It may sound terrifying to get classified as a "high-risk business," but it's not the end of the world. Your risk to credit card processors will determine how you are classified. It has no connection with how successful your company might be. Contrarily, a high-risk business can result in substantial revenues for the bank, processors, and merchants if appropriately handled.
High-risk merchants have better access to international marketplaces and unrestricted processing. If we examine what makes you high-risk, we can determine how to minimize the risks and maximize the benefits associated with that classification. Please continue reading to know more about what it means to be high-risk and what kinds of businesses qualify as high risk businesses.
What is a High-Risk Business?
A merchant gets classified as "high-risk" for a variety of reasons. A firm is deemed high-risk if there is a more significant chance of fraudulent charges, embezzlement, or financial failure. Due to the nature of their business and client, merchants can get classified as high-risk, but they can also do this to themselves by using unethical business tactics. Banks, however, base their risk assessments on four primary variables: your firm, industry, billing methodology, and processing volume.
Credit card processors determine how hazardous of a customer you will be. Typically, your risk factor gets chosen by the following:
The sector you work in: Some businesses, like gaming, adult entertainment, CBD, and tobacco/vaping, see far more fraud than others.
Financial and commercial position: If you have lousy credit personally, a checkered past, a closed merchant account, a failing business in the past, etc
It will be more difficult to process credit cards if you are a high-risk merchant. Financial firms favor customers that generate revenue and pose less risk. Therefore, traditional merchant account providers frequently reject high-risk businesses.
Top 7 Examples of High-Risk Businesses
It may be considered high-risk depending on the industry to which a product gets offered. Several elements are taken into account when determining if a sector is high-risk. Fraud incidents, total returns, or debit card chargebacks could all be considered high-risk categories.
As previously said, one of the most crucial elements that categorize a company as high-risk is the goods and services it provides. Other factors used to organize specific business kinds include total sales volume and credit card chargebacks. Processors automatically mark the following goods and sectors as high-risk:
For many years to come, the vaping and e-cigarette industries are expected to expand. Banks and credit card processors view the industry as high-risk despite its popularity because of the Food and Drug Administration's strict regulation (FDA).
Since vapes and e-cigarettes are tobacco-related products, the FDA controls their use, sale, and safety. Underage purchasers are not permitted to purchase vapes or e-cigarettes under federal law. Since many of these eCommerce companies cannot confirm the age of online customers, which can result in potentially unlawful sales to minors, most banks and payment processors will not engage with vape/e-cigarette sellers.
Due to the high percentage of card-not-present transactions used by telemarketing companies, these companies are more vulnerable to chargebacks, fraud, and customer disputes. And as a result, they are regarded as high-risk.
The business of providing adult entertainment is successful. Each year, the American porn industry alone brings in $97 billion. Its classification as a high-risk corporation results from various factors, including highly stringent laws, reputational hazards, and above-average rates of fraud and chargebacks. We consider adult retailers high-risk companies even though they adhere to tight rules and regulations.
A naked woman in silhouette remains depicted in front of the balcony drapes. The creation and selling of products targeted toward adults are subject to strict rules. Banks and other financial institutions avoid adult businesses because of the possibility of selling things with age limits and child pornography to avoid legal issues and reputational harm. Another factor that prevents banks from engaging with adult customers is the industry's high rates of benign fraud.
Crypto markets are a type of lose-money get-rich-quick gimmick. And as a result of clients reporting chargebacks after losing money, this frequently results in friendly frauds or high-risk business.
Since they entail trading in cryptocurrencies, which remains unregulated in most nations, including India, businesses working in cryptocurrency are likewise considered high risk. Additionally, cryptocurrency businesses are risky because they include fraud and identity theft.
Despite their notoriety, nutraceutical companies are still considered high-risk due to a lack of specific restrictions. Even the producers make deceptive statements and lie about the ingredients they employ. That results in several legal consequences and chargebacks.
Even though more people are playing fantasy sports, these merchants are high-risk enterprises because of the connection between fantasy sports and gambling and the industry's high chargeback rates.
Due to the resemblance of fantasy sports to gambling, the sport remains prohibited in numerous states. In addition to legal concerns, higher-than-average industry chargeback rates cause banks and conventional payment processors to avoid these enterprises altogether. Players frequently request chargebacks after losing a wager, which causes fantasy sports organizations to suffer significant earnings losses.
Traveling and Booking
You might be startled to learn that the travel and booking industries get categorized as high-risk because of the upfront commitment. Customers can reserve flights up to nine months in advance, which puts the bank and processors at risk.
Also, the massive volume of chargebacks and fraud linked to services like travel and booking is one of the main reasons these industries are frequently identified. To get the money back, it's a frequent malevolent practice in Friendly Fraud for the user to plan or buy a trip, take it, and then claim that he never actually did it.
Being classified as a high-risk business does not preclude you from experiencing success. It indicates that you are a more significant risk to credit card processors.
To make the most significant decisions, it's critical to comprehend what it means to be high-risk. However, the correct high-risk merchant account can also assist you in managing risk and expanding your business, even though you will have to deal with additional bother and unfavorable terms.