What Role do Chargebacks Play When Determining Risk?
Credit card processors assign merchants to one of two categories: high risk or low risk. Many processors choose to do business exclusively with low-risk merchants who are viewed as “safe.”
Businesses that are dubbed high risk will require high risk merchant accounts. High risk merchant services are provided by only a handful of processors.
If you are forced to use a high-risk merchant account due to a higher than average number of chargebacks, there may be a better solution. Contact us for a free chargeback analysis.
Characteristics of a Low Risk Merchant
A merchant with the following characteristics is probably deemed low risk:
- Your average monthly sales volume is less than $20,000.
- Your average credit card transaction is less than $500.
- You only accept one currency.
- Your payment page is hosted by the payment service provider.
- The items you sell are considered low risk—books, office supplies, home goods, or clothing.
- Your country is considered low risk—US, Canada, Western or Northern Europe, Japan, or Australia.
- You use 3D Secure to prevent fraud.
- Your chargebacks and returns are kept to a minimum.
A card-present merchant is considered the lowest risk possible. Face-to-face transactions generally yield fewer claims of fraud because of the identity verification techniques available.
Characteristics of a High Risk Merchant
A merchant with the following characteristics is probably considered high risk:
- You’ve been placed on the MATCH list because of excessive chargebacks.
- You’re a new merchant with little credit card processing history.
- You accept recurring payments.
- You sell products or services to customers in countries that are associated with high levels of fraud (anywhere outside US, Canada, Western or Northern Europe, Japan, or Australia).
- You process multiple currencies.
- You have bad credit history.
- Your average monthly sales volume is greater than $20,000.
- Your average credit card transaction is more than $500.
- Your sales are seasonal or sporadic.
- You operate in an industry that is commonly associated with high returns or chargebacks.
How Processors Gauge Risk
Calculating risk is a subjective process. Many factors will be considered when evaluating your processing risk.
High Risk Products & Services
Many processors view the following products and services to be high risk:
- Casinos, gambling, or gaming
- VoIP or telemarketing
- Pharmaceuticals or drug stores
- All products or services related to adult content or activities
- Travel accommodations
- Dating services
- Magazine subscriptions
- E cigarettes
- Software, hardware, or other downloads with potential copyright issues
- Autographed collectibles
- Credit repair, consolidation, or counseling
- Psychic services
- Financial or investment services
- Counterfeit goods
Processors will consider each business on a case-by-case basis. Not all of the above industries will be considered high risk by all processors; likewise, many additional businesses that aren’t listed above could be considered risky.
In general, processors use the following criteria to evaluate the merchant’s service or product offerings:
- Will this business bring unwanted publicity to the bank because of the services or products it provides?
- Will there be potential legal and financial liability because of the services or products offered?
- Will excessive chargebacks and returns be an issue?
High Risk Verticals
Verticals, from low risk to high, are also considered when evaluating a business:
- Tangible products
- Digital products
- Online memberships
- High ticket items
- Gift Cards
High Risk Transaction Methods
Transaction methods are generally organized from low to high by the type of merchant-customer interaction:
- Card-present EMV Chip-and-Pin, Europe
- Card-present EMV Chip-and-Signature, US
- Card-present pin-based, no chip
- Card-present signature required swipe
- Card-present swipe kiosk, unsupervised
- Card-not-present signature required
- Card-not-present with 3-D Secure, non-recurring transactions
- Card-not-present recurring transactions
- Card-not-present recurring transactions with negative option offers
Sales methods can also impact a processor’s decision to offer a merchant account. From low to high risk, these are the most common sales methods used to generate new leads:
- Face-to-face (storefront)
- eCommerce sale (generated by organic SEO)
- Inbound call (infomercial)
- Impression based advertising (pay for impression views of an ad the merchant creates)
- Lead based advertising (pay for leads the merchant contacts to convert to sales)
- Pay-per-action based advertising to direct affiliate publisher (an affiliate has some control of the ad)
- Pay-per-action based advertising to affiliate network (a network of multiple publishers where each has some control of the ad)
- Outbound calling or upsell tactics used online or through a call center
Looking at the above list, it is also very true that the higher the risk, the higher the reward. For example, if you want more sales, you’ll use a pay-per-action affiliate network instead of waiting for people to come visit you. The most aggressive sales tactics tend to be both high reward and high risk.
Chargebacks Shouldn’t be the Determining Factor
There are many factors that might cause a business to be labeled high risk, but chargebacks shouldn’t be one of them. If it weren’t for chargebacks, many businesses would otherwise be labeled low risk. A merchant will only raise suspicions with the processor once chargebacks start to trickle in.
Traditional low risk merchant accounts can quickly be terminated if chargeback levels become excessive. When merchants suffer a closed merchant account, the only option left is to secure a high risk merchant account with exorbitant fees and a revenue-stealing merchant account reserve. Other high risk merchants have significant earning opportunities, meaning they can afford the higher rates and profit withholdings. However, merchants that simply get put in the high risk category because of excessive chargebacks won’t be able to survive the extra costs.
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Chargebacks are preventable. Merchants shouldn’t be forced into the category of high risk based solely on excess chargeback levels. Rather, the merchant should work to reduce chargebacks instead of defaulting to the merchant account that will ultimately threaten the business’s sustainability.
If your business is on the brink of becoming high risk, let us help before it’s too late.
High Risk Merchants Need Chargeback Management Too
Many merchants actually prefer the status of high risk; it accommodates their profit earning potential. Another perk merchants appreciate is the limited chargeback penalties. Be sure to check our blog article that outlines all the pros and cons of high risk credit card processing.
A low risk merchant account can be terminated if the business experiences too many chargebacks. A high risk merchant account, however, is not easily discontinued because of excessive chargebacks.
Just because the acquirer won’t close your account doesn’t mean you should neglect chargeback management though. Chargebacks might not threaten the longevity of your merchant account, but they do needlessly cause profit losses.
For example, Visa has three chargeback monitoring programs. These programs carefully track chargeback levels and assess fines when chargeback activity becomes excessive.
One program, High Brand Risk Chargeback Monitoring Program (HBRCMP), applies to high risk merchants. With HBRCMP, there is no warning or workout period. Fees are immediately assessed to acquirers, who then pass the financial punishment along to merchants. HBRCMP fees can be an extra $100, added to traditional chargeback administrative fees.
Everyone, no matter the type of merchant account, needs to implement chargeback management.
Avoid Penalties Brought About by Excessive Chargebacks
Chargebacks affect much more than just the category of your merchant account. It doesn’t matter if you are a low risk or high risk merchant, fraud affects everyone the same. The latest studies show merchants pay $3.08 per dollar of fraudulent transactions; you can’t afford to throw money away on chargebacks.
Let Chargebacks911® help. We enable all ecommerce merchants to increase profitability:
- Low risk merchants in danger of becoming high risk because of excess chargebacks
- High risk merchants who lose significant profits to fraudulent chargebacks
Contact us today. We’ll conduct a free, no-obligation chargeback analysis that shows exactly how much ROI you can expect.
Businesses should secure high risk merchant accounts as a personal decision, not as a penalty brought about by uncontrolled chargebacks.