So, you have realized that you are operating a “high-risk business” and that you are a “high-risk merchant,” at least in the eyes of the bank. What does that mean? What are the consequences of being a high-risk business? Many of the difficulties and challenges faced by high-risk businesses are related to e-commerce payment processors and financial institutions. Keep in mind that some payment processors and financial institutions are more resistant than others to dealing with high-risk businesses, while some are less hesitant, and some even specialize in high-risk industries. Below, we’ll look at some of the common challenges that high-risk businesses face.
Applying for financing or payment processing may be more difficult for high-risk businesses. Banks and other financial institutions usually prefer to deal with businesses that present the least risk possible. In some cases, the bank will find that a business is high-risk during the application and approval process. For example, when checking the business’ history, the bank may find that the company has a history of missing payments. This would put the business in the “Grey Zone” that we discussed in Part 1. The application may be denied at that point, but if the application process is allowed to continue, the bank may apply stricter criteria for approval.
On the other hand, if the business is in the “Red Zone” or otherwise known to be high-risk regardless of its business record, the stricter criteria for approval may be applied from the start. That means that the application process could be longer, more complex, and have more and tighter requirements. Those requirements could be submittal of a larger amount of supporting evidence regarding the business’ finances or maintaining a certain minimum reserve in the business’ account. (The latter is often a certain percentage of the business’ sales.)
Health and safety requirements are sometimes more stringent for high-risk businesses or industries, and the assessment of compliance may be more strict. In some cases, regulating authorities may conduct investigations and inspections more frequently. Business that are particularly susceptible to fraud, such as e-commerce websites, tend to be the target of such action. Industries that score high on the U.S. Health and Human Services Risk Index are in the same boat. These risks can be mitigated or eliminated, but it requires strict compliance with the relevant laws and regulations, such as the Payment Card Industry Data Security Standard in the case of online businesses.
Businesses that deal with high volumes of online sales and other high-risk businesses are especially susceptible to chargebacks. “Chargeback” refers to cases in which a customer disputes a charge made to your business due to things such as attempted fraud using the customer’s account or some failure attributable to the merchant. If a chargeback request results in a refund to the customer, your business will not be compensated for any loss. Not only is the revenue from the sale lost, but the business must spend time and money processing the chargeback and providing a refund, in addition to other clerical and administrative work that is generated by a chargeback. Some high-risk businesses lose thousands of dollars in revenue to chargebacks each year. Because of this, many high-risk businesses invest in chargeback prevention and protection services.
Many high-risk businesses are unable to accept credit cards and other non-cash payments unless they have a high-risk merchant account. Your business will process credit card payments through a high-risk merchant account. So, how is this type of account different from a conventional low-risk merchant account? One way is that it is able to accommodate businesses in industries that other financial institutions, etc., are not able to service. That means that you will have a much smaller selection of payment processors. It also means that you will pay higher fees than you would to low-risk payment processors.
These and other factors can make it a challenge to find the right payment processor to partner with, and it may take some time and effort to look into the available processors and merchant accounts. However, businesses in the “Red Zone” often need to have a high-risk merchant account, and such accounts and payment processors can be very helpful in mitigating risks and running your business effectively.
When selecting potential payment processors, be sure to ask questions and get clarification of anything you don’t understand. It will be a partnership, so pay attention to gaining a mutual understanding of expectations, requirements, and the details of services. The ideal is to find a payment processor that specializes in high-risk businesses, but either way, it’s important to find a payment processor that has a wide range of technological tools, a solid commitment to thorough compliance with laws, regulations, and industry standards, and a secure payment system and gateway.
Such a partner can alleviate many of your concerns about security and fraud, and can go far in automating your business, making the payment process itself more efficient and problem-free, and ultimately helping you save money and retain customers.