Most people are not aware of how much we take our electronic payments for granted day-in and day-out. It’s easy to head to your local grocery store, load up your cart, slap your credit card down and walk out with your products. However, this experience looks very different for merchants and customers who transact in “high risk” industries. For these individuals, the process of selling entirely legal products can come with complications, tremendous inconvenience, and serious financial risk. But what is a high-risk industry?
What is High Risk?
“High risk” is a moniker assigned by financial institutions to any industry which they determine to present a high level of risk to the three members of a transaction; those being the buyer, the seller, and the financial institution itself (the latter of which assumes the majority of the risk). This risk can be defined by many terms but is usually based on perceived financial insecurity caused by factors like vulnerability to chargebacks, conflicting legal standards (ex: state law vs. federal law), or simply perceptions of unreliability. There are dozens of businesses that are considered high risk, which can run the gamut from the expected (cannabis, casinos, cryptocurrency) to the unexpected such as churches, law firms, or car dealerships.
What High Risk Means
There are a number of different reasons why your business would be considered high risk. Is your company already registered with a local regulatory agency? That's one of the first steps to complete, and not being registered is often seen as a red flag. Previous issues with fraud or bankruptcy could certainly lead to problems as well. Sometimes, it has nothing to do with previous business dealings or registration.
Certain industries or activities are automatically thought of as risky. Gaming companies, ticket sellers, online health shops, the adult industry, and pharmaceuticals are all typically thought of as high-risk ventures. It's not uncommon to find such businesses being turned down for merchant accounts. Volume may be a point of concern as well. Do you frequently ship a large number of deliverables? Since customers usually pay for such goods before they're shipped, much less before they arrive, this increases the risk of the purchaser not receiving their goods. If the company were to file for bankruptcy or be shut down, there's a likelihood that the customers wouldn't receive their items or they’d get their payments returned.
So, What Does This Mean?
Being labeled as a high-risk merchant comes with a litany of problems. Since most domestic banks and standard merchant processors refuse to work with high risk companies, these businesses are forced to use cash exclusively or turn to sketchy third-party alternatives in order to secure electronic payment. These third-party options can be very risky for the merchant as they almost always include offshore routing and reserves.
These two systems can be shut down at any time, and this often occurs while the merchant’s money is still present inside. These sketchy alternatives oftentimes also charge exorbitant fees for their services and may be subject to a high degree of chargebacks and declinations. This is why when choosing a high-risk payment processor, it is incredibly important to select a provider who is domestic, does not use reserves, and is entirely in compliance with state and federal law. There are many high-risk processors out there. You don’t have to settle for the first choice.
Selecting a Provider
When your business is high risk and you're acquiring a merchant account, you'll notice that approval comes with noticeably higher rates. The processing fees will be raised, with an MDR that's typically 2% or greater. You'll likely have a much higher cost for initial setup as well. This could range anywhere from a few hundred to several thousands of dollars. It'll vary depending upon the specifics for your business.
Since taking credit cards is basically a requirement for doing business in the modern world, you really can't do without a merchant account. But that doesn't mean that you should sign whatever paperwork is presented. Be sure to read the fine print and know precisely what your obligations entail and what sort of support you're being given by the provider. There are many high-risk payment processors out there. You don't have to settle for the first choice.