is provided in multiple countries. | They deal with one currency which means that their service or product is provided in one country only. |
| The average transactions of the business or company are higher than $500. | The average transactions of the company or business are less than $500. |
| The business or company can get a high-risk merchant account if the business owner has a bad credit history. | The business owner should have a good credit history to get a low-risk merchant account. |
| Businesses offering subscriptions get high-risk merchant accounts due to high chargebacks. | Companies not dealing with the subscription-service model get a low-risk merchant account. |
| Product or services provided by the business include high-risk software, digital and seasonal items. | The products/services provided by the business or company are low-risk such as clothing, shows, or office equipment. |
| Examples of companies or business owners with high-risk merchant accounts include attorneys, cryptocurrency, health and beauty, hotel and lodging, luxury items, etc. | Examples of companies or business owners with low-risk merchant accounts include clothing, pet supplies, books, retail stores and more. |
| If the sales are in high volume or if the sales are of high-priced items, then a company or a business will get a high-risk merchant account. | If the sales are less in number and are of low-priced items, then the company or business will get a low-risk merchant account. |
There are several benefits of being a high-risk merchant and as a result, getting a high-risk merchant account. The company or the business gets to sell their product or service all over the world with a wider demographic to target.
They also get to sell high-valued items which may lead to profit. But they also pay more credit card fees and have to deal with several other issues to keep their business going.
High-risk merchants also are locked under longer contracts so getting out of the contract might be tricky.
The alternative to a merchant account is dealing with companies that provide online payments such as PayPal, Google pay, etc.
Another alternative can be to deal with different credit card companies instead of one merchant account provider. It is ultimately the decision of the owner.
