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What is a high-risk merchant account?

Farhan Malik

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A high-risk merchant account is a bank account or payment processing agreement suitable for a business deemed high-risk. High-risk businesses typically must pay higher fees for merchant services, which can increase their operating costs. Some companies work specifically with high-risk merchants, offering competitive rates designed to attract businesses that are having difficulty finding a place to do business.

Businesses in different industries are considered high risk due to the nature of the industry. All adult businesses are high risk, as are businesses such as travel agencies, car rental companies, collection services, legal gambling, surety bonds, etc. Because working with these companies can be risky for banks and payment processors, they are forced to sign up for high-risk merchant accounts that have different fee schedules than regular merchant accounts.

In a bank, a merchant account is a bank account that allows people to receive payments by credit and debit cards. The bank may also offer a payment processing contract, or the business may need to open a merchant account with a payment processor that collects the funds and routes them to the bank account. In the case of a high-risk merchant account, there are concerns about the integrity of the funds and the possibility that the bank could be called into question if something goes wrong.

Payments to a merchant account for high risk are considered to carry an increased risk of fraud. For example, a person may use a stolen or forged credit card to make purchases, or a consumer may use a debit card without sufficient resources to rent, say, a car. This increases the risk for the bank and the payment processor, as they will have to deal with the administrative fallout associated with fraud. E-commerce can also be a risk factor, as businesses don’t actually see a printed credit card; they take orders over the Internet, which greatly increases the risk of fraud.

In the e-commerce market, e-merchants compete for the quantity of goods and services sold to Internet consumers. To make payment for electronic transactions, consumers and e-merchants use an electronic payment system. Among consumers, some are “opportunistic” (ie they defraud if it is interesting and possible for them to do so) and others “honest” (non-scammers). We consider two types of electronic payment systems: a low security system and a high security system. Fraud is possible when the security level is low, but impossible when the security level is high.

E-Merchants

22In the electronic commerce market, n e-merchants compete on the quantities produced, each e-merchant produces a quantity q i of a homogeneous good for consumers and sells this good at price. To simplify the analysis, we normalize the marginal cost of production to zero and there are no fixed costs. To market their production, e-merchants use a low- level or high- level security system.