In this cashless era that we are in, running a business without the option of credit or debit cards can be hard. Many customers will require those services hence they will go to your competitor who offers them. You will be required to apply for a merchant account. Companies are however treated differently due to the level of risk that they pose to the processor. The latter judges the business to check if it is in the high-risk category. If yours is labelled as high risk, you will not be approved of a merchant account, or if approved, you will be charged higher rates. We will look at some of the factors that could make your business to be considered as a high-risk entity.
High fraud rate
If your business has shown a trend of fraud, then it is deemed as high risk. Your customers and not you mostly determine this behaviour. If you have cases of chargebacks, then this could be a red flag for any processor. They would not want any association with you since this means that your business could suffer losses if the authorities are involved. Any industry that is known for its outright fraud will not be given the light of day. They will be denied having a merchant account with no considerations. An example of this is the travel industry. These hotels are mainly flagged as high risk since they have a lot of chargebacks initiated by customers who are not satisfied with the services.
If you have a low credit rating, you are most likely going to be placed in the high-risk category. This is mainly if you do not pay your loans in time and if your company financials are questionable. It will show that you cannot support the sales volume that you may be applying to have. The processor will surely not give you that merchant account.
Businesses that cross international lines are considered a significant risk. It is because of the likelihood of fraud increases in this instant. If for example your headquarters are overseas, and you have an offshore account, but the majority of the customers are in another country, then this will be problematic. It will raise some red flags since it just screams off fraud. Lax banking regulations can be a huge factor in the home country.
Products that are of questionable legality
Any services or products whose quality raises eyebrows may be deemed as high risk. Distributing pornography is one of the examples and also selling drugs. Processors will not want any associations with these products since they are illegal and may cause more problems. Banks will also be criticized for doing business with companies that deal with firearms. It is an issue in many countries since there may be a stigma on guns and even on their ownership.
Due to risk by associating with these companies, most banks will opt out of these businesses. Adult entertainment companies may also face this issue. They offer a reputational risk that may be risky for any bank to want any association with them. Dating sites are also included here. Many people find love online these days, but it is at a cost. It is considered high risk since people always request chargebacks when they realize that they have not found what they were looking for on these sites.
Other people use these sites as a way to have an extramarital affair. Once the husband or wife sees this charge on their bank statement, they will claim that it was a fraudulent one and request for a chargeback from the bank on it.E-cigarettes are also considered high risk due to some legality issues which is a problem in many states. The issue of not knowing the age of people buying them also makes it a high-risk business for the banks.
Questionable sales and marketing practices
If people think of your business as a scam, then it will be tough for you to be given a merchant account. Having scrupulous deals will affect your chances of obtaining one. It is because of the principle of guilt due to the bank associating with you hence your business will be avoided by processors. You will be labelled as a high-risk business.
High ticket sales
Tickets are considered high risk due to some reasons. One of them is that they are used as a purchase by credit card fraudsters. People may buy tickets with stolen cards and then sell them off at a discount. When the people who were stolen from start realizing this, they demand a chargeback immediately hence this will be considered high risk by banks. If your average ticket sales size is in thousands of dollars, you should be sure to be flagged as high risk since it will be a risky investment to be done by the merchant service providers. This affects companies who process a lot of B2B transactions.
This is a common practice these days with people making subscriptions for services and products. It may be an issue where the customer signs up for a monthly supply of goods when they think that they have subscribed for one. They may request for chargebacks when they get these goods. There are also some cases where the merchants confuse the customers with offers and not giving the relevant details that they may need. Some provide these details in small print which the consumer may not notice hence pay more for it in the long run. There are some contracts which may also be renewed by consent which the consumer may be unaware of when signing. It will also contribute to chargebacks for the recurring payments.
If you have a business that has a high probability of chargebacks or refunds, then your business will be termed as high risk. Therefore, getting a merchant account may be very difficult. You will have to look further and more carefully for a processing solution for your company as opposed to low and medium risk businesses.