In payments, the term “high-risk” isn’t just a label—it’s a strategic classification with far-reaching consequences. Today, I’m peeling back the layers to understand why certain businesses bear this weighty designation, examining the ripple effects on their payment processes, and, critically, exploring best practices to tackle the payment challenges that come hand in hand with the high-risk label.
What Is a High-Risk Business?
In the fast-paced world of banking and investments, one of the initial factors that investors scrutinize is a business’s ability to generate revenue and profitability. This scrutiny extends beyond the surface into the core assurance that a business can sustain profitability without succumbing to financial turmoil.
Enter high-risk businesses—entities that, by their very nature, bear a heightened likelihood of financial instability. This elevated risk poses a challenge for banks and investors. Seeking optimal returns, they approach high-risk ventures cautiously.
Operating in a high-risk industry can present a number of payment and banking challenges, including difficulty obtaining merchant accounts, higher processing fees, strict underwriting requirements, scrutiny from regulators and reputational risks.
What Factors Lead To The Classification Of A Merchant As High-Risk?
Many business owners are oblivious to their high-risk status until they attempt to obtain a merchant account. So, what puts you in the high-risk crosshairs?
Well, the first can be the industry that you’re in. A diverse mix of industries is automatically placed in the high-risk category. These include, but are not limited to:
- CBD and hemp.
- E-cigarettes and vape.
- Gambling and online gaming.
- Crypto exchanges.
- Forex brokers.
- Pharmaceuticals and healthcare.
- Money transfer services.
- Financial institutions.
What ties these sectors together is the heightened level of government regulation they grapple with. While some are illegal in some parts of the world, others face stringent regulations.
Take the cryptocurrency space, for instance. Following the financial troubles of FTX, BlockFi and other platforms, the U.S. Securities and Exchange Commission (SEC) jumped into action, initiating 24 cryptocurrency enforcement actions in the first half of 2023. More recently, we’ve seen enforcement action heavily increase, due to Binance’s $4.3 billion settlement with the Commodity Futures Trading Commission (CFTC) and Treasury Department in the USA.
Similarly, in the U.K., the government this year announced a significant overhaul of gambling laws, aiming to safeguard vulnerable users. This legislative initiative involved a comprehensive restructuring of regulations governing the gambling industry.
Other Factors
Even when your business seems to be sailing smoothly in its industry, certain factors can swiftly toss it into the high-risk category. The Mastercard Alert to Control High-Risk Merchants (MATCH) criteria lays out the following potential red flags:
- The merchant has filed for bankruptcy or insolvency in the past.
- The business has an average monthly transaction volume of $20,000 or more.
- The number of chargebacks exceeded 1% of the number of sales transactions in that month or totaled $5,000 or more.
- The merchant did not comply with Payment Card Industry (PCI) Data Security Standard requirements.
Additionally, in my experience working with high-risk businesses, I have found that geographical location also plays a factor in determining whether a business is classified as high-risk. For example, it will likely be considered high-risk if a merchant is based in or catering to a high-risk country or region outside of the U.K., Europe, U.S., Canada, Australia or Japan.
Strategies For High-Risk Merchants
If you’ve established that you’re a high-risk merchant, here are some strategies you can use to have better access to finance:
Maintain a pristine processing history.
Your processing history is a reflection of your business’s reliability and trustworthiness. Aim to keep your processing history free from blemishes by adhering to best practices in transactions. This enhances your reputation with financial institutions and positions your business as a reliable and low-risk entity.
Work with a reputable high-risk merchant provider.
Numerous legitimate businesses may face rejections from conventional payment and banking services. However, there are specialized high-risk merchant processors tailored to these industries. Collaborating with industry experts increases the likelihood of approval for your high-risk merchant account application.
When evaluating high-risk business merchant accounts, seek providers with the following:
- Customization and flexibility: Opt for providers that offer tailored solutions to meet the unique needs of high-risk businesses. Customization and flexibility are essential for adapting to your industry’s specific challenges and requirements.
- Cutting-edge technology: Choose merchant processors that leverage cutting-edge technology to enhance transaction efficiency and security.
- Top-tier security: Security is paramount in high-risk industries. Look for merchant account providers with robust security measures, including encryption and fraud prevention tools.
- Experience and expertise: Partner with providers with a proven track record and extensive experience in handling high-risk merchant accounts.
Read the terms and conditions and application carefully.
Always pay close attention to the fine print of the terms and conditions as well as the application. Don’t fall into the assumption trap. Marketing materials may not cover all the crucial details. Here’s a breakdown of factors to consider:
- Processing fees.
- Chargeback fees.
- Chargeback thresholds.
- Contract length.
- Early termination fees.
- Excluded industries.
If questions arise about rates, terms or restrictions, reach out to the processor’s team directly. Seek clarification in writing. It’s your tangible evidence if disputes arise in the future.
Stay informed about industry regulations.
Remaining vigilant and well-informed about industry regulations is paramount for high-risk merchants. Regulations function as a foundational framework, exerting influence across diverse facets of your business operations.
A continuous commitment to staying ahead of industry-specific regulations is essential for multiple reasons. Firstly, it ensures that your business remains compliant, averting potential legal complications. Secondly, this proactive stance toward regulatory awareness serves as a robust risk mitigation strategy, acknowledging the heightened scrutiny characteristic of high-risk environments.
Final Thoughts
The journey through high-risk business is complex—from profit checks to sectors slapped with the “high-risk” label. Recent regulatory shifts add to this, and even seemingly smooth operations face scrutiny with the MATCH criteria. Success boils down to pristine transaction history, a savvy high-risk provider choice, and meticulous fine print reading. It’s not just compliance; it’s mastering survival in this unpredictable business terrain.
Source
Article written by Lissele Pratt, Co-founder of Capitalixe, as a thought leader on Forbes Business Council and published on Forbes.com.
