Is Your Business High-Risk Without You Even Knowing It?

You might be surprised to learn that many businesses across all industries are classified as "high-risk" by payment processors and banks. If you accept credit cards or other forms of digital payment, there's a very real chance your company could be one of them - even if you don't operate in a traditionally risky industry.

Being designated as a high-risk business can have major implications for your ability to process payments and maintain stable revenue streams. In fact, many high-risk merchants are initially denied a merchant account when they try to set one up.

But what exactly does it mean to be "high-risk"? How do you know if your business fits the bill, and what can you do to navigate the challenges that come with this classification?

In this comprehensive guide, we'll dive deep into the world of high-risk businesses to answer these critical questions. You'll learn:

What factors determine high-risk status and how processors evaluate them
Which industries and business types are most commonly flagged as high-risk
The consequences of being a high-risk merchant and how they can impact your bottom line
Strategies for securing payment processing and mitigating risk as a high-risk business

Whether you're a new entrepreneur wondering if you'll be able to accept payments smoothly or an established business suddenly facing high-risk hurdles, this article will give you the knowledge and tools you need to protect and grow your operation. Let's get started.

What Makes a Business "High-Risk"?

At its core, the designation of a high-risk business comes down to one thing: the level of financial risk a merchant presents to their payment processor or acquiring bank. Processors determine this risk level using various criteria, assessing the likelihood that a given business type or operation could lead to excessive chargebacks, fraud, or other financial losses.

High-Risk Doesn't Mean Bad Business

It's important to note that being labeled as high-risk doesn't necessarily mean a business engages in illicit or unethical activities. Many completely legitimate business types fall under the high-risk umbrella due to factors largely outside their control, such as higher-than-average chargeback rates in their industry or the increased risks associated with their sales and delivery methods.

Key Factors in High-Risk Classification

While each processor has its own unique risk assessment process, several common factors typically determine whether a business is designated as high-risk:

Industry or business type: Certain industries, like adult entertainment, sports betting, gambling, and CBD products, are almost always considered high-risk due to their elevated chargeback ratios and legal/regulatory challenges.
Transaction volume and amounts: Businesses with very high sales volumes or unusually large average transaction sizes may be flagged as high-risk, as the financial impact of chargebacks and fraud is amplified.
Financial history and credit score: Merchants with poor credit, limited financial history, or prior bankruptcies may have a harder time securing low-risk payment processing.
Chargeback and fraud rates: If a business exceeds the typical chargeback ratio thresholds (often around 1%), it'll quickly be moved into the high-risk category. The same goes for elevated rates of actual or suspected fraud.
Sales and delivery methods: Card-not-present transactions like e-commerce sales are inherently riskier than in-person payments. Merchants selling online or delivering goods/services before payment is fully processed will often be labeled high-risk.

Contrasting High-Risk and Low-Risk Characteristics

To better understand what qualifies as high-risk, it's helpful to compare some common characteristics of low-risk and high-risk businesses:

Low-Risk Business:

Average chargeback ratio: < 0.75%
Average transaction amount: < $500
Monthly sales volume: < $20,000
Primary payment method: In-person, card-present transactions
Established business with a good credit history

High-Risk Business:

Average chargeback ratio: > 1%
Average transaction amount: > $500
Monthly sales volume: > $20,000
Primary payment method: Online, card-not-present transactions
Higher likelihood of future delivery (travel, event tickets, etc.)

Of course, these are just general guidelines. The exact criteria for high-risk classification can vary significantly between different processors and acquiring banks. Additionally, some businesses may have a combination of low-risk and high-risk characteristics, making their risk assessment more of a judgment call on the processor's part.

Regardless of where your business falls on the risk spectrum, it's crucial to understand these key factors and how they impact your ability to obtain reliable payment processing. The next section further explores some of the most common high-risk business types.

High-Risk Industries and Red Flags

While any business could potentially be classified as high-risk depending on its unique characteristics and financial history, certain industries are almost always put in this category by payment processors. If your business operates in one of the following sectors, there's a good chance you'll be considered high-risk from the get-go:

Adult entertainment and products
CBD and cannabis-related products
Cryptocurrency and forex trading
Gambling, gaming, and casinos (online or in-person)
Travel services and ticketing
Subscription-based services with recurring billing
High-value goods (jewelry, electronics, etc.)
Telemarketing and direct marketing
Pawn shops and bail bonds
Credit repair and debt collection

This is not an exhaustive list, but it gives you an idea of the types of businesses that processors tend to view as higher risk. These industries often have higher chargeback rates, more instances of fraud, or are subject to increased legal and regulatory scrutiny, all contributing to their perceived risk level.

Other High-Risk Characteristics

Even if your business doesn't fall into one of the traditionally high-risk industries, several other factors can push you into this category:

Selling primarily online or through card-not-present transactions
Processing a high volume of international or cross-border sales
Having a high average ticket value (usually over $500 per transaction)
Operating in a highly regulated or politically controversial industry
Being a brand-new business with limited financial history
Having a history of excessive chargebacks or fraud incidents

Essentially, anything that increases the likelihood of financial losses for the processor or bank can lead to a high-risk designation. This is why it's so important for business owners to understand their own risk profile and take proactive steps to mitigate potential issues.

The Dreaded MATCH List

In addition to evaluating businesses based on their industry and financial characteristics, payment processors also rely on a database called the MATCH (Member Alert to Control High-Risk Merchants) list to identify high-risk merchants.

The MATCH list is a shared database of businesses that have had their merchant accounts terminated due to excessive chargebacks, suspicious activity, or outright fraud. Once a business is placed on the MATCH list, obtaining a new merchant account becomes extremely difficult, as most processors will automatically reject any application from a listed merchant.

Businesses can end up on the MATCH list for a variety of reasons, including:

Exceeding chargeback thresholds (usually around 1% of transactions)
Engaging in fraudulent or illegal activities
Violating the processor's terms of service or acceptable use policy
Going over monthly processing volume limits
Having a high rate of returned or NSF (non-sufficient funds) transactions

Getting placed on the MATCH list is a serious event that can have long-lasting repercussions for a business's ability to accept credit card payments. Merchants on the list are often forced to work with specialized high-risk processors that charge significantly higher fees and impose stricter terms.

The best way to avoid ending up on the MATCH list is to maintain tight control over your chargeback and fraud rates, work with reputable payment processors, and adhere strictly to all applicable laws and regulations. If you do find yourself on the list, it's critical to take immediate action to address the underlying issues and work with an experienced high-risk processor to get your payment processing back on track.

As you can see, the high-risk designation can come from various factors, some within a business's control and others largely dependent on the nature of the industry. In the next section, we'll dive deeper into the consequences of being labeled high-risk and what it means for your payment processing options.

The Consequences of High-Risk Classification

Being designated as a high-risk business can significantly affect your ability to accept payments and maintain steady cash flow. Some of the most common consequences include:

Difficulty Obtaining Payment Processing

One of the biggest challenges high-risk businesses face is simply getting approved for a merchant account. Many traditional payment processors and acquiring banks are reluctant to work with high-risk merchants, viewing them as too great a financial liability. As a result, high-risk businesses often face frequent rejections when applying for payment processing, even if they have a solid financial track record and low chargeback rates.

Less Favorable Contract Terms

Even when high-risk businesses can secure a merchant account, they often have to accept less favorable contract terms than their low-risk counterparts. This can include:

Higher processing fees and rates (often 3-5% or more per transaction)
Longer contract lengths with early termination fees
Rolling reserves (holdbacks of 5-10% of sales to cover potential chargebacks)
Stricter processing volume and transaction size limits

These terms can significantly eat into a business's profit margins and limit its ability to grow and scale its payment processing in line with customer demand.

Elevated Chargeback and Fraud Risk

By definition, high-risk businesses are more prone to chargebacks and fraud incidents. This can lead to a self-perpetuating cycle, where a business's chargeback ratio continues to rise as it struggles to manage the higher levels of fraud and disputes common in its industry. If chargeback ratios exceed preset thresholds (usually around 1%), businesses can quickly lose their merchant accounts and find themselves on the MATCH list.

Operational Hurdles

Operating as a high-risk business often involves more operational overhead and compliance requirements than low-risk businesses. Some common challenges include:

More extensive underwriting and KYC (Know Your Customer) processes
Ongoing risk monitoring and account reviews by the processor
Required implementation of additional fraud prevention tools and protocols
Stricter PCI DSS (Payment Card Industry Data Security Standard) compliance

These additional requirements can be time-consuming and costly to implement, further straining a high-risk business's resources.

Despite these challenges, it's important to remember that being high-risk doesn't make payment processing impossible - it simply requires a more specialized approach and the right partners.

Securing a High-Risk Merchant Account: A Step-by-Step Guide

If you've determined that your business falls into the high-risk category, the first step to ensuring stable payment processing is working with a provider specializing in high-risk merchant accounts. These providers have experience navigating the unique challenges of high-risk industries and can offer more flexible underwriting criteria and contract terms.

Finding the Right High-Risk Processor

When evaluating potential high-risk processors, look for the following key characteristics:

Experience working with businesses in your specific industry
Transparent pricing and contract terms
Robust fraud prevention and chargeback management tools
Exceptional customer support and account management
Ability to process a wide range of payment types and currencies

It's also a good idea to seek out references or case studies from other high-risk businesses that have successfully worked with the processor. This can give you valuable insights into their service quality and reliability.

The Application and Underwriting Process

Once you've identified a potential high-risk processor, the next step is to complete their merchant account application. This process is typically more involved than applying for a low-risk account, and may require additional documentation such as:

Detailed business plan and financial projections
Processing statements from previous merchant accounts
Personal and business credit reports
Bank statements and tax returns
Reseller agreements and supplier contracts

The underwriting process can take anywhere from a few days to several weeks, depending on the complexity of your business and the level of risk involved. During this time, the processor will review your application materials and assess your overall risk profile, taking into account factors like your chargeback history, credit score, and industry category.

Key Contract Considerations

If your application is approved, the processor will present you with a contract outlining the terms of your merchant account. Before signing on the dotted line, be sure to carefully review and negotiate key terms such as:

Processing fees and rates (including any surcharges for high-risk transactions)
Contract length and early termination fees
Reserve requirements and holdback percentages
Monthly processing volume and transaction size limits
Chargeback thresholds and liability protections

Don't be afraid to push back on unfavorable terms or request amendments to the contract. A reputable high-risk processor will be willing to work with you to find a mutually beneficial arrangement that supports your business's long-term success.

Mitigating Risk and Maintaining Stability as a High-Risk Merchant

Securing a high-risk merchant account is a crucial first step, but it's equally important to proactively manage your risk profile continuously. Here are some key strategies for minimizing chargebacks, preventing fraud, and maintaining strong financial health as a high-risk business:

Reducing Chargebacks

Chargebacks can quickly destroy a high-risk merchant's payment processing ability, so it's essential to take a proactive approach to prevent chargebacks from occurring in the first place. Some effective chargeback reduction techniques include:

Clearly communicating your return, refund, and cancellation policies to customers
Using clear, recognizable billing descriptors on credit card statements
Providing excellent customer service and promptly addressing customer complaints
Requiring signed delivery confirmation for physical goods
Implementing fraud prevention tools like CVV verification and AVS checks

If chargebacks do occur, be sure to respond promptly and provide compelling evidence to dispute the claim. Many high-risk processors offer chargeback representment services to help merchants fight illegitimate chargebacks and protect their merchant accounts.

Preventing Fraud

High-risk businesses are prime targets for fraudsters looking to make quick profits at a merchant's expense. To minimize your fraud risk, consider implementing the following best practices:

Using robust fraud detection tools like machine learning algorithms and velocity checks
Requiring additional authentication for suspicious transactions (e.g., 3D Secure)
Regularly monitoring transactions for red flags like unusual order sizes or billing/shipping address mismatches
Training your staff to identify and prevent social engineering fraud attempts
Staying up to date on the latest fraud trends and tactics in your industry

Maintaining Strong Financial Health

Finally, it's crucial to maintain strong financial health as a high-risk business to ensure long-term payment processing stability. This involves:

Keeping chargeback and refund ratios below industry thresholds
Building a solid credit history and maintaining a good credit score
Keeping debt levels manageable and ensuring sufficient cash flow to cover expenses
Diversifying your supplier and customer base to reduce concentration risk
Regularly reviewing your processing statements for errors or discrepancies

By taking a proactive, disciplined approach to financial management, high-risk businesses can build trust with their payment processors and position themselves for sustainable growth.

Thriving as a High-Risk Business: Turning Risk into Reward

At the end of the day, being labeled as a high-risk business isn't a death sentence - it's simply a reflection of the unique challenges and opportunities that come with operating in certain industries or having certain financial characteristics.

By understanding the factors contributing to high-risk status, securing the right payment processing partner, and implementing effective risk management strategies, high-risk businesses can survive and thrive in today's competitive marketplace.

The key is approaching the high-risk designation as an opportunity rather than a limitation. With the right mindset and tools, high-risk merchants can turn their perceived weaknesses into strengths and carve out a profitable niche in even the most challenging industries.

So if you find yourself navigating the complex world of high-risk payment processing, take heart - with knowledge, preparation, and perseverance, you can transform risk into reward and build a successful, sustainable business that stands the test of time.

Partner with Zen Payments for your High-Risk Payments Solution

Zen Payments has the expertise to help you land a merchant account for your high-risk business. We have experts in underwriting and account managers to help you and your business be set up for success.