Payment processors play a vital role in facilitating transactions between businesses and customers. However, not all businesses are viewed equally in the eyes of these processors. Some are classified as “high risk,” and this designation can influence processing fees, account terms, and approval rates. But what earns a business this label? Here’s a closer look at the factors that make a business high-risk merchant account to payment processors.
1. High Chargeback Rates
One of the most significant red flags for payment processors is a high rate of chargebacks. Chargebacks occur when customers dispute a transaction and request their bank to reverse the charge. Industries like e-commerce, travel, and subscription services often experience higher chargeback rates due to customer dissatisfaction or fraud, making them appear riskier to processors.
Processors incur administrative costs and potential fines when chargebacks are excessive. Therefore, businesses with chargeback rates above 1% of total transactions may find themselves labeled as high risk.
2. Industry Type
Certain industries are inherently riskier due to their product or service offerings. High-risk industries often include:
- Adult entertainment: Due to legal and moral complexities.
- Gambling: High levels of fraud and regulatory challenges.
- Travel: Refund spikes caused by cancellations.
- e-Cigarettes/Vaping: Regulatory scrutiny and strict age-related purchasing laws.
These industries are more prone to disputes, fraud, or compliance issues, automatically placing them in the high-risk category.
3. High Average Transaction Value
Businesses that process high-value transactions regularly attract more scrutiny. Payment processors perceive larger transactions as riskier, as they stand to lose significant amounts if something goes wrong. For example, a luxury goods retailer or a bespoke services provider may quickly fall into the high-risk category.
4. International Transactions
For businesses operating globally, international transactions can raise concerns. Transactions across borders increase the likelihood of fraud due to differing laws, regulations, and enforcement in various countries. Additionally, currency conversions and language barriers add another layer of complexity for processors, prompting them to classify such businesses as high risk.
5. Poor Credit History
Much like lenders, payment processors evaluate a business’s financial track record. Companies with poor credit histories, histories of bankruptcy, or unpaid debts may be seen as financially unstable. If processors perceive a higher likelihood that these businesses may default, they’re more likely to classify them as high risk to minimize potential losses.
6. Recurring Billing Models
Subscription-based businesses that rely on recurring billing may seem appealing, but processors often scrutinize them closely. Why? These models are prone to disputes when customers forget about automatic renewals or experience difficulty canceling a subscription. High levels of customer dissatisfaction can lead to disputes and chargebacks, earning these businesses a spot on the high-risk list.
7. New or Small Businesses
Startups and small businesses are commonly deemed high risk due to their lack of financial history and the perceived uncertainty of their success. Without sufficient creditworthiness or a proven track record, processors may approach these businesses cautiously, imposing higher fees or stricter terms to counterbalance potential risks.
8. Regulatory or Legal Issues
Businesses operating in highly regulated industries or those constantly under legal scrutiny are automatically considered higher risk. For instance, cannabidiol (CBD) enterprises often face this issue due to differing regulations regarding legality and usage across jurisdictions. Similarly, businesses operating without proper licensing or those with a history of fraud find themselves flagged by payment processors.
Key Takeaways
A business is labeled high risk to payment processors based on factors like chargeback rates, industry type, transaction size, and financial stability. While being identified as high risk doesn’t necessarily prevent a business from working with a payment processor, it often means higher fees, stricter terms, and a more rigorous underwriting process.
Understanding these risk factors is essential for businesses seeking to improve their classifications. Strategies like reducing chargeback rates, maintaining transparency, and improving financial records can go a long way in fostering better relationships with payment processors.
