High-Risk Chargeback Protection

Table of Contents

  1. What Is a High Risk Merchant?
  2. How Does Payment Processing Work for High Risk Merchants?
  3. How Can High Risk Merchants Prevent Chargebacks?

There's a lot of risk involved in the financial industry, from defaulted loans and credit to theft and fraud. Most companies do their best to minimize the amount of risk they carry without hurting their profits. For many banks and payment processors, this means refusing to take on merchants they consider "high risk."

Merchants in certain industries as well as those with high rates of fraud and chargebacks are usually classified as high risk, and being labeled high risk has consequences for merchants with regard to payment processing, merchant accounts, and chargebacks. What do merchants need to know to keep from being labeled high risk, and what do high risk merchants need to know about payment processing and chargebacks?

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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.

When 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're evaluating is the risk they are taking on by handling that merchant’s payment card transactions.

What Is a High Risk Merchant?

A high risk merchant is one that has a high rate of chargebacks or that is expected to have a high rate of chargebacks based on the industry the merchant is in. These merchants usually pay higher fees for payment processing.

There’s more than one way to be classified as a high risk merchant. Much of it has to do with the likelihood that their transactions will be disputed or reversed. If a merchant operates in an industry with historically high rates of fraud or customer disputes, or if the products or services they sell are subject to extended time limits for filing chargebacks, they're likely to be categorized as high risk.

Most payment processors define a maximum chargeback rate—often 1%—that their merchants must stay below. If a merchant exceeds that rate, they may be charged additional fees and could even have their account terminated.

If a merchant's account is terminated because of excessive chargebacks, they will typically be added to an industry blacklist called the MATCH list. Merchants on the MATCH list will be classified as high risk for that reason alone.

Some merchants are classified as high risk simply because of the reputation of the particular industry they're in. Here’s a non-exhaustive list of industries often considered high risk:

  • Tickets and reservations
  • Adult entertainment
  • Luxury goods
  • Recurring subscriptions
  • Online gaming
  • Pharmaceuticals and cannabis
  • Firearms
  • Electronics
  • Multi-level marketing

A merchant’s finances and personal credit history may also be a factor. Merchants must demonstrate the ability to cover the expected amount of chargebacks their sales volume will generate.

How Does Payment Processing Work for High Risk Merchants?

High risk merchants are often charged significantly higher fees by payment processors, and some may be rejected entirely. These merchants are also often required to maintain a certain level of reserve funds in their merchant account to prevent chargebacks from sending it into the red.

Manage Chargeback In-House Or OutshoreWhenever a merchant receives a chargeback, it costs their processor time and money. While some of that is recouped through the chargeback fee, most processors still prefer to keep the overall chargeback volume they have to deal with low. For that reason, some payment processors refuse to deal with high risk merchants.

Processors are especially likely to reject merchants in 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 high risk merchants, it may be that the only thing standing in between them and their preferred payment processor is money. Processors often quote rates that are 2% higher or more per transaction for high risk merchants, but few publicize these increased rates.

It’s also common for merchant service providers 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 funded before opening the merchant account, or a fixed reserve that draws a portion of every processed transaction until a certain cap is reached.

How Can High Risk Merchants Prevent Chargebacks?

There are some universal best practices for avoiding chargebacks: maintain a high level of quality control on your products, provide excellent customer service, establish clear terms and conditions of sale, and communicate those terms 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 name that gets printed on bank statements is a recipe for confusion and chargebacks.

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 a customer ends up disappointed and disputes the charge because you weren’t completely upfront with them, deceitful sales tactics can come back to bite you.

Most importantly, make sure your defenses against fraud are robust, effective, and up to date. Use anti-fraud tools like 3-D Secure and learn to spot all the common indicators of fraud. When you can identify a fraudster in your customer database, block them from making future purchases.

Being labeled a high risk merchant isn’t a pleasant experience for any merchant, but it’s not a death sentence either. 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, whether due to their nature or their history, may be stuck in the high risk bin indefinitely. However, it’s still important for those merchants to follow the best practices for stopping chargebacks, as well as to improve their business operations and 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!

Thanks for following the Chargeback Gurus blog. Feel free to submit topic suggestions, questions, or requests for advice to: win@chargebackgurus.com

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