Jul 09, 2018

What Is a High-Risk Business?

A financial institution labels a business “high risk” for a number of reasons, including its industry, potential legalities, and its risk for chargebacks and financial problems. This is problematic because it impacts a business’ ability to borrow money  and obtain merchant accounts, which are required if a business wants to accept and process credit card payments.

There are some businesses that commonly fall into the “high-risk” category, including: nutraceuticals, firearms, electronic cigarettes, adult entertainment, credit repair, bill collection, bail bonds, sports betting and gaming, travel, and high-end furniture. For instance, firearms and electronic cigarettes are considered especially risky because states laws vary and are often vague and confusing. Banks don’t want to be associated with a merchant that has the potential to leave them on the wrong side of the law. Where the law is considered, merchants really must do their due diligence to ensure they are following all laws and regulations.

Then, there are adult businesses. Banks classify adult businesses, such as those that offer live streaming, escorts, or online dating, due to the industry and its reputation for excessive chargebacks and refunds. Adult content users are notorious for initiating chargebacks, which are when a credit card brand requires a merchant to repay the loss on a disputed or fraudulent charge. Unfortunately, in many cases, users are disputing the charges due to friendly fraud. This isn’t when a person uses a stolen card to make a purchase, but is when a buyer decides he/she doesn’t want to pay for a product or service. For example, an adult content user may dispute a charge for adult content after his/her partner sees the purchase on a joint credit card statement.

Merchants selling a new product or one that has not been proven to work, such as a vitamin supplement, also can be labeled high risk. People purchase weight-loss supplements and then ask for a refund when the product doesn’t do what it claims. The same thing happens when people by skin care products. Banks don’t like to take on the risk of too many refunds and chargebacks because it put them in jeopardy. Too many refunds and chargebacks could result in merchants shutting down their businesses, and when that happens, merchant account providers are left on the hook for the money merchants didn’t pay.

Businesses also get slapped with a high-risk label if they have poor or no credit, a history of late payments, or have ended up on the MATCH (Member Alert to Control High Risk) list or TMF (Terminated Merchant File). MasterCard maintains the MATCH, which is a watch list that other credit card companies, like American Express and Visa, can access. It allows credit card brands to monitor businesses that have their merchant accounts terminated, likely due to excessive chargebacks, refunds, and fraud.

Banks also are cautious when merchants sell to customers outside the country they are located. Sellers of high-ticket products, such as furniture and luxury goods, and those that sell tours or travel plans also are risky because there is a good chance plans will change and lead to a cancellation.

When a business is classified as high risk, it can still get a merchant account, likely through an alternative lender. However, the high-risk label likely will result in a business paying higher rates and fees. Also, a lender may request a reserve, which is a sum of money that is held in a separate account that a merchant account provider can tap into if a business abruptly shuts down and pay its chargeback fees and refunds.

The good news is that several months of positive credit card history along with a low volume of chargebacks and refunds will make an impression on lenders. In general, lenders want merchants to have chargeback ratios of less than 2% of their total transactions. This will encourage lenders to consider businesses that started with monthly transaction volume caps or other restrictions.

Merchants that continue to have excessive chargebacks and returns should revisit their models. Likely, the business model is flawed or its products and services aren’t living up to their claims and changes need to be made. To combat fraud, merchants should begin using chargeback mitigation tools.

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Having a merchant account allows an account holder to take advantage of merchant cash advances. When a merchant is approved for an advance, the business agrees to receive a lump sum of cash in exchange for an agreed-upon percentage of future credit card sales.

Pricing varies depending the merchant’s industry, past credit card processing history, the type of business seeking the account, average ticket sales, and average transaction volumes.

Yes, EMB works with merchants who are building their credit, as well as those who have poor credit. EMB also approves merchants that have no credit card processing history and businesses that have lost their merchant accounts due to high chargebacks.

Several factors influence a merchant’s risk level. Though only one factor likely will not get a merchant classified as high risk, a combination of these may: business size, location, and industry, credit score, credit card processing history, a industry’s reputation for excessive chargebacks, a prior history of high chargeback ratios, and whether a merchant exclusively sells online.

Virtual terminals are stationed on a merchant’s website, making it easy for customers to make a payment or purchase online. Merchants or a payment processor can easily set up virtual terminals, so online businesses can accept credit and debit card and e-check transactions.

A merchant account is a business account with an acquiring bank. Without this business account, which actually works more like a line of credit, a merchant cannot accept and process credit and debit card transactions. Businesses need a merchant account to accept major credit cards via a static point-of-sale terminal, mobile card reader, or through a virtual payment gateway.

After filling out EMB’s simple online application and submitting any necessary, requested documents, many merchants get approved within 24 and 48 hours.

EMB specializes in working with high-risk merchants. EMB works with many merchants, including but not limited to businesses in these industries: gambling and gaming, adult entertainment, nutraceuticals, vaping and e-cigarettes, electronics, tech support, travel, high-end furniture, weight loss programs, calling cards, e-books and software, and telecommunications.

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