Some industries are prone to have a business model that entails a higher risk factor for both chargebacks and fraud. Being high risk does make things difficult for the merchant, but it does not mean that they are certain to go out of business. Countless businesses are still functioning labeled as high risk. Some of them are even prospering and growing; therefore, being high risk is not the end of the world for a business. There are some complications, however. High-risk companies are lesser likely to receive loans and business insurance. Furthermore, they may also face hurdles in credit card processing.
For businesses that solely operate online, credit card processing is probably the only way to get paid. Therefore need for a merchant account, and a merchant service provider becomes necessary. For smaller businesses, it is possible to use payment service providers that do not require a merchant account to operate. But as the business grows, a payment service provider is not enough to handle all the business’s financial matters. Then comes the issue of dealing with a payment processor. Payment processors show bias towards more prominent firms that work at shallow risk. Such businesses are given much lower processing fees than ones with high risk in business. Merchant service providers take extra care to ensure that an account does not fall in the high-risk category before signing it up.
Being labeled as high risk can be very devastating for a business. Some high risk merchant services providers make sure that their marketing is particular to high-risk companies. For signing up, the trades are faced with outrageously high processing fees and binding contracts that pose a liability if ended early. Therefore, knowing what makes a business high-risk beforehand and avoiding unreasonable payment processors is very important for a business’s health.
Main features of a High-Risk Business
High-risk businesses pose a threat to all the institutions involved in their payment processing. Therefore banks, insurance companies, and credit card processors make sure to segregate them from their regular, low-risk accounts. There are multiple factors based on how the business is managed, determining whether it is high-risk or not. Some reasons are over-regulations by the government, having a history of defaulting loans, having to face regular chargebacks, and operating in a high-market saturation situation. But it isn’t just determined by the business whether it is high risk or not.
Some payment processors have specific standards determining whether or not an account is a high risk or not, while others may have them a little different. Some industries such as pornography and drug paraphernalia are inherently high-risk no matter which payment processor you choose. But for businesses that are not explicitly known to be high-risk, there is a chance that the payment processor that termed you high-risk may have stringent conditions for accounts that they deal with as low or normal-risk. You can check the websites of different high-risk merchant processors or contact them directly to know whether or not your business is in the high-risk category with them. Here are a few reasons why merchant services providers may consider a high business risk:
International Business Operating in the US
Offshore businesses have their headquarters in another country but sell to the US by having outlets or other methods. This poses a higher risk of scams or fraud to the customers in the US. An offshore business may be flagged as high-risk because of lenient regulations on companies in the country where the headquarters are located.
Questionable Legality of Products or Services
This is one of the most significant reasons why a business is called high-risk. The most obvious examples of this are businesses that deal in pornography and companies that sell drug paraphernalia. But several more businesses deal in products or services that are questionable.
High Frauds and Chargebacks
This reason for being flagged as a high-risk business may not have anything to do specifically with the company. Suppose a sector of the business industry has a high rate of chargebacks or fraud historically. In that case, there is a very high chance that your business will be termed high-risk as well. This is more because of the behavior of customers than of the company itself.
Personal Credit Score not on Par
This is another type of reason that is not directly linked to the business or its practices. Suppose the owner of a company has a lousy reputation in credit score or loan defaulting. In that case, your credit card processor can claim your business as high-risk.
Unorthodox Strategies of Sales and Marketing
A few businesses are often scams, and there is a wrong impression on people based on their experience with a few companies that had some similarity to yours. Therefore, based on people’s perception, the payment processor can see your business as one with a high-risk factor involved with it by your payment processor.
Expensive Ticket Sales
If a business allows high-cost purchases based on credit cards regularly, there is a chance your business can be termed as high risk as well.
Benefits of a High-Risk Merchant Account
All the reasons above are indicators that high-risk merchant accounts are troublesome. But despite the high fees, there are a few notable upsides as well.
With a low-risk merchant account, transactions across the border can be complex as they are riskier. But with a high-risk account, you can trade with countries that are even considered high-risk, giving you a greater chance to expand your business worldwide.
High Protection against Chargebacks
Suppose a low-risk merchant account crosses 1% in chargebacks. In that case, they are often penalized by their merchant service provider or even have their account terminated. But with a high-risk merchant account, you get much greater protection against chargebacks as you pay more for it.
Expansion in Business
A high-risk account can sell products or services that are not generally allowed in low-risk accounts without any payment processor problems. This will enable you to expand your product line without issues as there is no restriction on the products you can sell.
A more extensive line of products directly equates to more profits because of a wider variety of products.