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Merchant accounts are used by businesses in order to collect credit card and debit card sales from customers. Businesses either can apply directly with banks or financial institutions, or can apply through an independent sales organization (ISO). Businesses classified as high risk usually must apply for an ISO and will be required to abide by tighter regulations and usually are charged higher fees.

High Risk Merchant Classification

Businesses are classified as being high risk if the bank or ISO determines that its business models or products and services will result in a large number of refunds or chargebacks. Banks will look at how the business’s products are sold, marketed, delivered, supported and the pricing strategy to determine if it is of high risk for them to process its transactions. Acquiring banks may decide to decline processing for a business if it does not want to underwrite it based on the nature of the products, its record of processing with other banks or for the potential liability of chargebacks.

The credit card associations, such as Visa and MasterCard, penalize banks that handle an excessive number of merchants with large numbers of refunds or chargebacks, therefore they need to minimize this risk by keeping a balanced portfolio of businesses. Examples of businesses that are often considered to be high risk are those within travel, timeshare, adult entertainment, gaming, loan modifications, call centers, collection agencies and telemarketing industries. In extreme circumstances, banks that do not balance its portfolio can result in getting fined so heavily that it must shut down operations.

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