The merchant banking industry grew by over 29% in 2022. Thanks to e-commerce and mobile payments, the industry should continue its rapid climb in 2023.
However, certain services won’t offer payment processing if they encounter a high risk merchant. If you’re wondering why your company gets viewed as a high risk business, the following guide can help.
Read on to learn about payment processing for high risk merchants and what makes them a higher risk.
What Is a High Risk Merchant?
If you get denied merchant services, it likely has to do with the industry you’re in. That’s because certain industries get labeled high-risk by credit card providers such as financial institutions and banks.
Even if you have a wildly successful business, you might still get denied payment processing services. It’s also important to note that there isn’t an authority figure making these rules for the payment industry.
Every single payment processor, service provider, and bank comes up with its own standards to follow. One company might refuse to work with certain industries no matter what, while others might accept applications of all kinds.
Typically, payment service providers have very strict standards for applicant acceptance. On the other side, merchant account providers tend to have a much more laid-back approach toward acceptance.
With both options, you have to send an application with details about your company. Then, the provider makes an ultimate decision based on their internal standards.
Industry Examples
Firearms, firearms accessories, tasers, and stun guns are examples of high risk products. Those industries usually require different types of Federal Firearms Licenses as well.
Cigarettes, tobacco, and, vape, and cannabis are higher-risk industries because of the strict regulations surrounding them. Online gambling and adult products and services also raise risk factors for many providers.
Some examples of less obvious industries with high risk include tech support, travel, and electronics. Even services like extended warranties and free trials can raise the risk factor for providers.
Chargeback Risks
A chargeback happens whenever a customer requests a refund for a disputed charge on their credit card. This process creates a lot of expensive headaches on the merchant provider side of things.
Having too many chargebacks is a huge reason why many merchants get rejected by payment processing services. It’s a fair decision because other than the customer, everyone involved in the chargeback loses money.
They directly affect the merchant, the credit card provider, and the bank issuing finances for the card. High chargeback rates also cause providers to charge merchants extra fees. The fees tend to grow if the number of chargebacks also continues to grow.
Industries like adult entertainment and CBD sales often receive more chargebacks than other industries. That’s because there’s a negative public perception of many of those services and products.
Friendly fraud is one chargeback example that those two industries run into often. It’s when an embarrassing product ends up on a statement that a friend or family member finds. So, the customer pretends it was a fraudulent or accidental charge.
Even though a friendly fraud chargeback isn’t done maliciously, it still costs some businesses a lot of revenue. It’s best to find a merchant provider that specializes in high risk businesses so that they can help reduce chargebacks.
CNP Transaction Risks
CNP transactions sit on the opposite side of the high-risk spectrum. It has to do with shoppers paying for items remotely via CNP (card-not-present) transactions.
That means the customer didn’t have a physical credit or debit card during the transaction. You’ve likely experienced this kind of transaction if you’ve ever entered your card number for an online item.
It’s an essential component of online sales, but it’s risky because the merchant can’t verify who is handling the card. That makes fraud much more likely because merchants can’t look for red flags as they could in a physical setting.
High Risk vs Regular Accounts
High risk accounts have a longer application process than regular accounts. The applications require more details such as bank statements a credit checks. A regular application might take a few days whereas a high risk application could take days.
Some payment processors have cash reserve requirements for high risk businesses. That means they might use some of a company’s cash as a hedge.
A capped reserve is when the processor keeps a percentage of every transaction until the final balance hits a certain point. Then, they stop receiving money until they need more for the reserve again.
With a rolling reserve. processors receive a percentage of your sales, but you get it back later. An upfront reserve involves a merchant sending a set reserve amount to the payment processor.
Some processors use a volume cap to block card transactions over a certain amount each month. Age-restricted products usually have their own unique requirements and tools to verify age.
Getting a High Risk Account
First, stay truthful and open on your application. If you withhold any information, it might hurt your chances of acceptance.
Next, go over your cash levels because cash on hand shows that a business is stable. Gather other relevant documents such as half a year of bank statements.
Bank statements should clearly show where your cash goes and where it comes from. You might also have to provide your last two tax returns in some cases.
Try to find anything you can do to lower your risk such as improving your credit score or reducing chargebacks. You can even contact your provider for advice on how to lower your rates.
Don’t forget to always communicate with your customers and remember that not all chargebacks are shady. Some chargebacks might occur because a customer simply didn’t like your product.
Make sure to have clear return and shipping policies so that customers know what to expect. Check that you have easy ways for customers to contact you directly instead of going through your provider.
Keep learning from the payment processor representatives you interact with. They’re experts in their field and can help you set up your payment process. They can also help you prepare and implement some of their suggestions.
Finding the Right Payment Processor
Remember that your risk level doesn’t mean that you don’t have quality products or services. While the application process is more difficult, it’s not impossible or uncommon to complete successfully.
First, identify your company’s risk factors and make sure to find a provider with experience in your specific industry. When meeting with potential providers, always ask about their chargeback policies and fees upfront.
Next, gather your financial statements such as tax documents for providers to go over. Financial statements help them decide your risk level and terms. Before signing a contract, make sure to review the conditions and terms carefully.
Stay open from the start because providers will eventually find out if you’re lying or providing false information. Then, they can delete your account and throw a huge wrench into your business operations.
Some provider issue account suspensions rather than total deletion. In either case, it disrupts your workflow and harms your reputation.
Review all fees and security standards before making a decision. You need to look at the fees for individual transactions and any fees based on percentages.
The merchant account provider you choose must comply with the Payment Card Industry Data Security Standard. They should also have effective tools and systems in place to help stop chargebacks and fraud.
Don’t forget to ask providers about their customer support practices in case something goes wrong. You’ll want to resolve issues as soon as possible so that you don’t lose out on sales or damage your reputation.
A good provider also works to lower your risk level and fees over time. Not only does this save you money in the future, but it also makes your company look more appealing.
In all aspects of your business, you want to work with partners that have reliable track records. Providers also need advanced knowledge of their industry because that speeds up application times. It also increases the chances of application acceptance.
Finally, make sure your potential provider has your company’s best interest in mind. For example, if you notice that they have an excessive amount of fees and conditions, you might look elsewhere.
High Risk Merchant Basics
Now you know what a high risk merchant is, what makes them high risk, and how their accounts differ from standard accounts. You also know how to get a high risk account and how to choose the best provider for your needs.
Remember this guide and check out the rest of our site for more great financial tips and information.
