The high-risk industry includes but is not limited to businesses such as adult entertainment, gambling sites, travel agencies, the sell of tobacco or vaping products, medical marijuana services, or simply e-commerce websites that process card-not-present transactions.
Like any financially savvy investor might, traditional banks and independent sales organizations (ISOs) prefer low-risk investments to increase the likelihood that they’ll turn a profit.
If you’re in a high-risk industry, you may have been turned down by typical payment processors but not know why. Here are 4 reasons why payment processors avoid high-risk industries.
They’re More Likely to Have Fraud
No legitimate business wants to process payment information that has been illegally obtained. Unfortunately, the likeliness of this happening increases in card-not-present transactions. As the name implies, this is when payments are processed without the customer’s card being physically given to the merchant. This includes any e-commerce merchant, no matter their business type.
The reason that fraud corresponds with card-not-present purchases is because it’s more likely that fraudsters accessed payment information without having the actual card. They then can use this information online to make fraudulent transactions.
In-person transactions also provide an extra layer of security because merchants can check that the person using the card is the actual owner.
The increased likelihood of fraud is a big deal for payment processors and brings us to our second reason.
They’re Prone to High Chargebacks
A chargeback is when a customer contacts their bank to forcibly have funds returned to them after a transaction was processed through a merchant. It’s supposed to protect consumers from fraudulent charges but can end up threatening the merchant’s livelihood and creating additional fees for them and payment processors alike.
Usually, chargebacks are performed directly through the bank and merchants may not even be aware it’s happening until after the funds have already been returned. Not only does this deny a merchant the ability to dispute the claim, but the customer is also not held responsible for returning any merchandise, so there’s no potential for recouping profits by reselling.
Besides e-commerce merchants that sell physical products, online dating sites and other companies that offer subscriptions are more likely to experience chargebacks due to the nature of their business.
This is bad news for payment processors that prefer that funds are consistently put into the account, rather than taken out.
They Sell High Priced Products or Services
Businesses that have high priced items, such as automobile warranties and airline companies, are considered high risk because of the amount of money involved with their typical transactions. A higher-priced product or service runs the risk of high chargebacks, which banks want to avoid.
Industries with high prices are also at the mercy of economic fluctuations. If the economy is doing poorly, people are less likely to go out and make large purchases.
This dip in profits is a risk for payment processors who depend on a continuous flow of cash through your business to uphold their own.
They Have Reputational Risks
Some businesses have less than stellar reputations due to their specific industry and higher possibility of identity theft.
Medical marijuana services, tobacco, and vape sales, adult entertainment, and sites that sell custom products not only fit this category but also might carry lower public opinions.
Traditional banks don’t want to tie their reputation in with businesses that are not mainstream and may tarnish their own reputation by proxy.
While your business may have been denied services through traditional venues because it fits into one or more of these categories, there are companies like EMB that specialize in high-risk industries and can provide the services you need.