Being a high risk business is not easy in the fast-paced digital payment world. If establishing a profitable company online wasn’t already hard enough, some merchants may also get labeled as “high risk” by payment processors, ending up in a difficult situation for accepting payments online.
But exactly does it mean to be a high risk business, and what can you do if your company happens to be one? In this article, we explain 8 important things you need to know if you are running a business on the riskier side of the spectrum.
1. Understanding the concept of high risk
The global economy is growing because all industries work to achieve a common goal: the highest number of transactions that will bring the highest revenue possible (which is directly proportional to the number of sales).
However, the equation is not that simple. Customers, companies and bank institutions can’t work together if they aren’t getting the value that they are paying for.
The customer wants to get the exact product he ordered, with the precise quality and delivery as promised by the seller. The merchant wants to generate a sale, and gain revenue from the customer as fast as possible. The financial institution, on the other hand, wants that buyers and sellers keep the value of their agreement, without ever disputing the transaction or misusing the payment processing structure – because in the end, it is precisely this institution that covers the maximum risk of payment processing.
Because financial institutions assume the risk associated with online payment processing, and it costs them money, they want to make sure that it is kept as low as possible. For this reason, they define businesses in 3 categories: Low, Mid, and High Risk. High risk businesses are the least likely to get an account with the majority of acquirers because they involve massive risk for all three parties.
2. Factors that determine a high risk business
There are many factors that might get your business labeled as high risk. They can be sorted into two categories: red zone (you operate in an industry that is considered high risk independently from your individual business history), or grey zone (businesses that are high risk due to their own processing history or performance).
These factors include (but are not limited to):
- Your sector is listed on a High Risk Industries List (see more in point 3)
- You are not compliant with the security regulations of your industry
- You are in a sector with high chargeback ratios
- You are in a sector with a high employee turnover rate
- You do business in countries with high chargeback risk (such as Brazil, Mexico, Russia, etc.)
- You’ve been previously labeled as a Terminated Merchant (TMF), which means that you’ve already lost a merchant processor due to excessive number of chargebacks.
- Your business is relatively new, and with little to no credit card processing history.
- You have a bad credit card history (such as not paying bills on time, or not providing a collateral for loans as high risk).
- You are experiencing a high number of chargebacks (above 1%)
- You are an international merchant with a multi-currency business
- You experience a high volume of refunds and returns
3. If your business is in the grey zone
If your company falls into the grey zone, your business history is going to play a huge role in the type of credit card processing that will be available to you. New businesses without processing history are usually at a disadvantage, especially in the case of card-not-present payments where fraud risk is higher.
Generally speaking, businesses in the grey area with good processing and stable financial history can usually find a provider to help them enable online payments. However, it will be more challenging for young companies or companies with poor history.
4. If your business is in the red zone
If your company falls into the red zone because you are operating in a high risk industry, you can still find a provider to help you accept payments online. Payment Gateways such as MYMOID are specialized in certain high risk industries, and can help you partner with an acquirer to obtain a Virtual POS Terminal.
5. What industries are usually flagged by processors?
The most common high risk businesses include (but are not limited to):
- Online Gambling, Online Gaming, and Casinos
- Sports Booking
- Travel and Advanced Booking
- Subscription-based services
- Telemarketing services
- Bitcoin Mining or Forex Trading
- Cannabis Products / Head Shops
- Online Dating and Adult services
- E-cigarettes and tobacco
One of the biggest reasons why industries like Travel and Booking are usually flagged is the high number of chargebacks and fraud associated with these services. A common malicious practice involving Friendly Fraud is that the user booked or purchased a trip, consumed it, and claimed that he never actually did it in the first place, with the purpose of getting his money back.
6. Maximum chargeback ratio
As we already mentioned, many industries that fall into the red zone, such as travel and booking, are considered high risk because they experience an excessive number of chargebacks.
One of the most important things that any high risk business should know is that chargebacks are a natural part of doing business, and that any merchant will experience a legitimate or a non-legitimate chargeback at some point of his business growth. It is normal and there is no technique that can reduce chargebacks to an absolute zero because you can’t prevent customers from disputing a charge if they don’t recognize it or agree with it (and sometimes, for valid reasons).
Most frequent reasons that trigger a chargeback
However, there is a chargeback ratio (number of chargebacks-to-transactions) that you should ALWAYS stay below if you don’t want to get penalties from the payment network: 1%. In other words, if your chargeback ratio is greater or equal than 1%, payment processors may place you on a high risk list such as the MATCH list – of course, not before warning you several times before that.
7. Reducing chargeback ratio
If you are a high risk business that receives an alarming number of chargebacks, don’t worry – the battle is not lost yet. To help you understand and apply the best practices for handling disputes, we wrote the article 10 ways to reduce chargebacks. It includes our tips and recommendations on how to work on improving your chargeback ratio.
8. The consequences of being a high risk business
If your company or the industry you are operating in is considered risky, the chances are that you will find it difficult securing a standard account with most acquirers. Usually, the majority of companies will have to go with a high risk merchant account, incurring in various restrictions and higher processing fees.
Another consequence that high risk companies should be prepared about concerns chargeback thresholds – when low risk merchants enter the chargeback monitoring program of a card network, they are usually given more time and flexibility to solve the issue. However, high risk merchants are immediately fee-eligible, meaning that excessive fees will be applied for each month the merchant remains in a chargeback monitoring program.
Now that you’ve understood the major concepts and consequences of being a high risk merchant, you can start working towards solving the challenges that are keeping you from accepting digital payments.
If your business is dealing with this kind of situation, get in touch with us to discuss the opportunities that our multi-acquiring Payment Gateway gives to high risk businesses. We might be able to help you find the right acquirer without incurring in excessive fees or multiple restrictions.