In the world of payment processing, not all businesses are created equal. Some are deemed “high risk” by banks and payment processors, necessitating specialized merchant accounts to manage their transactions. But what exactly makes a business high risk? In this blog, we’ll explore the factors that classify a business as high risk and the implications for obtaining a high risk merchant account.
Understanding High Risk Merchant Accounts
A high risk merchant account is a type of account designed for businesses that are perceived to have a higher likelihood of chargebacks, fraud, or other financial risks. These accounts are tailored to meet the unique needs of high risk businesses, offering higher levels of scrutiny and specialized support.
Factors That Make a Business High Risk
Several factors can contribute to a business being classified as high risk. These include:
- Industry Type
Certain industries are inherently considered high risk due to their nature. Examples include:
- Adult Entertainment: Businesses in the adult entertainment industry face high chargeback rates and regulatory scrutiny.
- Gambling and Gaming: Online gambling and gaming sites often experience high transaction volumes and potential fraud.
- Travel and Hospitality: These businesses are prone to chargebacks due to cancellations and disputes.
- Health and Wellness Products: Supplements, weight loss products, and other health-related items often face regulatory challenges and customer dissatisfaction.
- High Chargeback Rates
Businesses with a history of high chargeback rates are deemed risky. Chargebacks occur when customers dispute a transaction, leading to potential financial losses for the merchant and the payment processor.
- International Transactions
Companies that conduct a significant amount of international business are considered high risk due to the increased potential for fraud and currency fluctuations.
- Subscription-Based Services
Subscription-based businesses, such as membership sites or recurring billing services, face higher risks due to the potential for long-term disputes and cancellations.
- New or Unstable Businesses
Startups and businesses with limited operating history or unstable financial records are often classified as high risk. Without a proven track record, they are seen as more likely to encounter financial difficulties.
- High Average Transaction Value
Businesses with high average transaction values, such as luxury goods retailers, are deemed high risk due to the potential for significant financial loss from a single fraudulent transaction.
- Reputation and Legal Issues
Businesses with a history of legal issues, regulatory violations, or a poor reputation are considered high risk. This includes companies that have faced lawsuits, government investigations, or negative media coverage.
Implications of Being a High Risk Business
Being classified as high risk has several implications for a business:
- Higher Fees
High risk merchant accounts typically come with higher processing fees and transaction costs. Payment processors charge these fees to offset the increased risk they assume.
- Rolling Reserves
Payment processors may require high risk businesses to maintain a rolling reserve. This involves holding a percentage of the business’s revenue in reserve to cover potential chargebacks and disputes.
- Stricter Terms and Conditions
High risk merchant accounts often come with stricter terms and conditions. This includes more rigorous underwriting processes, enhanced fraud detection measures, and stricter compliance requirements.
- Limited Processor Options
High risk businesses have fewer options when it comes to choosing a payment processor. Many traditional processors may refuse to work with high risk businesses, necessitating the use of specialized high risk processors.
- Increased Scrutiny
High risk businesses face increased scrutiny from payment processors and regulatory bodies. This includes regular audits, enhanced monitoring, and strict adherence to compliance standards.
How to Manage a High Risk Business
- Maintain Financial Stability
Demonstrating financial stability and a solid business plan can help mitigate the perception of risk. Keeping detailed financial records and showing a history of profitability can be beneficial.
- Implement Robust Fraud Prevention Measures
Investing in advanced fraud prevention tools and practices can reduce the risk of chargebacks and fraudulent transactions. This includes using secure payment gateways, implementing customer verification processes, and monitoring transactions for suspicious activity.
- Enhance Customer Service
Providing excellent customer service can help minimize disputes and chargebacks. Promptly addressing customer concerns, offering clear return and refund policies, and maintaining open communication channels are crucial.
- Work with Experienced Payment Processors
Partnering with a payment processor experienced in handling high risk businesses can provide the necessary support and expertise. Look for processors that offer specialized services, flexible terms, and robust fraud prevention measures.
Conclusion
High risk merchant accounts are essential for businesses that operate in industries or circumstances that carry higher financial risks. By understanding what makes a business high risk and taking proactive measures to manage these risks, businesses can secure the payment processing solutions they need to thrive. Whether you’re starting a new venture or managing an existing high risk business, it’s crucial to work with the right partners and implement strategies that ensure financial stability and growth.