Technically, high-risk merchants are business owners running companies whose remittance automation is at a higher risk of chargebacks and fraud. Chargebacks are charges returned to a paying card after a client successfully disputes a purchase charged to their account.
Moreover, chargebacks can appear in their transaction report or statement of performance and may happen on debit or credit cards. Therefore, any business with a tendency for fraud occurrence or chargebacks is a high-risk business.
High-risk businesses and products
- Online gambling
- Newspaper and magazine subscription
- Forex trading as well as crypto exchanges
- Any business with a ticketing service
- Gaming and software businesses, amongst others
A few firms such as Paypound specialise in this sector, and their charges on businesses considered high risk are rigorous.
Factors that make businesses high risk
How businesses in your sector have fared plays a significant role in how financial institutions regard or classify your firm. If transactions or chargebacks have been low-risk in your industry, the chances are that you will receive the benefit of the doubt based on the sector’s performance so the risk classification is then on the businesses in your industry (Merchant Category).
Firm’s financial strength
What is your firm’s financial strength? Firstly, strength in the sense of overall profitability. Also, capital burn-through rates, debt to capital ratio, effectiveness compared with the sector’s average and so on. Also, running a multi-currency operation increases risk due to exchange rate discrepancies.
What does your credit rating look like on paper? You or your firm having a higher credit score invariably reduces your risk at face value.
Order processed volume
How many client orders do you process? How voluminous are your sales and business transaction per year? Lower would be classed as fewer than 10,000 transactions per year. Also, the higher your business transactions – greater than five million annualy – the more susceptible your business is to higher risk.
Card transformation form
Indeed, businesses with a Card for transactions are deemed less risky. Recurring billing is highly risky as the charging card could vary, from card expiration to card removal or even chargeback.
Terminated merchant file (TMF)
A terminated merchant file is a firm that has lost its previous business account due to a higher volume of chargebacks than expected. This precedence tends to push such firms into the high-risk business category.
You may ask, as a merchant who ticked most of the boxes, how do I and my business get included? Most importantly, the exact answer lies in doing what you can to untick those boxes, for instance keeping your chargeback fraction at a mínimum, improving your credit score and financial strength. Let your billing partner do verification on CVV and clients’ cards. Bear in mind, you as a merchant, cannot veto your risk category. However, you can responsibly oversee your risk and manage it accordingly.