The financial industry is teeming with risk. There is theft, fraud, and defaulted loans. Companies struggle to mitigate risk in order to keep more of their profits.
There are certain industries where there are higher incidences of both fraud and chargebacks. These industries are categorized as “high-risk”. When it comes to payment processing, being labeled as a “high-risk” business does carry its own implications.
What Makes A Business High-Risk?
Ultimately, the “high-risk” designation will be given by the provider. Many providers differ as to what they consider to be a high-risk industry. The criteria for being labeled high-risk has to do with the potential for their transactions to be either disputed or reversed. In addition, the industry would have to be one where it has demonstrated a history of higher-than normal rates of fraud and customer disputes.
Then there are the high incidences of chargebacks. Typically, a provider requires businesses to stay below 1%. Any merchant that surpasses this amount will be subjected to additional fees. Businesses can even have their accounts terminated.
Which Industries Are Considered To Be High-Risk?
The main characteristics that will land a business under the high-risk category have to do with the processing history and the industry’s reputation.
Other characteristics, depending on the payment processor’s guideline include the following:
- Bad credit history and excessive chargebacks.
- More than $20,000 monthly sales volume
- Average credit card transaction is higher than $500
- Selling products and services to countries known for high levels of fraud
As previously mentioned, which businesses are considered to be high-risk will largely depend on the provider.
Here are some industries that typically fall under the high-risk category:
- Adult entertainment
- Recurring subscriptions
- Luxury goods
- Online gaming
- Tickets and reservations
- Pharmaceuticals and cannabis
- Multi-level marketing
Implications For Being High-Risk
The harsh reality for high-risk merchants is that they will need to acquire a high-risk merchant account and with that comes higher-than-normal fees. Since risk is inherent in your business and providers do want to protect their interests, brace yourself to pay more for processing and account fees.
There are some providers that will require you to pay a setup fee, a monthly and annual fee, and even a PCI fee. Make sure you read all the fine print on your contract to ensure that you are aware of all charges.
Within some contracts, there are clauses where you will be required to pay an early termination fee, should you want to end your contract before it expires. Check to see that all of this information is clearly stated in your contract.
Other expenses to be aware of on high-risk merchant accounts are rolling reserves. They serve as an extra layer of protection for the bank against chargebacks or fraud on your end. How it works is that 5%-10% of the credit card processed volume is secured, kept back for a defined period, up to 6 months. After this time, the reserve is then released.
Chargeback fees are also something to be prepared for. These fees occur when a credit cardholder files for a chargeback, asking their bank to dispute the charge. These fees cover the administrative costs involved with processing the chargeback.
Overall, all the fees associated with your high-risk merchant account may cost as much as twice as those paid by “low-risk merchants”. If you happen to run a business where numerous transactions are processed daily, you can then negotiate with your provider for better rates.
Choosing the best high-risk merchant account provider is pivotal to your business success. Seek providers that have a demonstrated history working with high-risk businesses. Make certain that there is complete transparency on their fees, terms, and conditions. Finally, ensure you find a provider with the best, responsive support on the market.