If you’ve been looking for a payment processor, you may have noticed that some merchants are designated as high-risk. Some payment processors will refuse to work with these merchants. Other processors will work with risky merchants but charge substantially higher fees, thus raising the costs of doing business. Obviously, this could put a crimp on your entrepreneurial ambitions. Wondering when and why a business might be designated as one of the high risk merchants? Let’s dig in.

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Essentially, a high-risk designation means that the payment processor is expecting a higher rate of chargebacks and other hassles. For payment processors, chargebacks are a burden and can increase their cost of doing business. As such, they often pass on the extra costs to the merchants. Some processors simply refuse to work with high risk merchants in an effort to keep the costs of doing business low.

Chargebacks are a serious risk for all businesses, not just high risk merchants and payment processors. With a chargeback, a card-issuing bank can claw back money from a transaction and return it to their cardholder, thus depriving the retailer of sales revenue. On top of that, they’ll be hit with a chargeback fee, which ranges from $20 to $100 typically. With high risk merchants, fees typically weigh in on the higher side.

While every business needs to watch out for chargebacks, these disputes are an especially grave threat for merchants designated as high-risk. Not only could merchants be hit with higher chargeback fees, but payment processors may also charge higher fees for processing payments. A low-risk merchant might only pay processing fees of say .5 percent for a transaction, while a high-risk merchant may pay fees of 3.5 percent or more, which can quickly add up.

The above list is far from exhaustive and other industries may also be designated as high-risk. Even generally innocuous industries, like travel, are sometimes viewed as high risk. Ultimately, the payment processor can typically choose which industries they want to work with and which to avoid. 

Chargebacks are a leading reason most industries and/or companies end up getting designated as high-risk merchants. In fact, even companies in low-risk industries could be designated individually as high-risk. Merchants are assigned a chargeback ratio, which is essentially the percent of transactions that result in a chargeback. If this ratio gets too high it spells trouble.

Let’s take a closer look at why payment processors strive to avoid chargebacks.

At the end of the day, the merchant hit with chargebacks will often have to shoulder most of the burden of chargebacks. However, they are also a nuisance for payment processors, which will have to dedicate labor power and resources toward managing disputes. Since chargebacks result in extra costs for payment processors, they try to minimize them. As already mentioned, this may include charging higher fees or simply flat-out refusing to work with a company.

Of course, merchants outside of high-risk industries could still end up in hot water if they get hit with a lot of chargebacks. In fact, if even 1 percent of your transactions result in chargebacks, there’s a good chance that processors will either charge higher fees or refuse to work with you.

Further, if a business is suffering a lot of chargebacks, there’s a good chance that the company simply isn’t meeting the standards consumers expect. The business might poorly package shipped goods or using blatantly falsified online sales pages to move products. No matter the industry, these mishaps will lead to disputes (including chargebacks). Many payment processors don’t want to deal with the hassles of working with clients who are failing to maintain high standards.

First, it’s important to avoid a high-risk designation if possible. If your company operates in an industry that’s widely considered high-risk, you may not be able to get around the designation. If you’re not automatically considered high-risk, you’ll more likely be able to avoid getting designated as high-risk.

If you’re already a high-risk merchant, you can find higher-risk payment processors, which often cater to businesses in high-risk industries. Often, fees will be more expensive with these payment processors. Still, you may find square deals, and if you can maintain a low chargeback ratio, you might get a lower rate from your current processor, or you may secure lower rates from another.

Business owners should also audit their businesses to identify potential issues that could lead to more chargebacks. For example, bad customer service and vague billing descriptions on credit/debit card statements are leading causes of chargebacks. Merchants should also make sure they obtain Card Security Codes and watch for suspicious activity, like orders coming from suspicious addresses.

Ultimately, maintaining a low chargeback ratio and avoiding a high-risk designation will take some effort. That said, efforts of high risk merchants could easily pay off in the long run.

The post Why Some Merchants Are Designated as High Risk appeared first on The Startup Magazine.