What It Means to Have a High-Risk Merchant Account
Ecommerce businesses cringe at being labeled a "high-risk merchant account" for good reason. It can complicate agreements with acquiring banks and leave businesses at the mercy of stricter processor terms and higher fees. Credit card processing is still essential for online sales, so online businesses need to understand what “high-risk” means and how to succeed as a “high-risk merchant account.”
What Is a High-Risk Merchant Account?
Merchant accounts are typically opened through a bank or another financial institution and allow businesses to process credit, debit card or ACH transactions for customers. That means those businesses, not banks, are responsible for the transactions they process. They’re also subject to specific fees and service terms.
Ecommerce businesses that are considered high-risk can’t open traditional merchant accounts. Instead, they must secure high-risk merchant accounts, which are subject to additional fees and conditions. For a midsize or enterprise business, this is an annoyance. But it can be a deterrent to a small business or even put them out of business.
How does a business earn the “high-risk” label? There are a few ways.
The common reason a business is considered high-risk is because of the industry and/or products sold. It’s possible that the industry is a constant target for fraudsters or that the industry itself is highly controversial. There may also be an issue with regulatory requirements.
Many banks don’t want to underwrite any and all of the associated risk, or they demand that the businesses pay more in fees to have more of a stake in the game.
When we talk about high-risk industries, we’re referring to:
- Fashion and luxury goods
- Consumer electronics
- Travel agencies and airlines
- Legal and financial services
- Used car and automotive parts sales
- Neutraceutical and drug retailers
- Cannabis and CBD
- Adult entertainment
- Charitable organizations
- Casinos and online gambling
- Health and wellness
Businesses that accept recurring payments usually end up on this list, as do those with average order values of more than $500. Even a low credit score for the business can result in a “high-risk” label.
Another factor that can make an online business high-risk is where the company does business.
Some parts of the world have more rampant fraud – whether it’s due to lax regulations, high crime or other factors. That means where you do business can be a red flag for card issues.
Latin America, in particular, is traditionally known as a high-risk region, with certain countries experiencing higher-than-average fraud rates. Mexico, Brazil and Venezuela are particularly fraught with fraud. You’ll also find China, India and the Philippines among the top countries in the world for online fraud. Interesting, given how much ecommerce business goes in and out of China.
This brings up another factor pertaining to where you do business. Ecommerce consumers now shop on sites anywhere in the world and that trend is increasing – cross-border ecommerce is expected to grow by 30% through 2026. That means almost any company could be selling into high-risk regions and subjecting their online business to more fraud— a great reason to invest in comprehensive fraud prevention.
This brings us to one of the most preventable high-risk factors – your chargeback rate.
How Chargeback Levels Can Increase Your Risk
Just because your business isn’t designated high-risk doesn’t mean your business is safe. Even businesses in low-risk categories can run into trouble. The reason? Chargebacks.
A chargeback is the penalty businesses pay when customers (or fraudsters) successfully dispute a charge on their statement. So, if a credit card holder questions a transaction and can prove they didn’t make the purchase, the card issuer will reverse the payment made to the business and add a fee, or chargeback. That fee may be anywhere from the $20 that processors like PayPal charge up to $100.
We’ve established that banks are ultimately concerned about their reputation and their bottom line and reluctant to provide credit card services to potentially risky prospects – even if the online retailer is in a low-risk industry or region. So, increasing chargebacks can make an otherwise solid business seem questionable.
“Payment processors do not like dealing with a large number of chargebacks, so an ecommerce business that is struggling to control their chargeback rate could find themselves in what’s called a chargeback monitoring program, where the card issuer assigns more fees and may even stop working with the online business.”
David Fletcher, ClearSale Senior Vice President
The good news is chargebacks are preventable, as long as you have a strategy to not only fight and prevent them. That’s why chargeback management programs are often recommended to high-risk ecommerce businesses.
As companies build up a positive history— by lowering the number of chargebacks and refunds— they can be reclassified as low-risk, reduce their losses and possibly regain a traditional merchant account.
At ClearSale, we offer a full range of chargeback solutions:
- Total Chargeback Protection allows businesses to recoup a portion of losses due to fraudulent transactions.
- Chargebacks Guarantee reimburses the transaction amount plus the chargeback amount for any approved transaction that turns out to be fraudulent.
- End-to-End Chargeback Management offers comprehensive chargeback mitigation and resolution services, including team training, data audits and timely responses to issuers.
While chargeback management can help, it may not reduce enough risk for certain industries and regions. If you do find your business qualifying as high-risk in any of the categories listed, all is not lost.
What Can High-Risk Businesses Do to Succeed?
“High-risk ecommerce businesses have to be strategic and focus on three business pillars to be successful: Foster strong customer relationships, develop a niche high-risk processor relationship and prioritize fraud prevention.”
Salvador Tello, ClearSale Global Senior Enterprise Presales
Let’s take a look at each pillar.
Foster strong customer relationships
The customer experience (CX) is critical for any ecommerce business, but it’s especially important for those that are high-risk. Even the slightest misunderstanding or upset can result in customers initiating chargebacks or complaining about your company to peers and online.
Make sure you have clearly communicated policies about shipping, returns and refunds. This will help reduce confusion. Also consider ways to provide full-time customer support using AI-enabled chatbots and a searchable FAQ function.
Develop a niche high-risk processor relationship
Ecommerce companies in high-risk industries, in particular, should also look for niche channels that understand the nature and risk inherent to the business.
For example, if you’re in the casino and online gambling industry, you should find a payment processor that understands your business. The velocity that is natural for an online gambling business will seem alarming to an issuer that normally works with low-risk businesses.
If you do find yourself working with a specialized provider, be sure to closely review your contract to ensure they aren’t taking advantage of you.
Prioritize fraud prevention
High-risk ecommerce businesses have to be especially vigilant about fraud prevention because they are consistent targets for fraudsters. That doesn’t mean simply flipping on a series of fraud filters and calling it a day. Your team should be able predict and recognize fraud patterns. And because high-risk businesses rely heavily on CX, your fraud prevention tactics shouldn’t turn customers away.
It’s easy for high-risk businesses to assume that every suspicious order is fraud and decline it to be safe. Aggressively declining transactions may seem like a fraud prevention tactic, but it can cause serious and permanent damage to your brand reputation.
A high false decline rate is the last thing a high-risk business wants or needs. Even one false decline can turn away 40% of customers for good, and it will upset 34% of consumers enough to send to social channels where they will share their dissatisfaction. That’s why high-risk ecommerce retailers need a fraud prevention partner with a comprehensive solution.
At ClearSale, we utilize a multilayered approach to fraud prevention.
How ClearSale Helps High-Risk Ecommerce Businesses
ClearSale’s hybrid fraud prevention solution starts with an AI-enabled algorithm that leverages trends, intelligence and data gathered from decades of fighting fraud in the most high-risk regions of the world.
Our technology makes it possible to automatically approve the majority of orders quickly while flagging suspicious orders for secondary reviews performed by our more than 1,500 fraud analysts who can recognize some of the hardest-to-recognize fraud patterns.
“Too often, companies hear ‘secondary review’ and associate it with ‘time-consuming,’ but that’s not accurate. Our system is so accurate, we end up reviewing about 2%-3% of orders, at most.”
Salvador Tello, ClearSale Global Senior Enterprise Presales
Why is our system that accurate? Because we train it to know more about fraud patterns as we review more transactions. Using the data our analysts gather from those secondary reviews, we “teach” our system how to further distinguish valid transactions from fraud. So, our clients ultimately approve more “good” orders, increasing their approval rates and revenue.
To learn more about how ClearSale can help your high-risk ecommerce business check out our solutions offering based on your business type.