High risk merchants may find it difficult and costly to find someone who will be able to handle the processing of their credit card payments. When these card networks, merchant providers and payment processors deem merchants to be high risk, they are implying that there is a risk they are taking by handling the merchant’s payment card transactions. 

Various parties are involved in the payment process in an attempt to make the necessary connections between a customer, the issuing bank and the merchants acquiring bank. The card network may provide the platform and the rules under which the transactions are carried out; the payment processors handle the details of the transaction at the point of sale. Each of the parties involved charge a fee for their service and role in the process. This fee is not just to cover the cost of the service or their time but also for the risk that is involved. 

Disputes and reversed charges are either because of a customer, the merchant or sometimes even fraudsters. Sometimes these participants do not make the amount of money they had hoped to and this leads to a chargeback. For this reason, there are a few payment processors who do not want to deal with high risk merchants. 

What are the characteristics of a high risk merchant?

There is more than one way to be classified as a high risk merchant but it is mainly due to the likelihood that your transactions will be disputed or reversed. If you are in an industry that has a history of high rates of fraud and customer disputes then you will also be categorized as a high risk merchant. 

Payment processors generally have a threshold of about 1% for the chargeback rate that they allow their merchants to have. If the rate is exceeded then the merchant may lose their account or may even be charged additional fees. 

Below are some of the industries that are considered high risk: 

• Online gaming
• Pharmaceuticals and cannabis
• Firearms
• Electronics
• Luxury goods
• Recurring subscriptions
• Multi-level marketing
• Tickets and reservations
• Adult entertainment

A merchant’s finances and their personal credit history may be a factor especially if they are unable to demonstrate ability to cover the expected amount of chargebacks that may be generated with their sales volume. 

Processing Payments for High Risk Merchants

Some payment processors will screen out certain types of high-risk merchants and will decline to do business with them. This is common with industries that may not be legal globally like cannabis and online gambling. Merchants in these industries should seek out payment processors that specialize in high risk accounts. For other merchants, sometimes they cannot go with their preferred payment processor because of money, as some payment processors quote rates that are 2% higher or more per transaction for high risk merchants. 

They may also establish a cash reserve to protect them from the consequences of too many chargebacks. 

Chargeback Defence for High Risk Merchants

There are many ways that chargebacks can be avoided such as maintaining a high level of quality control on your products and providing excellent and proactive customer service. Clear terms and conditions must be established for sales:

• Ensure that when customers read their bank statements, they are clear on what your transaction was for. Ensure that the name of your business is clear because if the name on the statement and the name of the storefront is different, this could lead to chargebacks and confusion. 

• Be transparent and provide clarity about what you are selling. Withholding information about your products, billing and anything else that may be important will also reduce your chances of a chargeback as people are clear from the start about your business. It is very important to be upfront with the customer. 

• Provide a high level anti-fraud defence so that you will be able to identify the warning signs of fraud. Refuse transactions that look shady and do not pass the anti-fraud testing you have in place. Customers that are identified as fraudsters should be blocked from future purchases. 

It is not impossible to prevent chargebacks by devising a strategy to bring it back down. Shop around for a better deal on payment processing. Ask your processor for advice and assistance in this regard.