High-Risk Businesses

Acquiring banks, payment processors, and other merchant service providers are allowed to be choosy about who they do business with. Some merchants carry higher levels of risk than others, and not every service provider is willing to take on so-called “high-risk” businesses.

Merchants who find themselves in this unfortunate position may find it very difficult or expensive to carry out some of the essential functions of a retail business, such as accepting credit card payments. What causes a merchant to get classified as a high-risk business, and what can be done about it?

It’s not easy to get by as a cash-only retailer these days, and if you’re an ecommerce merchant, it’s really not an option.

While there are more alternative payment methods than ever, the most accessible electronic payment method for the vast majority of consumers is still credit cards. Accepting credit card payments isn’t something a merchant can do entirely on their own.

You need a payment processor who can negotiate transactions with the issuing banks and card networks on your behalf, and you need a merchant account that can receive the funds from settled card transactions.

Merchants need to contract with one or more service providers to obtain these necessary services, but these arrangements tend to be more complex than the average vendor-to-client relationship. Service providers can be held financially liable for the fraud and chargebacks incurred by their merchants, so they have no choice but to be careful about which merchants they take on as clients, and to terminate merchant accounts that bring in excessively high rates of consumer disputes and credit card fraud. One of the ways they manage this is by establishing criteria for distinguishing regular, average-risk merchants from high-risk ones.

What Is a High-Risk Business?

Banks, payment processors, and other merchant service providers designate businesses as high-risk when they meet certain criteria that puts them over their acceptable risk threshold. They’re looking at factors that influence the likelihood that you’re going to end up costing them money due to fraud, chargebacks, or financial collapse.

Some of these factors are inherent to your business, such as the type of industry you’re involved in, or your geographical location.

They may also evaluate the owner’s personal financial situation. However, the biggest variable—the one that can turn an ordinary retailer into a “high-risk business” in a matter of months—is the volume of fraudulent transactions and chargebacks you receive.  

What Causes a Merchant to be Classified as High-Risk?

Many industries automatically get placed on the high-risk list simply because the products they sell or the markets they operate in are known for attracting lots of fraud and disputes. This often occurs in industries that sell goods that are illegal or highly regulated in some areas. If your business fits into any of the following categories, you might already be classified as high-risk:

• Adult entertainment
• Airlines and travel
• Cannabis
• Cosmetics and skin care
• Credit repair
• Cryptocurrency
• Debt collection
• Digital services
• Firearms and other weapons
• Gambling
• Gaming
• Multi-level marketing products
• Nutraceuticals
• Subscription services
• Telemarketing
• Ticket resellers
• Tobacco and vape products

Even if your industry is in the clear, there are still some things that can lead to immediate placement on the list:

• The business is headquartered in a different country
• The owner has bad personal credit
• Your average monthly transaction volume is $20,000 or higher
• Your average transaction amount is $500 or higher

If none of the above criteria apply, you shouldn’t be classified as a high-risk merchant—but you can still become one if your monthly fraud-to-transaction or chargeback-to-transaction ratios exceed 1% over a sustained period of time.

Acquirers and payment processors are responsible for enforcing the maximum fraud and chargeback thresholds established by the credit card networks. To motivate compliance, they charge costly fees and refer merchants to remediation programs, but ultimately, they will terminate the merchant accounts of clients who cannot get their fraud and chargeback problems under control.

This can cause those merchants to be placed on the MATCH list, a special high-risk classification recognized across the payment industry. Once you get placed on it, you’re stuck there for five years. 

What Are the Challenges Faced by High-Risk Merchants?

The main problem for high-risk merchants is that you have fewer choices when it comes to obtaining credit card processing services. You may be allowed to stay on with your current provider by paying additional fees and higher per-transaction rates, but if your merchant account gets terminated, you have no choice but to seek out specialized high-risk payment processors. These can get very expensive, and it’s not always easy to find a reputable provider that offers adequate support and uptime.

It’s also common for high-risk merchants to face additional burdens beyond the higher cost. The application process to open an account can be longer and more intrusive, and you may be asked to maintain a rolling reserve. That means you have to leave a certain amount of the funds in your merchant account untouched in case it is needed to cover unpredictable expenses such as chargebacks.

How Can Merchants Avoid being Classified as High-Risk?

For some merchants, riskiness just comes with the territory. If you’re running a subscription-based online gaming site, there’s not much you can do about payment processors that put you in the high-risk category based on your verticals alone.

If you’re still considered low-risk, the best way to keep that classification is to put up a thorough and vigorous defense against fraud and chargebacks. This may involve things like deploying AI-based anti-fraud tools, making use of chargeback deflection services, or instituting stricter authentication protocols.

To develop a truly effective strategy, you need to analyze your chargeback data to see exactly where your fraud and disputes are coming from.

Only then can you choose the most effective methods for reducing them, whether that points you toward technological solutions or operational changes.

It’s always a good idea to monitor your chargeback ratio so you know right away if you’re in any danger of exceeding your maximum threshold. When you see your chargeback rate starting to increase month after month, it’s time to step up your efforts to figure out where they’re coming from and how to stop them.

Conclusion

Even though you may feel more immediate pain from the loss of revenue, one of the most dangerous things about chargebacks is that too many of them can get you placed in that high-risk category and put your merchant account in jeopardy. Losing your ability to process credit card payments can paralyze your business, and the rates charged by high-risk processors can cut deeply into your profits.

Merchants in high-risk industries can anticipate these expenses and bake them into their business plans, but it can be a massive system shock for ordinary merchants to suddenly find themselves considered high-risk.

A strong, data-driven chargeback defense strategy can help you steer clear of this fate. If you find yourself inching closer to that 1% chargeback threshold and you don’t know how to turn things around, it’s a good idea to reach out to experts who can review your situation, crunch the raw data, and come up with a personalized plan to get you back on safer footing.

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