Unveiling the Criteria for Identifying High-Risk Merchants

This article will reveal and break down the criteria that classify merchants as high-risk, making it easier to understand and manage payment processing risk factors. Get ready to gain insights that could save your business time and money!

Key Takeaways

• High-risk merchants are businesses categorized as risky by banks. They face more fees and rules when working with a payment processor.
• Common signs of high-risk merchants are high chargeback rates and working in industries like e-commerce, travel, and online gaming.
• Companies that offer help to these merchants provide risk management strategies and fraud prevention plans to lower their risk levels.

What Defines a High-Risk Merchant?

High-risk merchants are businesses that are more likely to face chargebacks, fraud, and legal issues. Think about businesses in online gaming, e-commerce, retail, and travel services. These are industries that need high-risk merchant accounts in need of specialized processors to handle their transactions.

High-risk businesses need to find the right payment processing partner that understands their needs and risks.

For eCommerce sellers in the USA, understanding the criteria for being categorized as high-risk is crucial to having smooth transactions with their local and international customers. If you identify with the characteristics below, you might be tagged as high-risk.

1. Dealing with large transactions or large amounts of money per sale
2. Reliance on international sales
3. Selling controversial products
4. High chargeback rates

Being categorized as high-risk means higher costs and stricter contracts with payment processors. Make sure to partner with one who knows your industry from the inside out so you’re guaranteed they can lower your risks and ensure better transactions.

Common Criteria for Identifying High-Risk Merchants

Spotting high-risk merchants is fairly easy when you know what to look into. Checking their industry type and chargeback rates can already tell you whether they are high-risk or not.

Here’s in-depth information about the common criteria to identify high-risk merchants.

Industry type

Industry type plays a big role in deciding if a business is high-risk. For example, antiques and collectibles, bus lines, country clubs, and sports betting are seen as high-risk industries.

So are the travel, online gaming, e-commerce, and retail. High-risk merchant accounts are vital for these businesses to transact with their customers.

Here’s a closer look into high-risk industries:

1. Adult industry: This includes websites and services focused on adult content. They face high chargeback rates and fraud risks.
2. Gambling: Online casinos and betting platforms deal with large cash flows and legal issues. This makes them risky for payment processors.
3. Travel: Airlines, travel agencies, and tour operators have a lot of cancellations and chargebacks. Their future sales depend on many unknown factors.
4. E-commerce: Online stores, especially those selling high-value items, often see more fraud cases. They handle a lot of personal customer information.
5. Subscription services: Companies offering monthly boxes or streaming services face challenges with recurring payments and customer disputes.
6. Telemarketing: Businesses that sell over the phone get lots of chargebacks. People sometimes deny buying products.
7. VoIP services: Companies offering internet-based call services are vulnerable to fraud. They also deal in a highly technical field, which adds complexity.
8. Pharmaceuticals: Online pharmacies are prone to regulatory scrutiny and counterfeit product issues, making them a high-risk sector.

These industries often need special attention in risk management strategies and fraud prevention measures to operate smoothly.

Chargebacks

Chargebacks are big problems for high-risk merchants. They happen when customers ask their bank to return their money because they’re not happy with a product or they think it’s fraud.

It’s important that high-risk businesses have a processor adept in fraud prevention in payment processing and effective risk management strategies. Good customer support also helps in lowering chargeback rates and overall risk levels.

Financial Risk Factors

High chargeback ratios are a big red flag for high-risk merchants. When businesses have high chargeback rates, it shows they might be too risky to work with.

This problem leads to higher fees and longer contract terms. Merchants also need to keep some money in reserve, like rolling reserves, for these cases.

On top of chargeback issues, a history of financial instability can lead to being identified as high-risk. Past problems like bankruptcy, bad credit history, or having merchant accounts closed before are examples of bad financial health.

Such issues show that a business might have trouble in the future, like fraud and chargebacks. They also suggest that the business might not handle money well. Processors may fear that working with such a business could lead to losing money or facing legal issues.

Fraud and Compliance Risks

High-risk merchants often face big risks with fraud and rules they must follow. They need to fight fraud and meet legal standards, or they could face serious problems.

Susceptibility to Fraud

High-risk merchants often deal with more fraud because their type of business draws more scams.

Merchant risk assessment spots these problems early. Checking for risks and managing them is critical in high-risk payment processing. It prevents fraudulent behavior from scamming businesses and customers.

Here are common types of fraud that a high-risk business may encounter:

1. Identity theft: Someone uses another person’s personal information to buy things or get money.
2. Phishing scams: Emails trick people into giving out private information like passwords or credit card numbers.
3. Friendly fraud: A customer buys something, and then claims they didn’t get it or didn’t order it to get a refund.
4. Chargeback fraud: Similar to friendly fraud, but the customer directly asks the bank for a refund, claiming fraud.
5. Account takeover: A scammer gets into a customer’s account and makes unauthorized purchases.
6. Refund fraud: Scammers return stolen goods or use fake receipts to get money back.
7. Card testing: Thieves test stolen credit card numbers with small online purchases before making bigger ones.
8. Fake websites: Sites that look real but are set up to steal credit card details when customers try to buy things.

These types of fraud are especially common in high-risk industries because these areas deal with lots of online transactions and international payments. High-risk merchants need good plans for fraud prevention in payment processing to keep their businesses safe and build trust with their customers.

Regulatory Compliance Challenges

High-risk businesses have many rules they must adhere to. If that’s not difficult already, these rules can change constantly, which makes it harder to keep up with.

Many high-risk business types find it tough to get standard merchant accounts due to their risk levels. They must meet strict legal and regulatory demands, especially if they operate in other countries.

Their chosen payment processor must be able to handle international payments and transactions to maintain smooth operations despite regulatory challenges.

Transaction and Sales Patterns

Looking at how businesses sell and handle money can show if they are high-risk. Here’s what to check in their transaction and sales patterns.

Large Volume of Sales

Selling a lot can make a business seem risky to banks. This is because high sales often lead to more chargebacks. Often, high-risk merchants with high-volume sales pay more fees.

As sales grow, a business might move from low-risk to high-risk. This change happens because big sales mean more risks like fraud or chargebacks. Banks and payment processors watch this closely.

If a company starts selling a lot or goes into new countries, it may need a specialized payment processor that can handle big deals or foreign sales.

International Transactions

Selling things to people in other countries can make a business high-risk because there’s more chance for chargebacks and fraud. High-risk merchants often take payments from across borders, needing special accounts that can handle the ups and downs of selling internationally.

Businesses dealing with customers around the world face unique challenges. Different rules and money types add to these challenges. Providers help by offering accounts fit for these businesses, thinking about where sales happen and what currency they use.

High-risk merchants also see more disputes and fake activities in international deals. This leads to bigger money losses and legal troubles if they don’t follow foreign laws right.

Strategies for Managing High-Risk Merchants

Putting strong fraud prevention steps in place is key. Banks and businesses need to catch fraud before it happens by scrutinizing each sale.

Using advanced tools and technologies can help in catching fraud better. AI and machine learning are being utilized in payment processing more now since they can monitor transactions better and check for fraudulent behavior.

Aside from strict fraud prevention in payment processing, high-risk businesses should also stick to regulations. This way, they keep payment processors happy and run smoothly.

Following laws that keep their business safe. Regulations like PCI DSS, GDPR, AML, and KYC are important in ensuring each transaction is safeguarded against fraud attacks. It’s about more than just avoiding trouble—it helps them run smoothly.

Benefits of Identifying High-Risk Merchants

Knowing who high-risk merchants are helps protect banks and other financial groups. It also aids in cutting down on money loss and keeps their good name safe.

Protecting Payment Processors and Financial Institutions

Payment processors and banks face big risks when working with high-risk merchants. To stay safe, payment processors charge them higher fees and uphold stricter contracts.

Some companies specialize in helping high-risk businesses and managing risks better. This helps keep the financial world safer and more stable both for merchants and customers.

Reducing Financial Losses

Spotting high-risk merchants helps keep money safe and builds a good name.  Being careful with these merchants also stops chargebacks and keeps the business’s name clean.

After cutting down financial losses and saving the reputation, it is crucial to back high-risk businesses fairly. Providers like Vellis offer special help to these merchants.

High-risk processors give help to businesses with big financial risks. They specialize in fraud prevention, risk management, and chargeback management for high-risk businesses. Other special help includes support for international payments and smooth system integration, depending on the needs of each high-risk business.

These providers use tools and know-how to lower the chances of fraud. They also make sure businesses follow all rules to keep both money and reputation safe.

Conclusion

High-risk merchant accounts are special accounts needed by businesses that have trouble getting standard ones. To find these high-risk merchants, look at things like how much they sell, the size of their transactions, their history with chargebacks, what they sell, and where they’re located.

Thorough risk assessment is vital for high-risk merchants to see everything carefully before choosing service providers. Checking all details helps avoid traps and bad contracts. It also helps find the best services for their needs, without extra costs or problems. This protects the business and keeps costs down.

If your business is in high-risk industries, partner with Vellis today to have safer and smoother transactions!

FAQs

1. What does it mean to be a high-risk merchant in the USA?

A high-risk merchant in the USA is a business that operates in an industry with higher than usual risk of financial failure or fraud.

2. How can we identify high-risk merchants?

High-risk merchants can be identified based on their industry, business model, and history of chargebacks or fraudulent transactions.

3. Can a business change its status from being a high-risk merchant?

By implementing strong fraud prevention measures and maintaining good financial health, businesses can potentially lower their risk level over time.

References

Miranda D. Best High-Risk Merchant Account Service Providers of 2024. Forbes Advisor. https://www.forbes.com/advisor/business/best-high-risk-merchant-account-providers/. Published August 6, 2024.

Chargebacks. High-Risk Merchant Accounts: The best providers of 2024. Chargebacks911. https://chargebacks911.com/high-risk-merchant-accounts/. Published June 14, 2024.

Soar Payments. High risk merchant accounts | Soar Payments online application. Soar Payments LLC. https://www.soarpay.com/high-risk-merchant-accounts/. Published November 20, 2023.