Merchant accounts are classified as low risk, mid risk, or high risk based on the level of risk associated with the type of business and its history of chargebacks and fraud.
Low risk merchant accounts are associated with businesses that have a low likelihood of chargebacks or fraud. These businesses typically sell low-cost, tangible goods and have a well-established customer base. Examples of low risk businesses include retail stores that sell clothing, books, and electronics.
Mid risk merchant accounts are associated with businesses that have a moderate likelihood of chargebacks or fraud. These businesses typically sell products or services that are somewhat unique or high-ticket items, and may not have a long history of processing payments. Examples of mid-risk businesses include online retailers, travel agencies, and subscription services.
High risk merchant accounts are associated with businesses that have a high likelihood of chargebacks or fraud. These businesses typically sell products or services that are high-ticket items or are associated with a high likelihood of chargebacks, such as digital goods, or have a high rate of chargebacks or fraud in the past. Examples of high-risk businesses include online gaming, adult entertainment, and e-cigarettes.
Due to the high potential for chargebacks and fraud, high risk merchant accounts usually come with additional fees and higher processing rates compared to low and mid risk accounts. Additionally, they may have more strict rules and restrictions, like rolling reserve, to mitigate the risk.
Fees Based on Risk Level:
Interchange prices are the fees that merchants must pay to card issuing banks for processing card payments. The fees are determined by a number of factors, including the type of card being used, the type of transaction, and the risk level of the merchant.
Low risk merchant accounts typically have lower interchange fees because they are associated with businesses that have a low likelihood of chargebacks or fraud. These businesses typically sell low-cost, tangible goods and have a well-established customer base. Because of the lower risk, card issuing banks are willing to charge lower fees for processing transactions.
Mid risk merchant accounts typically have higher interchange fees than low risk merchant accounts, but lower than high risk merchant accounts. These accounts are associated with businesses that have a moderate likelihood of chargebacks or fraud. These businesses typically sell products or services that are somewhat unique or high-ticket items, and may not have a long history of processing payments. Due to the increased risk, card issuing banks charge higher fees for processing transactions.
High risk merchant accounts typically have the highest interchange fees because they are associated with businesses that have a high likelihood of chargebacks or fraud. These businesses typically sell products or services that are high-ticket items or are associated with a high likelihood of chargebacks, such as digital goods, or have a high rate of chargebacks or fraud in the past. Card issuing banks charge higher fees to compensate for the increased risk of chargebacks and fraud.
It’s worth noting that the Interchange fees are set by the card networks such as Visa and MasterCard, and merchants cannot negotiate on them. However, there are other costs, such as the processing fees, that can vary based on the merchant’s agreement with the payment processor.
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