High-risk businesses are subject to more expensive merchant service charges than others. A business will spend more to process each transaction if it is a high-risk entity. It could also be subject to increased fees and charges. Contract terms for the business could also be restrictive. Some companies may even have some of their revenues tied up in rolling reserves. They may not get those funds in their reserves until weeks after they would be paid.
The issues that come with being a high-risk business for merchant services are significant. But what would cause a business to become high-risk in the first place?
You must be aware of these concerns that can cause a business to become risky for merchant service providers. There’s always a chance you might fall into this category.
The Industry May Be Risky
The most common reason why a business can be considered risky is because of its format. Businesses in certain fields are more likely to experience chargebacks, fraud, and other concerns.
Some of the industries that are often high-risk include:
- Adult product businesses
- Bail bonds
- Online electronics sales
- Debt services
- Telecommunications sales, including for VoIP services or calling cards
- Travel services
- Firearm dealers, including those who sell ammunition
- Software downloads
- Dating and personal sites
- Online auctions
- Multi-level marketing programs
- General business opportunities; these include promotions where someone could invest in a business endeavor that hasn’t gotten off the ground yet
These industries and many others have higher chargeback rates than others. Their financial stability and legality can also be in question in some cases. There’s a chance a company might shut down or become heavily regulated, causing its risk to increase.
The Products or Services Are Questionable
A business can also be a high-risk one if it sells products or services that might be of concern to some merchant service providers:
- A company sells expensive items. These include customized vehicle parts, high-end computing systems, and many other high-price things.
- A business can provide memberships or other items that entail automated recurring billing processes. Billing errors often occur here, thus leading to chargebacks.
- A business could sell items that banks might ban. These banks could prohibit the sale of certain products or services. While some banks may allow these sales, the fact that others will not do this could increase a company’s risk.
- Some of the products a website offers can be future deliverables. These include things like event tickets, hotel or transportation reservations, and other things that will be scheduled for later. A business may issue chargebacks or returns for cases where these events are cancelled or the purchaser has buyer’s remorse and wants to walk back the transaction.
These threats are significant ones that can occur among many businesses. A business can review its operations to see what types of items or services it sells to determine its risk.
High-risk businesses will be on the MATCH list. The Merchant Alert To Control High-Risk list highlights merchants whose accounts have been terminated in the last five years. The MATCH list highlights companies that have struggled to manage their accounts and have been deemed unable to work with them as desired.
Not Enough Financial Data
A merchant service provider may list a business as high-risk if it doesn’t have enough company financials to review. A business must have enough money to support its chargeback liabilities. A company that doesn’t have enough proof to show it can handle chargebacks will be charged more.
This problem is more prominent among newer businesses. But more established companies could also have the same issue. Some businesses may be willing to conceal their financial data to reduce the risk of them losing funds.
A business could also have a poor credit rating. The weak rating may be due to a business running up significant debts and being unable to manage its inventory. A business with a weak credit score may be high-risk due to how it might be unable to manage chargebacks and other threats. A business needs to manage its funds well, or it will be unable to get a better credit rating going forward.
Time In Business
Most business owners don’t assume that the amount of time they’ve spent in business will influence their risk. But businesses that have been around for a while won’t be as risky to merchant service providers. A long-running business will be more established and will have an idea of how it can run its operations. It will be more stable, thus reducing its general risk.
A business can reduce its risk for chargebacks by managing physical card transactions. But companies that don’t see the actual cards these customers use will be high-risk entities.
A business that operates online will complete CNP or card not present transactions. These deals allow someone to enter one’s card data online. While a website might offer a secure platform for transactions, there’s always the chance that someone might engage in card fraud. Someone who isn’t the proper customer might take the physical card and enter it into a website for a purchase. The risk of purchase fraud will increase the general risk that the business holds.
Check Your Business Status
Take a good look at your business and see how it operates and functions. Be aware of what it is doing and that you have control over how you operate things. Look at what you sell and how your finances look, especially if you’ve been around for a while. Your review can help determine if your business is a high-risk entity and if you’re going to spend more on credit card processing efforts.
But don’t think that if you’re a high-risk business operator that you can’t find merchant services. You can still look for many merchant services that can support high-risk entities. But be advised that you will still pay more for the service than if you were at a lower risk than what someone is often willing to afford or support.