Thinking about starting a subscription business but aren’t sure how to get paid?
Applying for your first merchant account is one of the most daunting tasks facing any entrepreneur. And most business owners mess it up at least once before they figure it out.
Let’s talk about why that is…
Subscription billing businesses are flagged as high-risk right off the bat. Period.
Underwriters at payment processing companies see recurring charges, increased chargeback activity and unpredictable month-over-month revenues. Which translates to risk.
When risk is detected, applications get put on hold… and often denied outright.
The good news? 9 out of 10 denials can be avoided.
But first, you need to know what they’re looking for.
In this article:
- Why Subscription Businesses Are Considered High-Risk
- 3 Common Mistakes That Lead To Denial
- Top 3 High Risk Payment Processors
- 5 Steps To Getting Approved
Why Subscription Businesses Are Considered High-Risk
If you were running a traditional brick and mortar retail business today, your payment journey would be much different.
That’s because subscription billing services are held to a different standard than regular stores.
Forgetful customers open charge disputes months after signing up. Digital goods merchants have astronomical chargeback rates. Predicting revenue is nearly impossible.
As a result, data shows that chargebacks hit 1.85% across SaaS and digital subscription businesses. If chargebacks exceed 1%, chances are your application will be flagged.
Subscription businesses need a high-risk merchant account capable of managing high volumes of recurring transactions.
Here are some other characteristics that make subscriptions high-risk:
- Customers who forget about recurring charges
- Natural increases in refunds and chargebacks
- Weekly/card-not-present transactions
- Monthly revenue that goes up and down
Once you understand why subscription businesses are considered high-risk, you can start preparing your application accordingly.
As you’ll see below… that’s where most entrepreneurs go wrong.
3 Common Mistakes That Lead To Denial
Believe it or not, most business applications are denied because of issues with the application—not the business.
Incomplete applications, misunderstanding terms, and leaving out critical business details are the biggest causes for denial.
Here are the things you absolutely need to avoid…
Applying Before Understanding Your Risk Classification
Many entrepreneurs simply apply for processing through standard companies like Stripe, PayPal or Square.
Wrong answer.
Subscription billing is not standard. Don’t waste your time sending in applications to processing companies that don’t work with high-risk businesses.
Know the type of business you have. Apply with companies that specialise in those businesses.
Incomplete Applications / Poor Documentation
Applicants will often get denied because the owner failed to include important information or documents.
This cannot be stressed enough…
If you send in an application that’s missing key information, it will be denied.
Take your time. Make sure you have all the requested information and that everything is filled out correctly.
No Chargeback Monitoring or Prevention Strategy
Here’s another big one…
Payment processors hate chargebacks. This is nothing new.
But did you know that chargebacks are expected to hit 324 million transactions annually by 2028?
It’s true.
Subscription businesses who aren’t prepared for that reality are going to get denied.
Major credit card companies are paying attention. They see the trends coming and they’re requiring merchants to have a plan to combat chargebacks.
Make sure there are measures in place to…
- Monitor chargebacks
- Alert you when chargebacks occur
- Offer easy cancellation options
- Provide exceptional customer service
- Have a straightforward refund policy
Processors want to see businesses take chargeback prevention seriously. Without a plan, the application will be instantly denied.
Hiding Business Information
Lastly, some entrepreneurs try hiding their business model in hopes the processor won’t notice.
For example:
“It’s just a media company that sells online courses.”
Does the merchant account provider know online courses are being sold? Of course not.
Media companies are considered high-risk and face intense scrutiny during the application process. Don’t make processors feel like information is being hidden from them.
Top 3 High Risk Payment Processors
The right processor can make all the difference between approval and denial.
But not all payment processors are created equally. Ideally, you want to find a high-risk merchant account provider who specialises in subscription billing businesses.
Here are the top 3 payment processors for high-risk businesses:
Ranked in order.
1. 2Accept
Hands down, the best choice for subscription billing businesses. 2Accept specialises in high-risk industries and understands exactly how to process recurring payments without issuing freezes left and right.
Having worked exclusively with high-risk industries for over a decade, 2Accept built their business around helping entrepreneurs get approved and stay approved.
2. PaymentCloud
PaymentCloud specializes in subscription businesses. They offer incredibly high approval rates and work with clients one-on-one to help guide them through the entire process.
The biggest benefit with PaymentCloud is their approval rates. PaymentCloud’s dedicated account managers have years of experience navigating approvals and they work with merchants on every step.
3. Durango Merchant Services
The third recommendation is Durango Merchant Services. Durango is perfect for businesses that are hard to place with traditional banks or if offshore processing is required. They also have a great suite of fraud prevention tools.
5 Steps To Getting Approved
Here’s a secret…
Getting approved the first time isn’t hard. If the research has been done and the proper documentation prepared in advance, the application will be approved.
Here are the steps to take before hitting that submit button.
Step 1: Gather Documentation
Have your ducks in a row before you begin the application. Documentation matters. Everything from processing history to refund policies should be laid out neatly when you apply.
Step 2: Choose The Right Processor
This step can’t be skipped. As mentioned above, you need to apply with payment processors that specialise in high-risk businesses.
Stick with companies that have experience working with high-risk subscription businesses. That way you’ll avoid the standard processors who instantly deny you.
Step 3: Chargebacks Should Be Low
If chargeback prevention hasn’t been installed or chargeback rates are currently high, now is the time to take care of that.
The lower the chargebacks, the more likely the application will be approved by the processing company of choice. Keep chargebacks below 1% at all costs.
Step 4: Have A Plan For Customers
During the application process, you’ll be asked to explain the business model. You’ll want to do this verbally as well.
Things like having clear billing descriptors, easy cancellation policies, and providing great customer service should be communicated to the processing company.
It’s always best to be over prepared than unprepared.
Step 5: Don’t Hide Anything
This has already been covered above, but it’s worth saying again.
Tell the processor EVERYTHING about the business.
Where will customers come from? What’s the expected monthly volume? How much are customers spending on average? Who is the target demographic?
The more information provided upfront, the better off the application will be.
Wrapping Things Up
Getting approved for the first time is never easy. But when running a subscription billing business, there are some extra steps you’ll need to take.
The biggest mistake entrepreneurs make is applying with the wrong payment processor. Most payment companies won’t even consider high-risk businesses because of their high chance of fraud.
By knowing the risk classification, preparing documentation, and laying all the business details on the table… you’ll be setting yourself up for success.
