Understanding the Pitfalls of High Risk Credit Card Processing

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In the payments world, there’s one key buzzword that no business wants to think about but must always consider: risk. In fact, this hot topic has paved way for an entirely new industry: high risk credit card processing.

For any high risk business, securing a merchant account via a traditional processor can be complicated. Risk is never a word that banks will embrace, which means there are always going to be extra hoops to jump through in order to get approved for a high risk merchant account. Luckily, there are methods to avoid these pitfalls while still being able to grow your business.

The right payment partnership helps your manage this process on your terms. Unlike traditional retailers who can get a merchant account easily, those who engage in the sale of products deemed “risky” can be harder to find their place in the mainstream financial fold. The higher the risk, the more obstacles to overcome. Luckily, there is a streamlined path for business owners to take to get approved for a high risk merchant account, maintain their account, and start growing their business.

To fully understand how to navigate the challenging high risk credit card processing ecosystem, merchants must first understand what defines this industry, how they can determine why they’re high risk, and what they can do to manage this process without overcomplicating their payment processing needs. We’ve broken down this subject in hopes of educating high risk merchants about how to navigate these increasingly challenging waters.


The Nuances of High Risk Credit Card Processing


Traditionally, being labeled “high risk” would be a kiss-of-death for a merchant. The designation of needing high risk credit card processing services, however, doesn’t have to carry the same negative connotation. Like most things in the world of payments, this title isn’t so black and white and there can actually be benefits to falling into the high risk credit card processing category.

For a merchant to accept credit card payments, they need to secure a merchant account with an acquiring bank. The cost of having this service varies based on what bank you choose, what type of business you have, and the level of transactions you’re conducting on a daily basis. It all boils down to how much risk there is associated with the types of products you’re selling.

In general, the term “high risk” refers to services associated with the types of services that might have more fraud associated with them. This includes things like gambling services, telemarketing, pharmaceuticals, travel, legal services, dating services, computer software, credit repair services, electronics, financial investment services and goods that tend to have a high risk for being counterfeit.  That risk may seem lengthy and broad, but there is a common thread between each of them: The common association to illicit behavior and the propensity to fraud.

For that reason, the fees associated with high risk credit card processing are typically higher. These merchants must also use a payment processor equipped to handle these types of transactions. Many traditional processors won’t take on these types of goods and services because of the associated risks, which is why the world of high risk credit card processing exists. Every business needs to process credit cards, regardless of the perceived risk, which is why this is a market of its own.

A high risk status is typically assigned to businesses who might sell high priced items in these categories or has a high volume of monthly sales. The nature of the products and services is also associated with more chargebacks since there is a greater chance for transaction disputes to occur. This can open up risks for banks and credit card processors, as well as the merchants themselves, which is why there is a category of high risk credit card processing companies to address this market.

FAST BREAK: Work with a high risk processor that “gets” you and your business


What Defines a High Risk Credit Card Processing Merchant?


Even though the products and services sold by merchants in the “high-risk” category are often legitimate business deals, banks and credit cards simply don’t like the associated reputation. As they are often on the hook when a transaction is disputed, many banks aren’t keen to take on merchants associated with high risk credit card processing. Since products and services in this category are typically highly regulated, they raise more regulatory red flags.

The only way to overcome this hurdle is by finding a payment processing partner that has experience in this market and has established relationships with financial institutions who are willing to trust the intermediary payment processor to take on much of the risk associated with these transactions. Think of a high risk credit card processing provider as the middle-man between the merchant and the bank to create a more trusting relationship.

There are a number of reasons a merchant lands on the high risk list. One of the most common reasons is that the merchant is offering products or services that are historically prone to a large number of chargebacks. Merchants who accept recurring payments often fall into this category since these types of transactions are more likely to be disputed by consumers — both for legitimate or illegitimate reasons. It could also simply be that they are a new merchant that doesn’t have a proven record of solid credit card processing history. Bad credit history and being placed on the MATCH list are other ways to land in the high risk category.

Where and how you conduct payments and process payments is also a factor. Merchants who accept multiple currencies and sell products outside the U.S. can raise a red flag to banks and processors who are looking to avoid taking on high-risk merchants. There is more likely to be fraud when dealing with multiple currencies, specifically when conducting business cross-border — especially outside regions like the U.S., Canada, Western/Northern Europe, Japan or Australia.


What Merchants Can Do to Manage High Risk Credit Card Processing


For merchants who may fall into the high risk credit card processing category, the first thing they must understand is what happens when an underwriter reviews an application for a merchant account. Like any financial partnership, the underwriter is focused on avoiding a large volume of unpaid chargebacks and limiting exposure to regulatory fines from the government or card brands.

There are methods that can help merchants avoid pitfalls. To start, when dealing with high risk credit card processing, it’s always good to have some funds in your bank account to show stability. You’ll want to prove you’re a legitimate business and be transparent about what goods or products you are selling. Beyond those key financial checks, you’ll want to ensure your website follows basic security protocols, such as having a secure license (SSL), and that you’re properly marketing your business model. This means being transparent to customers about terms and conditions for buying products/services and how your shipping and return process works.

The last bit of information merchants must consider is the amount of processing volume allowed. In high risk credit card processing, this process gets a little more complicated. For example, your business may be able to take in a large amount of revenue each month, but that doesn’t mean the underwriter is willing to approve that amount or take on the risk. The trick here is to provide the underwriter with as much information as possible to ensure they underwriter is confident taking on your business.

Unfortunately, the only way to convince many underwriters is by proving your stability over time. Traditionally, a 3 to 6 month period of successful payment processing without large amounts of chargebacks will help the underwriter increase your approved processing volume. Having consistent transaction sizes can also help your business establish some regularity, which may trigger an underwriter to re-review your monthly processing volume limit.

The best method for managing your high risk merchant accounts is to diversify your business model. For example, if you’re a business offering subscription-based products or services or recurring payment options, this probably makes you fall into the high risk credit card processing category. Avoid extra scrutiny by adding other payment methods such as ACH. For businesses needing to lower transaction fees, get payments faster, and make the process easier for you and your customers, ACH can deliver a more streamlined way to get regular recurring payments approved.


How Merchants Can Avoid Chargebacks From High Risk Credit Card Processing


One of the biggest problems for high risk merchants is that they’re prone to more chargebacks. Luckily, there are ways to keep your chargebacks under control so you don’t sour your relationship with your high risk processor or the acquiring bank. The trick here is relying on a third-party chargeback prevention platform that can monitor your merchant account in real-time to proactively help you manage the process.

Chargebacks are a headache for any merchant, but they don’t have to be so complicated. With the right partner, your business can be privy to a solution that automates the chargeback monitoring process so you can worry less about your transactions and focus more on growing your business. The right chargeback partner can help you get ahead of any chargeback pitfalls and be there to recover lost revenue whenever a chargeback does get filed.

With all the available technology in the merchant marketplace today, your business shouldn’t be left in the dark. The right chargeback prevention partner will empower you with real-time transaction monitoring of your merchant account, provide business-friendly analytics, and be able to save you time and money so you can do what you do best: Develop a business and keep your customers happy.

Like most things in the payments industry, there’s always going to be a partner equipped and ready to deliver your business the solution needed to overcome any pitfall — even for those needing high risk credit card processing. Once that partnership is formed, you can better manage chargebacks, fight fraud, and fully protect your business.


Get A High Risk Merchant Account


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Anna Kragie is a content contributor for Payline Data. She previously wrote for PYMNTS.com, as a Sr. Content Producer, where she focused on financial services and payments innovation, fraud and security, emerging payments, and FinTech news, research and thought-leadership content across the payments industry.

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