What is a High-Risk Business? What Does This Mean for Your Bottom Line?
“High-risk business” is a designation applied by payment-card processors. It’s usually based on two general criteria: your industry (some verticals aren’t as stable as others) and your specific situation (things like credit history, past profitability, etc.). The first category refers to more general and superficial characteristics that are based on the type of business you have. Traits from the second category are more directly related to your history and business practices.
A high-risk business faces challenges in accepting credit or debit cards with which standard businesses don’t have to contend. For instance, you will be forced to use a high-risk merchant account. This typically means more restrictions and significantly higher processing fees.
If you’re in a high-risk vertical or selling high-risk products, there’s not much you can do about this situation. You want to take to avoid being classified as high-risk fi you can, though.
What is a High-Risk Business?
- High-Risk Business
A high-risk business is an operation that, for one or more reasons, is perceived by credit card processors or financial institutions to represent an elevated risk for chargebacks.
High-risk businesses are simply merchants who are perceived to have a greater risk of financial failure. There is a certain amount of risk associated with all payment processing, and eCommerce in particular; there’s no way around that. Merchants assume a lot of that risk directly, but acquirers and payment processors can get hurt, too.
Everyone involved wants the best possible return on their investment. So, it makes sense that financial institutions would either try to avoid risky situations or charge more for assuming greater risk. Unsurprisingly, merchants who fall under the high-risk umbrella are required to operate from a high-risk merchant account. This means you’ll have fewer (and pricier) options for card processing.
Processing providers are ultimately responsible for all credit card transactions you send through. They want things to go as smoothly as possible, so they may shy away from a business with high-risk elements. Things like excessive chargebacks or fraud could potentially cause trouble between the provider and the issuing bank.
High-Risk Vertical? Or Just High Risk?
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To prevent that, the provider may decide such a company isn’t worth taking a chance on. In fact, the majority of providers don’t accept high-risk clients at all. This forces you to choose from a shortlist of providers who do offer high-risk merchant accounts (typically at a higher price point).
What Makes a Business High Risk?
So what is the difference between a high-risk business and a low-risk one? As we noted above, there are multiple reasons your business could be considered risky. “Low-risk,” on the other hand, is more or less considered normal.
Determining a business’s risk level is based on multiple compounding factors. Here are a few examples of factors that differentiate between the two types of risk labels:
|Low-risk merchant||High-risk merchant|
|Average monthly sales volume||Less than $20,000||Over $20,000|
|Average credit card transaction||Less than $500||Over $500|
|Number of currencies accepted||One||Multiple|
|Offer recurring (subscription) payments||No||Yes|
|Placed on MATCH list/history of excessive chargebacks||No||Yes|
|Main product offering||Books, office supplies, clothing, home goods, etc.||Software, digital, tickets, seasonal items, etc.|
|Based in or sell to a high-risk country/region (anywhere outside the US, EU, Canada, Japan, or Australia)||No||Yes|
Each payment processor has its own set of guidelines. One processor might label you high-risk while another doesn’t. Once a processor evaluates your business, they'll make an "either/or" decision as to whether you qualify as high risk.
Processors may be concerned about high-risk product categories. This is based on trends within the industry as a whole. They calculate factors like fraud instances, returns, debit card chargebacks, credit card chargebacks, and sales volume. This information is used when classifying business types. The category your business falls under is identified by a Merchant Category Code or MCC.
Some of the high-risk products and industries usually flagged by processors include (but are not limited to):
- Casinos or online gaming
- Prepaid debit cards
- Calling cards and PBX VoIP systems
- Pharmaceuticals and online drug providers
- Tobacco/E-cigarettes/cannabis products
- Telemarketing sales
- Adult entertainment and dating services
- Airlines, accommodations, and ticketing agents
- Subscription services (magazines, collectibles, etc.)
- Financial counseling/credit repair/debt reduction
- Recurring billing/subscriptions
These verticals tend to be more susceptible to returns, chargebacks, and fraud. Despite the rather ominous-sounding name, however, operating a high-risk business isn’t inherently a bad thing.
Some verticals present an elevated financial risk, but big risks can sometimes offer big payoffs. Merchants who choose to function in high-risk categories do so with the confidence that the reward will offset the extra hassle and expense of a high-risk merchant account.
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Some Risk Factors You Can Control
What if your industry isn’t considered high-risk? Are you in the clear?
No. You can still be classified as a high-risk business, no matter what MCC you fall under. Processors and financial institutions look at how typical businesses in your vertical perform, but they also examine your business specifically. They want to know that working with you is a reasonably safe investment.
There are various factors that might contribute to your business being considered high risk:
- Your business has been put on the MATCH (terminated merchant) list within the last 5 years.
- You are a new business with very little credit card processing history.
- You have a bad credit card history (late payments, insufficient collateral for loans, etc).
- You sell products or services that usually result in high-dollar transactions.
- You experience a higher-than-average amount of returns/refunds.
- Your chargeback ratio is too high.
There are steps you can take to keep your low-risk business from turning into a high-risk headache. The keys are to follow business best practices and provide superior customer service.
One of the most powerful ways to keep from earning a high-risk label is to avoid chargebacks whenever possible. A chargeback is essentially a forced credit card payment reversal, facilitated by the cardholder’s issuing bank. When a chargeback occurs, your business loses:
- Profits from the sale
- Any merchandise which has already been shipped to the buyer
- Shipping or restocking fees
- Interchange fees
- Chargeback administration fees levied by the bank
Merchants who amass a high volume of chargebacks are in danger of losing their current processing agreement. If your processing agreement has been terminated because of excessive chargebacks, you will automatically be placed in the “high-risk business” category. This puts you in danger of losing the ability to accept credit cards at all.
Is Your Business at Risk?
Worried about being labeled a “high-risk business” due to the number of chargebacks you sustain? Contact Chargebacks911® today. Our chargeback management professionals can help you assess your risk and determine what you can do to keep post-transaction threats under control.
What is a high-risk business?
A high-risk business is any business that credit card processors feel represents a higher-than-average risk of financial failure.
What makes a business high-risk?
Certain industries are automatically designated high-risk based on the historical performance of the entire vertical. Individual merchants can also be placed in this category based on multiple factors, such as a previously terminated merchant account, a bad or minimal credit card processing history, or a high chargeback rate.
Is there such a thing as a “low-risk” business?
Sort of. A “low-risk” status is more or less the default setting; this refers to any business that is not considered high risk.
Which industry has the highest risk?
It’s difficult to determine. However, some MCCs (merchant category codes) that pose elevated risks include gaming, prepaid debit cards, pharmaceuticals, tobacco/E-cigarettes/cannabis products, and ticketing and events.
What can I do to avoid the high-risk designation?
If you’re not in a high-risk business category, the best way to avoid that label is to keep your chargeback ratio low by preventing as many chargebacks as possible.