For businesses, accepting credit card payments is critical. However, the type of processing solution you choose can make a significant difference in cost, risk management, and approval potential. While most businesses qualify for traditional processing services, some fall under the “high risk credit card processing ” category. But how do these two options differ, and what should business owners consider when choosing between them?
This article provides a concise breakdown of high-risk credit card processing and traditional processing to help you evaluate which option suits your business needs.
What Defines High-Risk Credit Card Processing?
High-risk credit card processing is designed for businesses that are considered to have a higher likelihood of chargebacks, fraud, or financial volatility. Industries already labeled as “risky” include adult entertainment, travel, CBD products, and subscription-based services. Additionally, startups or businesses operating in highly competitive markets may also fall under this category.
Because of the higher liability, merchant service providers impose additional requirements and fees for high-risk accounts. They often require businesses to maintain higher reserves and implement stricter fraud prevention measures.
Common Features of High-Risk Credit Card Processing
- Higher Processing Fees:
High-risk merchants are typically charged higher transaction fees. Rates can range from 4% to 10%, depending on the business model.
- Rolling Reserves:
Many high-risk processing agreements include withholding a percentage of sales for a specified time to cover potential chargebacks or disputes.
- International Acceptance:
High-risk processors often allow businesses to accept payments from international markets more effectively. For some industries, this is a significant advantage.
- Custom Fraud Tools:
Many processors offer more sophisticated fraud monitoring and management to manage potential risks.
How Does Traditional Credit Card Processing Work?
Traditional credit card processing is tailored for low-risk businesses with predictable operations and strong financial stability. Retail shops, restaurants, salons, or brick-and-mortar stores with reliable transaction histories typically qualify for this tier of service.
The approval process for traditional processing is generally straightforward and comes with fewer fees or restrictions. With lower risk involved, merchants enjoy more favorable terms.
Features of Traditional Credit Card Processing
- Lower Transaction Costs:
Transaction fees hover between 1.5% and 3%, making it more cost-effective than high-risk alternatives.
- Limited Fraud Coverage:
Unlike high-risk processors, fraud prevention tools may be basic or limited, as businesses in this category are deemed less susceptible.
- No Rolling Reserves:
Traditional processors typically don’t withhold a percentage of your funds, giving businesses immediate access to their earnings.
- Faster Approvals:
Low-risk accounts benefit from quicker approval times, ensuring businesses can start processing transactions promptly.
Key Differences Between High-Risk and Traditional Processing
1. Fees and Reserves
High-risk processing involves noticeably higher transaction fees and often requires businesses to maintain rolling reserves. On the other hand, traditional processors charge lower fees and enable businesses to access full transaction revenue without reserve restrictions.
2. Fraud Management
High-risk processors typically offer advanced fraud-detection tools to mitigate risks, while traditional services provide basic fraud protection due to lower exposure.
3. Approval Complexity
For businesses in high-risk industries, securing approval can be challenging, requiring thorough documentation and higher scrutiny. Conversely, traditional processing approval is more straightforward and faster.
4. Market Reach
High-risk processors often facilitate international transactions, making them suitable for businesses with global audiences. Traditional processors usually prioritize domestic transactions.
What to Choose?
Choosing between high-risk credit card processing and traditional processing depends on the nature of your business. If your industry is categorized as high-risk, opting for a specialized solution that safeguards your operations against fraud and chargebacks will be essential. However, for low-risk businesses, traditional processing remains the more cost-effective and straightforward choice.
Understanding your business model, transaction volume, and exposure to risks is key to selecting the right payment processing method. Making the right choice now could save your business time and money while ensuring smoother operations in the long run.
