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What Makes A Business High-Risk? The 5 Biggest Factors & What You Can Do About It

High-risk businesses pay 10x higher transaction rates, they have to wait longer to get their money, AND they have a much harder time getting a merchant account. 

But what makes a business high-risk? And if you are found to be high-risk, what can you do about it?

What Is A High-Risk Business?

First, let’s quickly go over what a high-risk business is and who makes that decision.

A high-risk business, or merchant, is one that presents a lot of risk to the acquiring bank that handles their transactions. This risk comes in many different forms and various levels (which we go over in more detail below). 

But who makes the decision? 

Who Determines If A Business Is High-Risk?

Oftentimes, card networks (ie. Visa, Mastercard, etc) determine whether a business is high-risk or low-risk based on the industry it’s in. 

That being said, most acquiring banks also have their own specific rules that they use to determine the risk level of a business.

What Makes A Business High-Risk?

Your Industry

We briefly touched on this above, but the industry in which you run your business plays a huge role in whether you’re considered high-risk or not. 

The card networks or acquiring banks make this decision by looking at the historical processing data from the entire industry, so unfortunately, this has nothing to do with your specific business. 

If your business falls into this category, trying to find a merchant provider that specialises in high-risk merchant accounts can help avoid some of the harsh penalties. 

Some Examples Of High-Risk Industries:

  • Pawn Shops
  • Gaming & Competition Websites
  • Travel Agencies
  • Bridalwear Shops
  • CBD Oil Businesses

Deposits

If your company takes deposits for your products or services, this can raise the chances of your business being seen as high-risk. 

The reason for this is that it’s hard for the acquiring bank to accurately predict the monthly income they’ll make from your transactions. 

Let’s say, for example, when applying for your merchant account, you tell the bank that you make £10,000 of sales every month and you take a 50% upfront deposit from the customer by card. 

However, in theory, all of those sales could cancel. 

What this means is that your business will only take £5,000 that month (the 50% upfront deposits that were paid via card) and the acquiring bank only earns half of the money it was expecting to earn.

To offset the risk of lost income, the acquiring bank will typically charge higher rates on your transactions. 

Furthermore, without a robust refund policy in place, a customer could demand their deposit back and open up a chargeback dispute. 

If this happens, and the dispute falls in the customer’s favour, the acquiring bank has to refund the customer and then recoup that money from your business (for good reason, they really don’t like doing this).

Your Delivery Times

Similar to deposits, longer delivery times also increase your businesses perceived risk by the acquiring bank. 

The longer your product/service takes to deliver, the higher the risk is that the customer will cancel and ask for a refund. This means that the acquiring bank will make less money.

So how can you mitigate this? 

Businesses who deliver within 24 hours of a payment being taken are deemed to be significantly lower-risk. Therefore, if you’re a takeaway food store or your business is able to offer next-day delivery, you’ll fall nicely into a lower-risk category.

The Products You Sell

Certain products are deemed high-risk by acquiring banks because of the rules and regulations around such products. 

A good example of this is CBD products; these products are now heavily-regulated because there have been instances where products have contained substances other than CBD oil which have proven a health-risk to consumers. 

Where cases like this have been reported, the businesses selling these products have been fined or, in some cases, shut down. For an acquiring bank, if your business closes down then they lose you as a revenue-source.

Your business doesn’t have to be centered around a high-risk product category to be considered high-risk, either.

As an example, a convenience store would usually be seen as an extremely low-risk business, but if they decided to stock even just one high-risk product (such as CBD oil), it springs the entire business into a higher-risk category.

Past Processing History

There are two main things that an acquiring bank will check for in any previous card processing history you have:

  1. Level of chargebacks
  2. Gaps in processing history

The Level Of Chargebacks

Usually, acquiring banks will see you as higher-risk if your level of chargebacks (the amount of money in dispute) goes above 1% of your transaction revenue. 

You can reduce your chance of chargeback disputes by providing detailed invoices/receipts and ensuring that you have good policies in place for the products and services you sell. 

For example, if your product is non-refundable, it’s important that the customer is aware of this BEFORE they make a purchase. If they later ask for a refund, and you can prove that the customer signed a document to say they were aware of this policy at the time of purchase, then the chargeback dispute will fall in your favour.

Gaps In Processing History

If you have large gaps in your processing history, it suggests that your business has had to close for a period of time or that your business isn’t fully stable. 

An acquiring bank looks at how much income per month they will make from your business when you submit your application. If there are gaps in your processing history, it suggests that there are some months where the acquiring bank may not make any money. 

Consistency and transparency is key here so, if you know you are going to have a gap in your processing history, inform your acquiring bank so that they aren’t wondering if your business is in financial difficulty. 

If you are applying for a merchant account with a new provider and you have gaps in your processing history, let the bank know upfront and provide an explanation for this.

Conclusion

High-risk businesses have it rough. They pay higher rates, wait longer to receive their customers’ money, and often encounter issues when opening merchant accounts. But what makes a business high-risk?

These five factors can lead to your business getting a high-risk merchant label by a bank or card network: 

  • Your industry is considered a high-risk one (e.g., pawnshops, gaming and competition sites, CBD oil businesses).
  • You take deposits for the products and services that you offer.
  • You don’t deliver your products quickly enough.
  • You sell products that fall into high-risk categories, even if your business is otherwise considered low-risk (e.g., you own a convenience store but sell CBD oils).
  • Your level of chargebacks is higher than 1% of your transaction revenue. 
  • There are major gaps in your past processing history.

If any of these apply to your business, it would be wise to look for an acquiring bank that services plenty of clients in your industry and is, therefore, a bit more lenient with its risk standards and regulations.

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