If you’ve been looking for a payment processor, you may have noticed that some merchants are designated as high risk. Some payment processors will refuse to work with these merchants. Other processors will work with risky merchants, but charge substantially higher fees, thereby increasing the costs of doing business. Obviously, this could dampen your entrepreneurial ambitions. Wondering when and why a company might be designated as one of the high risk traders? let’s dig
Essentially, a high-risk designation means that the payment processor expects a higher rate of chargebacks and other hassles. For payment processors, chargebacks are a burden and can increase the cost of doing business. As such, they often pass the additional costs on to merchants. Some processors simply refuse to work with high-risk merchants in an effort to keep the costs of doing business low.
Chargebacks are a serious risk for all businesses, not just high-risk merchants and payment processors. With a chargeback, a card-issuing bank can take money back from a transaction and return it to the cardholder, depriving the retailer of sales revenue. Additionally, they will be charged a chargeback fee, which typically ranges from $20 to $100. With high-risk traders, fees tend to carry a higher weight.
While all businesses need to monitor chargebacks, these disputes are an especially serious threat for merchants designated as high risk. Not only could merchants receive higher chargeback fees, but payment processors may also charge higher fees for processing payments. A low-risk merchant may only pay processing fees of .5 percent for a transaction, while a high-risk merchant may pay fees of 3.5 percent or more, which can add up quickly.
Some industries are considered high risk
First, some industries are considered higher risk than others, and it’s important to know what high-risk companies and high-risk products are. Often these industries are legally complex, perhaps involving online gambling or the sale of tobacco. In both cases, there are age restrictions and other regulations that make the operating environment difficult. Both are also considered vices. Also, people on tight budgets may be more likely to file a chargeback. Someone who just drained their savings account while playing online might not want to pay that bill. If they can secure a chargeback, the casino could end up on the hook for the costs.
High-risk industries include:
- Adult content
- Games of chance
- Vaping and tobacco products
- supplements
- fantasy sports
- CBD and marijuana products
- firearms
The above list is far from exhaustive and other industries may also be designated as high risk. Even generally innocuous industries such as travel are sometimes considered high risk. Ultimately, the payment processor can usually choose which industries to work with and which to avoid.
Chargebacks are one of the main reasons why most industries and/or companies end up being designated as high risk merchants. In fact, even companies in low-risk industries could be individually designated as high-risk. Merchants are assigned a chargeback ratio, which is essentially the percentage of transactions that result in a chargeback. If this ratio is too high, it creates problems.
Let’s take a closer look at why payment processors strive to prevent chargebacks.
Why do payment processors care so much about chargebacks?
At the end of the day, the merchant affected with chargebacks will often have to bear the brunt of the chargebacks. However, they are also a hassle for payment processors, who will have to devote manpower and resources to handling disputes. Because chargebacks incur additional costs for payment processors, they try to minimize them. As already mentioned, this can include charging higher fees or simply refusing to work with a company.
Of course, traders outside of high-risk industries could still end up in hot water if they get hit with a lot of pullbacks. In fact, if even 1 percent of your transactions result in chargebacks, there’s a good chance processors will charge higher fees or refuse to work with you.
Also, if a company is experiencing a lot of returns, there’s a good chance the company simply isn’t meeting the standards consumers expect. The business may poorly package shipped goods or use blatantly fake online sales pages to move products. Regardless of industry, these setbacks will lead to disputes (including rollbacks). Many payment processors do not want to deal with the hassle of working with customers who do not maintain high standards.
What traders at risk of a high-risk designation can do
First, it’s important to avoid a high-risk designation if possible. If your business operates in an industry that is widely considered high risk, you may not be able to avoid the designation. If you are not automatically considered high risk, you are more likely to be able to avoid being designated as high risk.
If you’re already a high-risk merchant, you can find high-risk payment processors, which often target companies in high-risk industries. Fees will often be more expensive with these payment processors. However, you may find square deals, and if you can maintain a low chargeback ratio, you may be able to get a lower rate from your current processor, or you may be able to get lower rates from another.
If you are not in a high-risk industry, proactive steps could greatly reduce the risks of being designated as high-risk. Most importantly, you need to keep your chargeback ratio low (typically less than 1 percent). You can prevent, divert and fight chargebacks by using dispute management platforms like ChargebackHelp that provide data and make it easier to fight fraudulent activity. With services like chargeback alerts, you can even resolve chargebacks before they happen.
Business owners should also audit their businesses to identify potential issues that could lead to more returns. For example, poor customer service and vague billing descriptions on credit/debit card statements are the leading causes of chargebacks. Merchants should also be sure to obtain card security codes and watch for suspicious activity, such as orders from suspicious addresses.
Ultimately, maintaining a low return ratio and avoiding a high-risk designation will take effort. That said, the efforts of high-risk traders could pay off in the long run.
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As technology continues to revolutionize the business world, startups are becoming an increasingly popular option among entrepreneurs. Ikaroa, a full-stack tech company, understands the importance of staying informed on the latest trends in the startup industry. This is why Ikaroa is interested in discussing why some merchants are designated as high risk and what it entails for companies that are in this classification.
The term “high risk” can be misleading as it may evoke negative connotations. However, it simply means that a merchant is considered to have a higher degree of risk when it comes to credit card processing. This is due to certain factors such as industry, the length of time in business, the volume of sales, or a high chargeback rate. These merchants may include professional services, debt collection companies, travel services, and more.
Though being designated as high risk can lead some merchants to become discouraged, this does not necessarily mean that their businesses are doomed to fail. As a matter of fact, there are numerous benefits associated with being classified as high risk.
For starters, high risk merchants tend to enjoy more lenient chargeback processes. For example, specialized credit card processing services can provide merchants with fraud protection and dispute management to help mitigate their losses. Secondly, businesses in this category can instantly qualify for high-risk payment processing services without having to go through expensive and lengthy underwriting processes. Lastly, merchants can take advantage of offshore banking services with much lower start-up costs, setup fees, and daily transaction limits.
The key takeaway is that while there may be certain challenges associated with being designated as a high risk merchant, there are a number of benefits that businesses can take advantage of. With the increasing popularity of startups, it is essential for entrepreneurs and business owners to fully understand the implications of being categorized as a high-risk merchant, and to evaluate which services can help them grow their business in the most effective way. With the right approach and access to the right resources, businesses can leverage the benefits presented to high-risk merchants to succeed in the startup world and beyond.
