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July 10th, 2020

Why Payment Processors Avoid High Risk Merchants?

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A business needs a payment processor to handle the transactions. For payment processing companies these businesses are simply clients. It is vital for a business to remain in the good books of these payment companies or else they could be cut-off by suspension or termination. Payment processors tend to do this when a business is showing more frequency of chargebacks and disputes.
It is important to understand why a company like PayPal, Stripe or Paycron would suspend their legitimate and genuine business clients over a few chargebacks. Why would a company let go of their own business? Well, it may be when those clients become a liability more than an asset. Chargebacks are a primary factor and further payment processing companies do not want to jeopardize their relation with financial giants. Thus, if a business is flagging a large number of disputed transactions, they are cut down.

What is a high risk business?

Payment processors classify businesses into 3 categories according to their risk-level. This classification helps them to identify and weed out any businesses that might be hurting them.

  • Normal or low risk businesses that work with no major problems.
  • Prohibited businesses like drugs, black market, online casinos etc.
  • High risk clients which includes a long list of businesses.

What makes a business high-risk?

What is the criteria to classify a business as high-risk? Which businesses fall in this category? There are a few factors that help decide and classify a business as high-risk, let’s explore them:

1. Nature of products/services offered by the business are under regulation and purview of strict legal guidance.

2. High frequency of chargebacks and disputed transactions decrease the credibility and reliability of a business.

3. Defaults in the payment processing fund cause financial instability with regard to payment processing.

4. Multiple merchant accounts for one business exhibit risky behavior of businesses.

5. Underperforming & niche businesses that are more susceptible to being shut down.

6. Businesses with a high rate of failure.

7. Businesses that invite high fraud rates & bad credit.

8. Processing history & industry reputation.

There is a whole long list of businesses that fall into the purview of one or the other factors listed below. Examples of some high-risk businesses are:

eCommerce businessesAdult-oriented business
Tech support services Health & wellness
Gambling, casinos, forex trading Legal services
Travel & hospitality industry Financial services
Gambling, casinos, forex trading Software

There are hundreds more and payment processors keep a close eye on all of them. When these businesses start hurting the payment processors, they are cut loose by them. For this reason payment processors ask businesses for a bank account which acts as a secondary reserve if owners try to shut down the business.

High risk business risk management

If a business shuts down due to lack of funds or any other reason, payment processors end up bearing the costs of chargebacks and disputes which is highly inconvenient. Thus, they opt for letting go of a small business instead of dealing with big banking institutions. There are options for high risk businesses to choose special high risk merchant services and card processors.

High risk business owners can also choose to directly deal with a bank processor too. This makes it convenient for both business owners and banks. This option is used less because the setup process is complicated and businesses seem to choose the more convenient option of payment processors.

How to deal with it?

As discussed, a high-risk merchant is someone who sells a product/service associated with strict regulations or has a higher probability for frauds and chargebacks. Products may often require age restrictions or may have different jurisdictional boundaries across borders. Policy and governmental laws may also give some businesses the designation of high-risk. Such businesses present several legal and financial problems and payment processors generally try to avoid them.

There are ways to prevent risks from such businesses. One is to keep a sharp eye out for businesses that flag frequent chargebacks/disputes (total chargebacks should be less than 0.9% of the total transactions value). Businesses can also develop a chargeback protocol that detects suspicious activity which could lead to a chargeback. More secure payment methods should be promoted and debit/credit card, card not present kind of transactions should be avoided. Address verification, KYC (Know Your customer) protocol, 2-step authorizations and other security features can substantially reduce chargebacks.

Tips for high risk businesses

If you run a high risk business, chances are that you will find it extremely difficult to sign up a payment processor. There are, however, several card processing companies that are willing to work with high-risk merchants. Either way, as business owners you too need to ensure a few things at your end to avoid getting suspended by your payment processor:

1. Don’t try to fool card processors:

Fully disclose your products and services and do not conceal information. Be honest as they will discover it on their own simply with an audit, so be transparent and honest.

2. Have a backup capital resource:

Prove that you have financial backing for adverse situations. This can include your resources like equipment, inventory, building, land etc. This can help banks and underwriters in writing a good report for your business and getting you a payment processing service.

3. Provide all payment processing history:

To build trust, provide your past payment processing data. This makes it easy for the payment processor to judge your credibility.

4. Avoid exceeding limits:

Payment processors may or may not provide your limits for chargebacks and disputes. However, stick to a preset limit if there is one or try to minimize setbacks upto a certain limit that does not hurt your payment processor.

5. Payment security is must:

Payments with secure payment gateways and a robust authentication and security protocol are non-negotiable and non-impacting. Keep the security at an all time high.

6. Choose a good high risk processor:

A good high risk processor can help you build a reputation and trustworthiness in the payment market. It can also help you minimize chargebacks.

Most payment processing companies offer a level of relaxation, but when a business starts showing characteristics that can be concluded as ‘high-risk’ behavior’ it’s best to let them off the hook. This might incur losses in the short run but is a better option when considered in the long run. There are also ways by which both payment processors and businesses can reduce these discrepancies. Moreover, if both parties suffer the damage, it seems sensible to find ways that can end the problem completely.


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