In the payment processing sector, some businesses are deemed ‘high-risk’ and require specialised merchant accounts. In this article, I’ll look at why businesses are classified as high-risk, the practical implications it has upon their day-to-day operations and my advice for dealing with life as a high-risk merchant.
To get started, let’s talk about why businesses are classified as high-risk.
Generally speaking, there are two reasons why a merchant might be classified as high-risk. First, they operate in an industry, sector or niche deemed high-risk. Second, they have exhibited high-risk behaviour.
In the coming sections, I will look at both of these reasons in more detail.
What is a high-risk industry?
As I mentioned before, certain industries, sectors or niches are always flagged up as high-risk.
Some of the most common industries include:
- Multi-Level Marketing
- Financial Services
This list is far from exhaustive and it’s always useful to consult a full list of high-risk industries before you submit your merchant account application to avoid any nasty surprises.
(As a quick note, it’s important not to mistake businesses operating in a high-risk industry with being a bad business. The majority of high-risk merchants are perfectly legitimate merchants who just happen to operate in a sector deemed high-risk.)
Generally speaking, there are three high-level reasons why an industry is deemed high-risk. They are as follows.
#1 Credit risk
Industries with a time delay between payment and fulfilment are often flagged up as high-risk. This includes industries like travel, transport and home interiors where the cardholder pays several months before the merchant fulfils the order.
If the merchant was to go bust during the delay, the acquirer becomes liable hence the increased risk.
Credit risk also covers industries that are experiencing economic hardship as this increases the likelihood of merchants going bust. Again, if a merchant goes bust, the acquirer becomes liable for non-fulfilment and chargebacks.
Industries with a high level of chargebacks are also classified as high-risk as the acquirer is liable for chargebacks should the merchant go bust.
Finally, businesses that use third-party fulfilment (in other words, businesses that have a third-party provide the service or product) are usually classified as high-risk. This includes businesses like property letting where the acquirer deals with the letting agent but the service is delivered by the property owner.
#2 Regulatory risk
Heavily regulated industries like gambling and pharmaceuticals are usually classified as high-risk. If the industry experiences a high level of regulatory change, it not only makes it difficult to predict the long-term viability of a business model (which increases the risk of the business suddenly failing) but also means the payment provider may fall foul of laws or regulation itself.
This is important as breaking laws or regulations can have criminal consequences. Directors from payment processors have actually been arrested for falling foul of US gaming laws.
Finally, businesses with high levels of cash takings are also usually classified as high-risk as they can be used for money laundering.
#3 Reputational risk
Acquirers historically developed from banks who generally have a puritanical approach to reputation management. Activities that could potentially bring reputational damage to the bank are unwanted and are classified as high-risk.
It’s important to point out that these activities are perfectly legal — for example, pornography and high-interest short-term money lending — but do not pass the ‘Daily Mail’ test.
Operating within certain industries isn’t the only way businesses can be classified as high-risk, though.
Mastercard holds an extensive database of ‘risky’ businesses called the MATCH (Member Alert to High-Risk Merchants) list. Merchant account providers use the MATCH list to quickly screen out high-risk businesses.
Businesses are entered onto the list if their merchant accounts have been terminated and this can happen for a number of different reasons. Some of the most common include:
- Receiving a high number of chargebacks
- Money laundering
- Violating terms and conditions
- Convictions for fraud
- Bankruptcy or sequestration
If your business is on the MATCH list, it’s unlikely that you will be accepted by a mainstream merchant account provider.
In the next few sections, I’ll discuss the consequences of being classified as a high-risk merchant and what you can do to minimise disruption to your business.
What are the disadvantages of being classified high-risk?
As you may have guessed, being classified as a high-risk merchant doesn’t block you from all merchant services. After all, tobacconists, pharmacies and insurance companies can and do accept card payments.
The headline disadvantage of being classified as a high-risk merchant is that you are limited to specialised high-risk merchant accounts and these products tend to be a bit more expensive than regular merchant accounts.
Below are a couple of quotes I received for two merchant accounts. The quotes are for a business with the exact same details except the first is classified as high-risk and the second is not.
High-Risk Merchant Account
Regular Merchant Account
As you can see, the high-risk merchant account charges quite a bit more than the regular one. It also comes with higher setup fees and some annual fees too. Both of those extra fees are, unfortunately, fairly common for high-risk merchant account products.
To make matters worse, high-risk merchant accounts are usually subject to longer settlement periods and are required to hold a rolling reserve. Risk management strategies like these might seem like a minor inconvenience but they can cause serious cash flow issues if not managed correctly.
What should you watch out for?
To summarise where we are at the moment. You should know why businesses are considered high-risk and you should also understand the key disadvantages they face.
In this section, I’ll point out a couple extra things that you should watch out for.
Keep your accounts squeaky clean
If you know your business is classified as high-risk, it’s incredibly important to make sure all other aspects of your business are squeaky clean. That includes completing your accounts in full, adhering to PCI compliance regulations, filing them on time and making all of that accessible to the provider.
Try and include everything possible in your application, even if it’s not entirely positive, as omitted details will get your application tossed out immediately.
Tighten up your T&Cs
With high-risk businesses, you’ve got to reduce the amount of uncertainty as much as you can. Part of that is having bang up-to-date terms and conditions that explicitly state what you offer and what you expect.
Removing all possible ambiguity reduces potential risk and makes you more attractive to providers.
Third-party fulfilment protection
Some merchants — for example, letting agents — have to use third-party providers for fulfilment because it’s part of their business model. If you have to use third-party fulfilment, it’s essential your contract protects you — and therefore your acquirer — adequately.
A common way this is done is by withholding a certain portion of your fee to cover future chargebacks.
Variable attitude to risk
Different merchant account providers have different attitudes to risk and different ways to assess a company’s risk. So it’s not good enough to go to one company and assume their analysis is how everyone else will treat you.
While one provider may consider you high-risk, another may analyse your business and decide that you constitute a medium risk.
Before signing up with one provider, get a number of different quotes to see if other providers treat your business differently.
Minimise chargebacks (and other risk factors)
From the perspective of an acquirer, nothing is more worrying than the threat of a mass of chargebacks hanging over a company. That’s because if the company fails, the acquirer becomes liable for all those disputed charges.
Offshore merchant accounts
Over the last couple years, offshore merchant accounts have become more and more popular for companies that are unable to access regular merchant accounts in the UK.
The premise behind these merchant accounts is simple. Instead of opening a merchant account with a local bank, you open one with a less risk-averse or less regulated bank in a non-resident country.
Offshore merchant accounts are particularly popular amongst online businesses where using local suppliers isn’t as big a concern.
High-risk isn’t the end
Since you’ve reached the end of the article, you should now have a firm grasp on what constitutes a high-risk merchant, the ins and outs of high-risk merchant accounts and some of the extra things to watch out for.
If you are looking for a merchant account, your first step should always be to avoid high-risk providers and target mainstream providers as they can offer the best deals on the market. To do that, click here to compare the best payment processing options on the market. (You could save up to 40% on your card fees!)