Keeping High Risk Merchants Safe From Chargebacks
Running a business invariably involves taking on some degree of risk. No matter how solid your business plan, there’s no such thing as a sure thing. In ecommerce, where the entire world is your marketplace but the competition is as fast-moving and fierce as you’ll find anywhere, that goes double—but even among online merchants, there is a hierarchy of risk. For high risk merchants, it can be difficult and costly to find anyone willing to assist in processing their credit card payments.
When the card networks, merchant service providers, and payment processors deem a merchant to be “high risk,” they’re not talking about the chance that the business itself will stay solvent and profitable—not directly, at least. What they are evaluating is the risk they are taking on by handling that merchant’s payment card transactions.
To make the necessary connections between a customer, their issuing bank, the merchant, and the merchant’s acquiring bank, various parties are involved in the payment process. The card network may provide the platform and rules under which the transaction is carried out, the MSP hooks up the issuers and acquirers, the payment processor handles the transaction details at the point of sale. Each party charges fees for their role in the process, not just to compensate for their time and labor, but also to offset the risk they’ve taken on.
What is a High Risk Merchant?
When disputes occur and charges are reversed, either because of the customer, the merchant, or outside actors such as fraudsters, the interchanges fees and other premiums that these parties expect to make off of these transactions can evaporate. For that reason, some payment processors and MSPs refuse to deal with high risk merchants, or charge them much higher fees for their services.
There’s more than one way to be classified as a high risk merchant. Much of it has to do with the likelihood that your transactions will be disputed or reversed. If you’re in an industry with historically high rates of fraud or customer disputes, or if the products or services you sell are subject to a longer-than-typical chargeback liability timeframe, you will likely be categorized as a high risk merchant.
Most payment processors have a certain threshold—usually about 1%--for the chargeback rate their merchants are permitted to have. If the merchant exceeds that rate, they may lose their account or be charged additional fees.
Lastly, regardless of any specific account activity, some industries are considered “high risk” due to their reputation, and any merchant involved in those industries may be considered high risk. Here’s a non-exhaustive list of these industries:
- Tickets and reservations
- Adult entertainment
- Luxury goods
- Recurring subscriptions
- Online gaming
- Pharmaceuticals and cannabis
- Multi-level marketing
A merchant’s finances and personal credit history may also be a factor, if they can’t demonstrate an ability to cover the expected amount of chargebacks their sales volume will generate.
Also, it should go without saying that merchants who end up with a Terminated Merchant File, or placement on the MATCH list, will be treated as high risk merchants.
Processing Payments for High Risk Merchants
Some payment processors will screen out certain types of high risk merchant and refuse to do business with them. This is more commonly the case with industries that aren’t legal everywhere, such as gambling or cannabis. These merchants may have to seek out payment processors that specialize in high risk accounts.
For other merchants, the only thing standing in between them and their preferred payment processor is money. Payment processors often quote rates that are 2% higher or more per transaction for high risk merchants, but few publicize their “high risk” rates.
It’s also common for MSPs to require high risk merchants to establish a cash reserve to insulate them from the consequences of excessive chargebacks. This may take the form of a rolling reserve that temporarily withholds a portion of each day’s revenue, an up-front reserve that must be put up before opening the merchant account, or a fixed reserve that draws a portion of every processed transaction until a certain cap is reached.
Chargeback Defense for High Risk Merchants
There are some universal best practices for avoiding chargebacks that are good general business advice as well: maintaining a high level of quality control on your products, providing excellent and proactive customer service, establishing clear terms and conditions of sale and communicating them clearly to all of your customers. There are also some specific tips for high risk merchants.
First, make sure that when customers read their bank statement, there’s no reason for them to struggle to figure out what your transaction was for. Your business name should be clear and unambiguous. Having one business name on your storefront and a different one as the “merchant name” that gets printed on statements is a recipe for confusion and chargebacks.
Next, provide as much transparency and clarity as you possibly can about what you are selling. Don’t withhold information about your products, your billing policies, or anything else that might cause friction for a customer just to make it easier to close the sale—when they end up disappointed and dispute the charge because you weren’t completely upfront with them, it will come back to bite you.
Finally—and most importantly—provide as robust and up-to-date a defense against fraud as you can muster. Use anti-fraud tools like 3-D Secure and learn to spot all the warning signs of fraud, and refuse transactions that don’t pass the smell test. When you can identify a fraudster in your customer database, block them from making future purchases.
Being labelled a “high risk merchant” isn’t what any ecommerce entrepreneur wants to hear, but it’s not a death sentence. If you’ve been assigned to this category because of your chargeback rate, you can devise a strategy to bring it back down and shop around for a better deal on payment processing once you’ve got things sorted out. In the meantime, look for the best deal you can find on high risk merchant services.
Some businesses, due to their nature or their history, may be stuck in the high risk bin indefinitely, but it’s still important for those merchants to follow the best practices for stopping chargebacks and improve their business operations to provide the best products and service they can. Just because you’re high risk doesn’t mean you can’t steer clear of the hazards!