Why Payment Processors Avoid High-Risk Industries?
What Is A High-Risk Industry?
A high-risk industry is a business sector that involves a significant level of risk for financial institutions such as banks due to the issues arising in their payment processing. These industries involve high chances of fraud, have huge chargeback rates and are more exposed to cyber threats.
In addition, high-risk industries require business owners to have merchant accounts that compensate for the increased liability banks undertake and offer sustainable payment solutions. Payment processors charge a premium fee for processing transactions for these accounts to match the increased level of risk involved in managing high-risk merchant accounts.
Which Industries Have a High Business Risk?
Many industries have a high business risk that could result from multiple factors such as complex business strategies, chances of money laundering, and involvement of reputational risk. High business risk means that your company has to face certain obstacles in terms of the legal landscape and bank compliances.
Moreover, you might be required to strictly abide by the terms and conditions of your payment processor to process credit card payments effectively. Some industries that have a significant business risk include:
What Makes A Business High-Risk?
A company’s history or the industry it is operating signifies the level of risk involved. Some examples of high-risk industries include travel agencies, high-priced ticket sellers, online dating websites, debt collection services, subscription-based products and services, and vape retailing.
Moreover, a high-risk business faces numerous challenges in its operations and payment processing as banks and low-risk sales organizations (ISOs) tend to avoid any association in the high-risk sector.
Businesses in the high-risk category also involve reputational risk. A reputational risk for a particular business highlights its past issues that result in a bad reputation. This concept also signifies the reluctance of major financial institutions such as banks which are hesitant when boarding high-risk accounts, which could have a negative impact on their reputation as a result of association with high-risk businesses.
In addition, businesses that accept international payments and operate in countries that are listed for increased risk of fraud have a high business risk. Businesses that have a transaction volume greater than $20000 per month and rely primarily on online payments are at high risk.
How Does My Processing History Affect My Merchant Account?
The processing history of a business indicates the consistency and reliability of its revenue and cash flow over a certain time period. The processing volume of your business, combined with factors such as processing history, highlights the level of risk associated with your business. It might also signify the probability of a business in terms of processing future transactions.
Although high-risk industries might seem profitable and have the financial data to prove their viability, they have a high chance of getting rejected while looking for a payment processor. Multiple businesses might not be generally categorized as high-risk business types, but many payment processors might not prefer to be associated with them due to past events.
Examples of High-Risk Businesses
High-Priced Products and Services
Businesses such as travel agencies, airline ticketing, and automobile warranties offer high-priced products, which increases their overall riskiness. High ticket sales mixed with a greater probability of returns increased the chances of reverse transactions.
Moreover, companies such as airlines might have insufficient sales, which signal poor financial performance to conventional payment processors. As a result, high-risk businesses need to bear hidden and extra fees to make up for their sales fluctuations.
eCommerce Businesses With Future Deliverables
Most e-commerce stores operate on the strategy of future deliverables by offering consumers the ease of purchasing online and shipping at a later date post receiving payment. While there are countless secure e-commerce businesses, these online businesses have increased excessive product returns and chargebacks.
In addition, some e-commerce businesses might offer yearly membership service or continuity billing options which adds to the risk of increased chargebacks indicating too much risk in managing their accounts for payment processors.
Businesses Involving Reputational Risk
Businesses such as adult entertainment and CBD retailers fall under the high-risk category due to significant reputational risk. Although marijuana is legal in some states of the US, medical marijuana businesses are usually not facilitated by traditional payment processors, as any such company presents reputational risks from association with them.
Moreover, traditional banks and low-risk independent sales organizations (ISOs) pay strict attention to their public image and are reluctant to offer services to businesses that bring in a certain amount of reputational risk for them, such as supporting firearm companies.
How Do I Choose A Good High-Risk Payment Gateway Provider?
Choosing a good high-risk payment gateway provider requires a business to have a high-risk merchant account. Banks require a high-risk SSL certificate for high-risk business websites as well as top-notch encryption technology to open up a high-risk account.
In order to avail of high-risk merchant services, you might be required to complete 3D verification procedures as part of the consumer authentication requirements. Here are some of the essential factors to consider when looking for a reliable payment gateway.
An effective high-risk payment processor offers easy and efficient management of transactions and the generation of real-time information. High-risk accounts offer a variety of services that fit perfectly according to the nature of high-risk activities.
The top high-risk payment processors offer tokenization options that allow them to reuse customer information to process future transactions without storing it. This process ensures quick transaction processing while ensuring the safety and security of a business and its consumers.
Although high-risk payment processors require merchants to pay higher fees to compensate for the riskiness of their business, they should offer value-for-money services to ensure top-notch management of high-risk accounts.
An efficient high-risk payment gateway needs to offer better focused and prompt customer support as compared to a conventional payment processor to cater to the transaction processing issues in a timely manner.
The top payment processing platforms for high-risk businesses offer multiple transaction facilities such as mobile payments, self-service options, and internet transactions to ensure ease of payment processing for consumers as well as merchants through a secure channel.
Duration of Processing Future Transactions
A key aspect merchants need to look for in the top payment processors is the duration of processing transactions. Some payment processors allow instant transaction processing, whereas others require some time to complete verification procedures before providing access to the funds.
Security and Protection
The top payment processors for high-risk industries need to address the concerns regarding the security and protection of their customer’s information to prevent information thefts. For this purpose, they need to obtain a high-risk SSL certificate and optimize their websites’ encryption technology to ensure their customers’ privacy and security.
Example of a great crypto payment gateway that operates with merchant in high-risk industries is X1 payment gateway. Check our review on it.
Most Common Challenges of High-Risk Merchants
There are several challenges involved in the operation and management of high-risk merchant accounts, depending on the type of business and the nature of the industry.
Rolling Reserve Requirement
Due to the increased level of risks involved, high-risk merchants are required to have a rolling reserve. This process involves putting some amount of a specific transaction on hold for a designated time period, after which it will be settled.
Exorbitant Transaction Costs
Payment providers charge extraordinarily high processing costs to high-risk merchants to compensate for the increased level of risk, which leads to additional expenses for businesses operating in high-risk industries.
Significant Chargeback Rates
Statistics reveal that high-risk industries tend to have chargeback rates far more than other industry types. High-risk payment gateways might also introduce some covenants, such as minimum monthly requirements to match the level of risks involved in a particular industry.
Increased Chances of Fraud
Businesses with significant risks involved in their operations and payment processing tend to fall victim to fraudulent activities easily. Online businesses are a regular target of dubious schemes through a variety of methods which is a great challenge for businesses operating in high-risk industries.
Impacts on High-Risk Merchant Accounts
Significant Increase in Operational Costs
High-risk merchant account providers have high fees associated with their services compared to other merchant accounts. High business risk means that a high-risk payment gateway will charge a greater fee to compensate for the increased level of risk.
Businesses operating in high-risk industries have to abide by various compliance requirements to ensure that they operate according to federal and state laws. Therefore, the stringent compliance requirements increase the difficulty level of operating high-risk merchant accounts.
How cryptocurrency helps high risk merchants to overcome payment challenges?
The adoption of crypto payment solutions is raising through the last years and the trend will probably remain the same in 2023.
Crypto payment processors can provide a number of advantages to businesses in high-risk sectors, such as:
Anonymity – transactions conducted with crypto are usually anonymous, which is beneficial for industries which prefer not to attract attention from regulators. Also typically the clients of such businesses prefer to keep their identity in private.
Reduced chargebacks – cryptocurrency transactions are irreversible, which eliminates the risk of chargebacks. As we have mentioned above, a high chargeback rate may “flag” your merchant account as a high-risk one.
Lower fees – certain crypto payment processors offer fees that are lower than those charged by traditional payment processors, which can be advantageous for businesses with minimal profit margins.
Access to a global market – cryptocurrency allows companies in high-risk industries to take advantage of global trade opportunities by facilitating cross-border transactions with no hassle, which may be difficult to achieve through traditional merchant processing services.
Security and Decentralization – crypto transactions are considered more secure than regular card payments. All transactions processed on the blockchain, which is being used as a distributed digital ledger, are permanent and impossible to delete and modify. This adds another layer of security and peace of mind for everyone involved in the so-called high risk industries – from the merchants, to the end user.
Compliance – Certain crypto payment processors have built-in compliance protocols that can assist high-risk companies in fulfilling regulatory expectations and avoiding sanctions.
It is essential to bear in mind that although crypto payment processors can provide certain benefits for high-risk businesses, they come with their own risks and it important to do the necessary research and comply with all regulations related to the usage of cryptocurrency.
What Are High-Risk Transactions?
Transactions that involve chances of monetary losses are known as high-risk transactions. If a certain transaction involves a significant level of risk, you might lose your investment in case of negative outcomes resulting from that transaction.
What Is a High-Risk Merchant Account?
A high-risk account involves large transactions, increased chances of fraud, frequent returns, long delivery periods, and greater chargeback rates, due to which payment processors perceive an increased level of risk for opening these accounts. High-risk merchant accounts must bear greater processing fees due to the monetary risks involved in their transactions.
What is A Low-Risk Merchant Account?
Low-risk merchant accounts have a low transaction volume (less than $20000/mo) and an average transaction value of less than $500. These accounts do not have high chargeback rates and involve minimal payment processing fees.
What Types of Businesses Involve High Risks?
High-risk businesses range between traveling services, medical marijuana practices, furniture manufacturing, e-commerce, companies with recurring payment plans, adult entertainment, and telemarketing agencies. Hundreds of businesses fall under the high-risk category, which requires them to open up high-risk accounts.
How to Get A High-Risk Merchant Account?
When applying for a merchant account, payment processors assess the risks associated with the nature of a particular business and then categorize it as high risk or low risk.
Different payment processors are suited for different business types according to their industry and nature. Therefore, it is recommended that merchants should research and compare different platforms in terms of their processing fees, duration of transaction processing, customer support, and other important factors to arrive at a suitable option.
Although it is not easy to find reliable business services according to your company, it is far more complex for high-risk merchants to find an efficient high-risk payment gateway that fits precisely with their business operations.
Consequently, businesses operating in high-risk industries will have to pay higher fees and processing charges to ensure effective transaction processing. However, this does not mean they should compromise on their quality and customer service.
We hope this article will enable readers to understand the concerns of payment processors related to high-risk industries. Please note that this is not a financial advice.
Zornitsa is the Editor-in-chief at Coinlabz. She is involved in researching the impact of blockchain technology and the way crypto is transforming peoples’ perceptions of finances.