Why Your Business Might Be Considered High-Risk (And What to Do About It)

In the world of merchant processing, not all businesses are created equal. Some industries are considered “high-risk,” which can make it challenging to secure a reliable payment processor and acceptable processing rates. Understanding why your business might fall into this category is the first step toward mitigating the risks and finding a suitable payment solution.

So, what makes a business high-risk? It’s not necessarily a judgment on the quality of your product or service, but rather a reflection of the potential for financial loss, chargebacks, fraud, or regulatory scrutiny. Payment processors and banks assess risk based on a variety of factors, and falling into the high-risk category can mean higher processing fees, rolling reserves, or even difficulty finding a processor willing to work with you.

Here’s a breakdown of the common reasons why your business might be considered high-risk:

1. Industry Type: Certain industries are inherently viewed as riskier due to their business models or the nature of their products. These include:

Adult Entertainment: Transactions in this industry are often subject to scrutiny due to legal and ethical considerations, leading to increased chargeback risks.

Travel Agencies: High transaction volumes and the potential for cancellations and disputes make travel agencies vulnerable to fraud and chargebacks.

Subscription Services: Businesses that offer recurring subscriptions, especially those with unclear cancellation policies or free trial periods that convert to paid memberships, tend to have higher chargeback rates.

Online Gaming and Gambling: The potential for fraud and the fluctuating regulatory landscape contribute to the high-risk status of these industries.

Supplements and Nutraceuticals: This industry often faces concerns about product claims and efficacy, leading to potential consumer disputes and chargebacks.

Debt Collection: Dealing with sensitive financial information and the potential for legal challenges make debt collection agencies high-risk.

Cryptocurrency Exchanges: The volatile nature of cryptocurrency and the potential for fraud and money laundering make it a high-risk industry for payment processors.

Firearms and Weapons: Strict regulations and potential legal liabilities contribute to the high-risk classification.

2. High Chargeback Ratio: Chargebacks occur when a customer disputes a charge with their bank. A consistently high chargeback ratio (typically exceeding 1% of transactions) signals to payment processors that your business might be engaging in fraudulent activity, providing poor customer service, or selling substandard products. Excessive chargebacks can lead to penalties, account termination, and difficulty securing future merchant processing.

3. History of Fraud: If your business has a history of fraudulent transactions, payment processors will be hesitant to work with you. This includes instances of card-not-present fraud, account takeovers, or any other activity that raises suspicion.

4. New Business with Limited Credit History: Starting a new business can be challenging enough, but it can be even harder to obtain merchant processing if you have little or no credit history. Payment processors rely on your creditworthiness to assess the risk of extending credit, and a lack of established financial records can make you appear riskier.

5. High-Volume Transactions: While high sales volume might seem like a positive indicator, it can also be a red flag for payment processors. Large transaction volumes can attract more fraud and increase the potential for chargebacks, making your business a higher risk.

6. Offshore Operations: Operating a business from a country with less stringent regulations or a higher risk of financial instability can also make you high-risk. Payment processors need to comply with international laws and regulations, and businesses operating in certain regions might be perceived as posing a greater compliance challenge. Authorize.Net is a payment gateway that can help with secure online transactions.

What to Do About It:

Don’t despair if your business falls into the high-risk category. There are steps you can take to mitigate the risks and find a suitable payment processor:

Be Transparent: When applying for merchant processing, be upfront and honest about your business type, history, and any potential risks. Transparency builds trust and allows the processor to tailor a solution to your specific needs.

Improve Customer Service: Excellent customer service is crucial for reducing chargebacks. Respond promptly to inquiries, resolve issues quickly, and provide clear communication about your products or services.

Implement Fraud Prevention Measures: Invest in robust fraud prevention tools and strategies, such as address verification systems (AVS), card verification value (CVV) checks, and real-time transaction monitoring.

Manage Chargebacks Effectively: Develop a plan for handling chargebacks promptly and effectively. Respond to disputes with accurate documentation and evidence to support your case.

Build a Positive Track Record: Focus on building a positive track record by processing transactions securely, providing excellent customer service, and managing chargebacks effectively.

Consider a High-Risk Payment Processor: Specialized high-risk payment processors understand the unique challenges faced by businesses in these industries and can offer tailored solutions and support.

Secure Your Website: Ensure your website is secure with SSL encryption and complies with PCI DSS standards to protect customer data.

Establish a Strong Business Credit History: Building a strong business credit history can improve your chances of securing merchant processing at favorable rates.

FAQs:

Q: Will being considered high-risk always mean higher fees?

A: Generally, yes. High-risk businesses often face higher processing fees and rolling reserves to offset the increased risk for the payment processor. However, fees can vary depending on the specific processor, your transaction volume, and other factors.

Q: What is a rolling reserve?

A: A rolling reserve is a percentage of your sales that the payment processor holds back for a certain period (usually 3-6 months) to cover potential chargebacks or other liabilities.

Q: Can I avoid being classified as high-risk by misrepresenting my business?

A: Absolutely not. Misrepresenting your business is a serious breach of contract and can lead to account termination, legal consequences, and difficulty securing merchant processing in the future.

Q: Are there any advantages to using a high-risk payment processor?

A: Yes. High-risk processors understand the specific challenges faced by your industry and can offer tailored solutions, risk management tools, and support that traditional processors might not provide. They also often have more lenient underwriting criteria.

Q: What if I’m a new business but don’t fall into a high-risk industry?

A: You may still face challenges due to your limited credit history. Consider providing additional documentation, such as a business plan and financial projections, to demonstrate your creditworthiness.

Conclusion:

Being classified as a high-risk business can present challenges when it comes to securing merchant processing. However, by understanding the reasons behind this classification and taking proactive steps to mitigate the risks, you can increase your chances of finding a suitable payment solution. Transparency, excellent customer service, robust fraud prevention, and effective chargeback management are essential. If you are struggling to find a reliable payment processor for your high-risk business, we recommend contacting Payminate.com. They specialize in helping businesses in challenging industries obtain the merchant processing they need to thrive. They have experience with a variety of high-risk industries and can help you find the best solution for your specific needs.