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If you’re looking for a payment processor, you may have noticed that some merchants are highly vulnerable. Some payment processors refuse to work with these merchants. Other processors work with risk traders but charge higher fees, thereby increasing trading costs. Obviously, this can cause problems for your entrepreneurial ambitions. Wondering when and why a business might be classified as one of the highest risk businesses? Let’s dig in.
Basically, a high risk designation means that the payment processor is expecting high returns and other risks. For payment processors, chargebacks are a burden and can increase their costs of doing business. Because of this, they often pass on additional costs to merchants. Some processors simply refuse to work with risky traders in order to keep trading costs low.
Chargebacks are a serious risk for all businesses, not just vulnerable merchants and payment processors. A bank that issues a chargeback card can return the money from the transaction back to the cardholder, thereby depriving the retailer of sales revenue. On top of that, they will incur a chargeback of anywhere from $20 to $100. With high-risk traders, fees often weigh on the higher side.
While every business should be wary of chargebacks, these disputes are particularly risky for merchants. Not only are merchants hit with higher chargebacks, but payment processors can charge higher fees to process payments. A low-risk merchant may pay as little as .5 percent in processing fees per transaction, while a high-risk merchant may pay 3.5 percent or more in fees, which can add up quickly.
Certain industries are considered high risk.
First, some industries are considered more vulnerable than others, and it is important to know what high-risk businesses and high-risk products are. Often these industries are legally complex, perhaps involving online gambling or tobacco sales. In both cases, there are age restrictions and other regulations that make the surgical environment more difficult. Both are considered immoral. Additionally, people who are tight on money may be more likely to ask for a refund. A person who has drained his savings account while gambling online may not want to pay that bill. If they can expect a chargeback, the casino could end up on the hook for the costs.
High-risk industries include:
- Adult content
- Gambling
- Tobacco and tobacco products
- Supplements
- Fantasy sports
- CBD and marijuana products
- Weapons
The above list is far from comprehensive and other industries may also be classified as high risk. Even generally harmless industries like travel are sometimes considered high risk. Finally, the payment processor can choose which industries to work with and which to avoid.
Payback is the primary reason most industries and/or companies are designated as high-risk traders. In fact, even companies in low-risk industries can be individually classified as high-risk. Merchants are given a chargeback ratio, which is basically the percentage of transactions that result in a chargeback. If this ratio is too high, it will cause problems.
Let’s take a closer look at why payment processors try to avoid chargebacks.
Why do payment processors care so much about chargebacks?
At the end of the day, the trader has to bear the brunt of the return hit most of the time. However, they are also a problem for payment processors, who must devote manpower and resources to handling disputes. Chargebacks cause additional costs for payment processors, so they try to minimize them. As mentioned earlier, this can include charging high fees or refusing to work with a company.
Of course, traders outside of high-risk industries could still find themselves in hot water if they face a large charge. In fact, if even 1 percent of your transactions generate returns, there’s a good chance processors will either pay you more or be unwilling to work with you.
In addition, if a business is suffering from many setbacks, there is a chance that the company is simply not meeting consumer expectations. The business may poorly package shipments or use clearly fraudulent online sales pages to move products. Regardless of the industry, these mistakes lead to disputes (including returns). Many payment processors don’t want to go through the trouble of working with clients who can’t maintain high standards.
What can merchants do if they are at risk of a high-risk designation?
First, it’s important to avoid high-risk designations if possible. If your company operates in an industry that is widely considered high-risk, you may not be able to obtain the designation. If it is not automatically considered high risk, you can avoid being classified as high risk.
If you’re already a high-risk merchant, you can find high-risk payment processors, which often cater to businesses in high-risk industries. Often times, payments with these payment processors will be more expensive. Still, you can get square deals, and if you can keep a low return ratio, you can get a lower price from your current processor, or you can expect lower rates from another.
If you are not in a high-risk industry, proactive measures can greatly reduce the risks of being classified as high-risk. Most importantly, you should keep your return ratio low (typically less than 1 percent). You can prevent, deflect, and fight chargebacks by using dispute management platforms like ChargebackHelp that provide information and make it easier to fight fraud. With services like Chargeback Alerts, you can resolve a chargeback even before it’s filed.
Business owners should conduct an audit of their business to identify issues that may warrant a refund. For example, bad customer service and unclear billing statements on credit/debit card statements are the top reasons for returns. Merchants should monitor access to card security codes and suspicious activity such as suspicious addresses.
Finally, maintaining a low return ratio and avoiding high-risk designations requires some effort. That means that the efforts of high-risk traders can easily pay off in the long run.
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