Trying to figure out why your merchant account application keeps getting rejected?
You are not alone. Many business owners don’t realize their industry is considered “high-risk” until they receive a denial letter from a payment processor. And by then you’ve already spent weeks waiting.
Here’s the thing…
The difference between a high-risk and low-risk merchant account is huge. It affects:
- The fees you’ll pay every month
- How long approval takes
- Whether you can accept cards at all
In this article, you’ll learn what distinguishes the two and how to determine which one is needed for your business.
What you’ll discover:
- What Is a Merchant Account?
- Low-Risk Merchant Accounts Explained
- High-Risk Merchant Accounts Explained
- The Key Differences You Need To Know
- How To Get Approved Fast
What Is a Merchant Account?
A merchant account is a type of business bank account that allows you to accept payments from your customers via credit/debit card.
Without one, you can’t process card payments. Period.
The funds are deposited into your merchant account when a customer swipes their card. This money is then transferred to your regular bank account. Your payment processor will take a transaction fee.
But not all merchant accounts are equal.
Payment processors evaluate your business and assign you a “risk” level. From there, you are placed into one of two categories — low risk or high risk. This determines your fees, your approval chances, etc.
Low-Risk Merchant Accounts Explained
A low-risk merchant account is the easiest type to get approved for.
These cards are sold to merchants that the processors believe will have low chargebacks, low volume and no headaches from regulators. A coffee shop, local bookstore, or hardware store. Someone walks in off the street and pays. Very little opportunity for disputes.
Here’s what makes a business “low-risk”:
- Low chargeback ratios (under 1%)
- Average transaction sizes under $500
- Operate in stable, well-understood industries
- Sell physical, in-person products
- No legal or regulatory grey areas
If your business fits into these categories you will probably be approved rapidly. The processing fees for most low-risk businesses range from 3.49% to 3.95% per transaction plus a $.25 transaction fee.
High-Risk Merchant Accounts Explained
A high-risk merchant account is a merchant account where the processor believes the business is riskier than normal to deal with.
Merchant accounts like these are sometimes referred to as hard to approve merchant accounts because traditional merchant account banks and credit card processors will flat out deny them. If you have been previously denied, visit https://limitlesspaymentsolutions.com/ to find a specialist who works with these applications and offers a great solution for your business.
But what actually puts you in the high-risk bucket?
It usually comes down to one (or more) of these factors:
- Your industry has a history of high chargebacks
- You sell digital products or subscriptions
- You operate internationally
- Your average transaction size is large
- You’re in a legal grey area (CBD, vape, adult, etc.)
- You have bad personal credit or a new business
The reality is that many perfectly legitimate businesses are classified as high-risk through no wrong doing of their own. Travel, online gaming, supplements, firearms, and subscription boxes are almost always considered high-risk. It doesn’t mean anything is wrong on your end — it just poses a greater risk to the processor.
The Key Differences You Need To Know
Okay now let’s review the key differences between these two accounts. Knowing these differences will allow you to know what to expect when you apply.
Approval Time
Low-risk accounts get approved fast.
Most likely we’re looking at 24-48 hours. Processor does a cursory glance, doesn’t see anything suspicious and activates the account.
Riskier accounts take longer. Typically 1-2 weeks as underwriters will need to research your processing history, financials, ratios, etc.
Processing Fees
This is where the biggest gap shows up.
High risk merchants are charged between 4-8% in processing fees. Standard retail businesses can expect closer to 2-3%. Those few percentage points add up if you process a lot each month
For example, on $100,000 in monthly sales:
- Low-risk fees (~3%) = $3,000/month
- High-risk fees (~6%) = $6,000/month
That’s $36,000 a year in extra fees!
Chargeback Tolerance
Chargebacks happen with both account types. High risk accounts are monitored a lot closer though.
Visa considers you high-risk if you surpass a chargeback ratio of 0.90% or 100 chargebacks monthly. After crossing that threshold, they will mark you as high risk….and up the fees.
Chargebacks are skyrocketing. Ecommerce chargeback rates increased 222% from Q1 2023 to Q1 2024.
Rolling Reserves
Here’s something most people don’t talk about…
High-risk processors commonly place a hold on a percentage of your sales called a “rolling reserve.” This is money the processor is reserving just in case you receive chargebacks in the future.
Reserves are usually 5-15% of your monthly volume. The processor holds onto this for 6-12 months. This can really throw off your cash flow. Low risk accounts virtually never have reserves.
Contract Length
Low-risk accounts often come with month-to-month contracts. You can cancel anytime without penalty.
High risk accounts typically come with longer contracts — often 1-3 years. Early termination fees can be in the thousands. Read the fine print.
How To Get Approved Fast
Getting approved doesn’t have to be painful. Follow these steps:
Get your paperwork ready first.
Have your business license, EIN, voided check, processing statements, and ID ready ahead of time. Filling out your application will go by quicker this way.
Be honest about your industry.
Don’t attempt to conceal your businesses operations to appear low risk. Underwriters will find out, and you will get terminated — making future approvals much more difficult.
Lower your chargeback ratio.
When you apply, if you have priors, lower your dispute counts. Ones and twos will still ding you.
Work with a high-risk specialist.
If you know you’re high risk, don’t bother with banks. Self declare and head right on over to a specialist that works with your industry.
Final Thoughts
The distinction between high risk and low risk merchant accounts is determined by your processor’s perception of your business.
Low risk equals lower fees, quicker approval, simpler contracts. High risk equals higher fees, longer approval, more scrutiny.
Neither is bad … they’re just different. What is important is knowing which category you fall into BEFORE you start applying.
Quick recap:
- Low-risk accounts charge around 3% in fees
- High-risk accounts charge 4-8%
- High-risk accounts often require rolling reserves
- Travel, CBD, and subscriptions are almost always high-risk
- A specialist makes a huge difference for high-risk applications
Don’t freak out if your business has been declined in the past. There are many processors that accept businesses that others decline.
