Risky Business: What Being Labeled A High Risk Merchant Actually Means
The words “high risk merchant” or “low risk merchant” are thrown around often by credit card processing companies, banks or business lenders. But what does it actually mean to be a high risk merchant? What are the problems that come up if you are categorized as high risk? Can you even shake that label? These questions are often asked by new and established merchants alike, and these questions (and more) will be answered for you.
What Is High Risk Really?
When a merchant is first labeled as “high risk”, the first question they ask is why. Being a high or low risk business has nothing to do with the work ethic or trustworthiness of an owner, and everything to do with the type of business they run. Unfortunately, there isn’t an in-between category, so merchants will end up being one or the other when categorized by banks or payment processing companies. Unfortunately, there are many times that characteristics are just inherent to the industry in which your business operates, so even if you as a merchant are doing everything right, your company will still likely be branded as high risk. There are a few specific characteristics that companies will flag:
- High rate of chargebacks or fraud: Chargebacks are when funds paid by a customer to a merchant are returned, or taken back. Unlike regular returns, chargebacks happen when an error occurs (double billing, expired card was used or bank error), a customer is unsatisfied, or fraud occurs. Fraud is tied in, and can include fraud by the customer, another person (e.g. someone’s card information was stolen), or even by the merchant themselves. Both chargebacks and fraud are typically customer driven, so it’s not something that can be controlled. Both fraud and chargebacks come with extra charges to the merchant from their bank or credit card processing company and oftentimes, a high risk classification.
- Unknown reputation/new business: Newer businesses can be tough to sell as low risk. If you’re just starting out, it’s hard to know if you will succeed or not as a bank or credit card processor considering the number of small or new businesses that fail. This is especially true if you are in an industry that is typically considered high risk, you operate mostly in cash, or you are an exclusively online business.
- Unsteady revenue streams: This category could encompass a number of things, but is typically industry-related. If you aren’t yet profitable, you operate on a large number of preorders or prepaid products or services, or the demand for your product or service is unpredictable, you will likely be a high risk merchant.
- Large number of accidents: If accidents on the job are happening more frequently than other industries, this will often lead to a high risk label. Businesses that often fall into this category are in agriculture, mining, construction, or petroleum
- Low credit score: If the business or the owner/operator has a low credit score, this will propel you straight to high risk, regardless of the industry.
To further breakdown the categorizations, you can generally separate out a swath of businesses that will always be considered high risk. These include:
- sex-related industries, such as strip clubs, porn, paraphernalia and products, and other services
- drug paraphernalia or drug-related companies, including marijuana, tobacco, and pharmaceuticals
- online only stores or online shops
- vacation and travel sites, including rentals, planning, time shares and tours
- guns, weaponry and self-defense dealers and sellers
- financial investing, financial planning, payment processing
- gambling, lotteries, or betting
- life coaching, self-help industries and talent management, including business advice, psychics, talent agencies etc.
- real estate or rentals
- non-U.S. citizens operating in the United States or offshore businesses
- online-exclusive businesses (examples would be Amazon, eBay, Etsy, and social media sites)
- A business on the Terminated Merchant File (TMF) list, also known as the MATCH list (more on this later)
This is not an extensive list, so even if your company’s category or description isn’t included, you may still be high risk. When you speak with banks or credit card processing companies, it’s important to ask if you would be considered high risk by their standards since they can vary across the board. Even credit card brands such as American Express, Visa, and MasterCard have different barometers for high risk and low risk merchants, so it’s important to establish where you fall early on.
Low risk merchants and businesses are relatively easy to spot. They’re essentially the opposite of a lot of the qualifiers of a high risk merchant, and have an easier time finding credit card processing companies that will take them on. Some of the qualities of a low risk merchant or business include:
- low volume processing, typically less $20,000 a month
- an average price per transaction under $50
- little to no chargebacks
- a business in a low risk industry, which can vary depending on the processing company
- operating a business in a country that is considered low risk
I’m High Risk. What does this mean for my business?
At this point, you may be asking yourself, I’m high risk, but so what? Is this really going to affect me? The answer is obviously yes, or else it wouldn’t matter at all which category you fall into. So, what are the consequences exactly? First of all, high risk businesses can expect credit card processing companies. Although there are many credit card processing companies that do provide service to high risk businesses, there are some that have stringent policies when it comes to the riskier businesses, and many times there are fewer companies with good customer service to choose from.
One of the biggest differences to consider is the increase in fees, especially processing fees. Typically, you can choose between an interchange plus, flat rate or tiered fee processing structure, with interchange plus being the better option in most cases (for a review on each of these, visit our CCP Primer). What can often happen, however, is that processing companies will only make their tiered fee processing structure available to high risk merchants, which can end up being much more expensive, especially for a company that is in its early stages.
Oftentimes you may also be locked into a long-term contract up to three years with an expensive early termination fee or even a liquidated damages fee, which can cost up to thousands of dollars. Even though these kinds of contracts can typically be negotiated, as a high risk merchant there’s often less power to discuss the terms because of the risk a credit card processing company is taking on.
There are other fees that end up being added on or increased, such as increased chargeback fees, additional protective measures and higher penalties. Reserves are one of the more popular fees that payment processing companies use for its high risk merchants. There are three major types of reserves: a rolling reserve, an up-front reserve, or a fixed reserve.
–Rolling Reserve: A reserve is essentially collateral the acquiring bank uses in case of fraud, chargebacks, liquidation or bankruptcy. When a rolling reserve is used, a credit card processer will hold a percent of revenue for a definite period of time and then will steadily provide the money back to the merchant.
–Up-Front Reserve: If an up-front reserve is put in place, a specific amount of money is put in escrow at the very beginning until a balance is met. This can also be done by letting 100% of all of the deposits from credit card transactions be used to fund this reserve until the set amount is met.
–Capped Reserve: In the case of a capped reserve, a percentage of credit card transactions will be withheld each month until a fixed (or capped) amount is met. At that point, no more money will be withheld, but amount in the reserve will remain in place as long as the merchant processing agreement remains intact.
These costs can be crippling to the cash flow for any business, especially a new or emerging one. The costs coupled with often poor customer service can be frustrating and discouraging for merchants, especially when being high risk isn’t always in the control of the merchant themselves.
What if I’m on the TMF/MATCH List?
Terminated Merchant File (TMF), also known as Merchant Alert to Control High-Risk (MATCH) is a list that lets other processing companies know that a business and its owner had their service terminated with their merchant bank account and/or payment processor. A merchant and their business are added to the list when there is a large number of chargebacks, money laundering, fraud, bankruptcy or liquidation, PCI compliance violations, identity theft, or a number of other violations. Merchants and their businesses remain on the list for five years. Because these are all serious violations, most reputable credit card processing companies and banks will not touch a company that is on the MATCH list. If you are able to find a credit card processor and bank that will accept you, there are not only high risk fees, but also other qualifiers or stipulations that have to be met. If you are on the MATCH list, it’s best to do whatever you can to get off of it, or else you may not be able to function as a business (or start another one) at all.
How can I become a low risk merchant?
Once you’ve been labeled as high risk, is there hope to become low risk? It depends. Sometimes the answer is no. Being pegged as a high risk merchant is often so entwined with an industry that their business is operating in that it becomes difficult to fully shake the label. However, there are ways to combat some of the issues that come with being a high risk merchant that may even get you into the category of low risk:
–Reduce the number of chargebacks: There are strategies and policies that you and your business can put in place that can greatly help reduce the number of chargebacks. These include unambiguous shipping return policies, using more secure processes for credit card purchases like signature requirements in person or confirmation of expiration dates online, and keeping detailed records of transactions and receipts.
–Fraud detection and prevention: Using fraud detection tools and alerts can help prevent major issues in the future for any business. Many times, credit card processing companies have this built in or offer additional software to beef up the security for both online and in-person purchases.
–Bring in consistent revenue: Focus on how you can create a more reliable and dependable stream of cash to your business rather than large spurts of revenue. This alerts credit card processing companies and banks alike that the business you run is reliable and sustainable.
–Find high risk specialists: If you are high risk, it’s usually a good idea to find a merchant account and credit card processing company that specializes in high risk merchants. Their experience in dealing with riskier businesses will often be a great help to managing the risk your business carries. As with any long-term deal, however, it’s always important to read the contract very carefully. Some of these “high risk specialists” have been known to take advantage of merchants with a lot of additional costs that could cripple your business, so be sure to always know what you’re agreeing to beforehand.
It can be disconcerting or discouraging to know that your business is high risk. But risk is inherent in running and owning your own business, and without risk there is no reward. It may take a little more work, but even with a high risk label, you can still companies that will work for you and help you reach your business goals.