What is a High-Risk Merchant?How Payment Processors Evaluate & Classify Merchants
In a Nutshell
A high-risk merchant is a business that payment processors consider more likely to generate chargebacks, fraud, or other financial liabilities. This classification stems from industry type, business model, processing history, or some combination of these factors. Being labeled high-risk affects your processing options and costs, but it doesn’t prevent you from accepting card payments.
What is a High-Risk Merchant? Definitions & How Processors Define Risk
Every business that wants to accept credit or debit cards needs a merchant account. Before approving a new account, though, processors and acquiring banks evaluate their applicant to determine how much financial risk the relationship could present.
If you’ve ever applied for an account before, you’ve undergone this process. The evaluation determines whether you’re classified as a “standard” or “high-risk” merchant. It’s a binary decision, with no real grey area between. And, the side of the divide you land on carries significant ramifications for the terms of your processing agreement.
The core question your processor is trying to answer is straightforward: how likely is it that this merchant is going to cost us money?
That cost might come from chargebacks the processor has to absorb. It could come from fraud losses, regulatory fines, or reputational damage. Merchants who present elevated risk in any of these areas get classified as high risk and face different account terms than their standard-risk counterparts.
“High risk” is a financial classification, not a moral judgment. Plenty of legitimate, well-run businesses operate in high-risk categories. The classification reflects the processor’s assessment of aggregate risk for businesses with similar characteristics; not an evaluation of your specific business practices.
How to Avoid Chargebacks
The average merchant is struggling to handle today’s chargeback threats, and has no bandwidth to think about what’s coming tomorrow. In this guide, we show you how you can build adaptable and future-proof chargeback prevention systems that help you protect your revenue, no matter what tomorrow’s landscape holds.
Knowledge Guide
- Core Chargeback Prevention Strategies
- Documenting Transactions for Chargeback Prevention
- Multi-Channel Chargeback Prevention Strategies
- Chargeback Prevention Team Structure
- Building a Chargeback Prevention Technology Stack
- Chargeback Regulatory Compliance
- Using Data Analytics to Avoid Chargebacks
- How to Budget to Avoid Chargebacks
- Chargeback Prevention Implementation Plan
Industry-Based vs. Performance-Based Risk
High-risk classification generally stems from two sources: the industry/product vertical you operate in, and your history as a merchant.
Industry/Product Vertical
Performance
Of course, a lot of high-risk merchants face problems on both of these fronts. Say you’re running a nutraceutical company; because this is a more risk-prone vertical, you’re already carrying industry-based risk. But, say you’re also currently sitting at a chargeback rate of 2% of transactions. Now, you’re dealing with compounded risk, and that’s going to significantly affect your options for securing a processing service provider.
What Factors do Processors Evaluate?
Processors evaluate criteria including chargeback history, merchant category code (MCC), business model, average ticket value, and more, before deciding to offer processing services to a merchant.
When underwriting a new merchant account, processors examine multiple data points to assess risk. Specific criteria will vary by provider. But, most evaluations consider the following factors:
#1 | Your Chargeback Rate
Your chargeback-to-transaction ratio — the percentage of transactions that result in disputes — carries the most weight of any factor here. If you have a chargeback rate above 1% of transactions, or even close to that figure, that’ll typically trigger high-risk classification. If you’re a new merchant, and don’t have an existing track record, then processors will typically evaluate you based on industry averages.
#2 | Your Product Category
Industry and product type determine baseline risk expectations. Processors maintain internal lists of high-risk MCCs (merchant category codes) and product categories. Operating in these sectors means starting from a high-risk baseline regardless of your individual performance.
#3 | Your Business Model
How you sell to your customers has a big impact on risk assessment. Subscription billing, free trials, future-delivery services, and recurring payments all increase chargeback likelihood. Even businesses in otherwise low-risk industries can be classified as high-risk if their billing model creates elevated dispute potential.
#4 | Your Location
Businesses headquartered or operating in regions where fraud is more prevalent than usual are likely to be classified as high risk. The same applies to businesses that operate across national borders. This is because international sellers frequently submit card-not-present transactions for processing, encounter more chargebacks due to currency conversion errors, and must contend with onerous (and sometimes conflicting) regulations surrounding cross-border payments.
#5 | Transaction Characteristics
What does your typical transaction look like? High average ticket values increase the processor’s financial exposure per chargeback. Card-not-present transactions carry higher fraud risk than in-person sales. International transactions add currency conversion complications and cross-border fraud concerns. There are a lot of different variables at play here.
#6 | Processing History
Business age and processing history influence decisions for established merchants. Newer businesses without track records are often evaluated more conservatively. Merchants with previous account terminations — especially those on the MATCH list — are gonna face the steepest uphill battle.
#7 | Creditworthiness
Credit and financial stability round out the evaluation. Processors may examine personal credit scores of business owners, review bank statements, and assess overall financial health. Businesses with poor credit or unstable finances represent elevated risk of default. They might also have trouble covering a sudden surge in chargebacks. If either of these happen, then the processor and/or acquirer could end up being held liable for the merchant’s mistakes.
| 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 |
| Different currencies accepted | One | Multiple |
| Offer recurring (subscription) payments | No | Yes |
| Placed on MATCH list/history of excessive chargebacks | No | Yes |
| Main product offering | Low risk: books, office supplies, clothing, home goods, etc. | High risk: software, digital, tickets, seasonal items, etc. |
| Based in or sell to a high-risk region (anywhere outside the US, EU, CA, JPN, or AU) | No | Yes |
What High-Risk Classification Means for You
Being classified as “high risk” doesn’t prevent you from accepting card payments. It only changes the terms under which you can do so.
Your processor options narrow considerably. Many mainstream processors, including popular aggregators like Stripe, PayPal, and Square, tend to avoid high-risk merchants entirely. They’re also pretty prompt to terminate accounts that drift into high-risk territory. So, you’ll need to work with processors that specialize in high-risk verticals.
Working with a high-risk processor means:
Unfortunately, not all service providers are ethical. Some may take advantage of high-risk merchants by charging junk fees, offering difficult-to-terminate contracts with unreasonable terms, setting unrealistic chargeback limits with harsh penalties if exceeded, or refusing to offer proper customer support.
Before you sign with any service provider, be sure to do research, check reviews, and look up reports from the Better Business Bureau and other advocate groups. Finally, always read the fine print (or better yet, get your attorney to read it).
Now, I won’t mince words: getting a standard, low-risk merchant account is pretty much always preferable to a high-risk one. But, I’d be remiss not to highlight a couple of unique advantages to having a high-risk account:
The consequences of getting slapped with the “high-risk merchant” label are burdensome. But, they're also manageable. And, most importantly, they can be temporary. Performance-based risk can be reduced through better chargeback management. Even industry-based risk can be partially offset by demonstrating that your specific business performs better than industry averages.
