Why Businesses Labeled as ‘High Risk’ Navigate with Pay.cc

Payment processors don’t treat all businesses the same way. Some businesses are deemed “high-risk,” and this classification affects them in several ways. High-risk businesses face higher fees, must closely monitor chargebacks and fraud, and must meet various requirements before they can access merchant services. Even after they meet these rigorous demands, they remain under close scrutiny to alleviate concerns from banks and payment networks.

Fortunately, there is a solution for high-risk businesses in the form of high-risk merchant accounts. These specialized merchant services cater to high-risk businesses, helping to reduce risks and ensure a smooth open banking payment gateway experience. But what exactly makes a business high-risk? What kind of products or services put them in this category? And what benefits do high-risk merchant accounts offer to their clients? Continue reading to get a concise overview of why a business might be labeled as high-risk and discover how to minimize expenses and maximize profits if your business falls into this category.

Distinguishing High-Risk from Low-Risk Businesses

In essence, the categorization of a business as high-risk or low-risk hinges on the potential for banks or payment processors to incur financial losses. It’s primarily a matter of financial safeguarding. It’s important to note that these labels are determined by banks and payment processors rather than government agencies. On the flip side, low-risk businesses pose minimal financial risks to those who process their payments. Often, this differentiation can be further refined by examining the chargeback ratio.

High-Risk Products and Services

More often than not, high-risk status is often attributed to e-commerce businesses that deal in specific products or services. It’s important to understand that being classified as a high-risk merchant shouldn’t discourage you from operating your online store. Many online businesses have successfully navigated this classification. The key is to be aware of the specific requirements set by your high risk payment processing, ensuring that your shop runs smoothly.

Additional Factors Impacting High-Risk Labeling by Credit Card Processors

The classification of your business as high-risk isn’t solely determined by the nature of the products and services you offer. Several other factors come into play, increasing the perceived risk for payment processors. If your business has encountered the unpleasant experience of losing its merchant account before, if your industry experiences high levels of chargebacks or you regularly handle large dollar transactions then they are at greater risk than others and labeled high risk entities by banks and credit card processors.

It’s worth noting that some of these criteria can be addressed over time. For instance, as your business matures and maintains a low chargeback ratio and accumulate a positive history of credit card processing, these factors can potentially be mitigated. However, it’s important to emphasize that this primarily pertains to new businesses, startups, and other small enterprises with poor credit that may require credit repair services. Once you find yourself in the high-risk merchant category, it’s often challenging to escape that classification.

Requirements Imposed on High-Risk Businesses by Payment Processors

The rules governing merchant operations favor a swifter start for low-risk businesses. In contrast, for high-risk merchants, the journey is not quite as straightforward. Here are some requirements imposed on any business labeled as high risk:

The Fee is Usually Higher

High-risk merchants can anticipate somewhat higher fees as part of their payment processing arrangements. However, it’s important to note that the fee landscape has evolved significantly over time. The extent of these fees varies based on the type of payment processor you choose. Flat-rate processors tend to impose the highest fees, followed by three-tier processors with lower fees, and the least costly fees come from interchange-plus processors. 

Additionally, high-risk businesses may also be subject to increased fees related to compliance. Attaining PCI compliance, for instance, is relatively straightforward, but it’s vital to conduct thorough research on the specific compliance requirements for your industry to ensure that you meet the necessary criteria to operate legally.

Payment Settlements are Often Delayed

To mitigate the risk of fraud, many processors hold onto funds, resulting in payments that may not reach you as swiftly as you’d prefer. It’s important to understand that not every credit card transaction or processor will subject you to this delay. If you encounter this as a recurring issue, you have the option to address your payment processor and request a reduction in the timeframe during which funds are withheld. This becomes especially relevant if your sales have demonstrated consistency and your chargeback ratio remains low.

Contributing to a Reserved Fund

Certain acquiring banks may require you to contribute to a reserve fund aimed at offsetting potential chargebacks. Reserves, particularly rolling reserves, might seem like an inconvenience, but they serve as a necessary safeguard that you shouldn’t initially attempt to avoid. The good news is that reserves are negotiable and need not heavily impact your profits. 

Final Thoughts

It is not all doom and gloom for businesses with a high risk label, as there are plenty of reliable high risk payment processing providers out there. Once you acquire their services, you will see that their solutions like high risk credit card processing could just be what your business needs to thrive.