What Are High-Risk Industries? Do I Have A High-Risk Business?
High-risk businesses often have more trouble finding payment processing options, lenders, and business insurance. Learn if your business is high-risk, and what you can do about it.
Businesses in high-risk industries often struggle to access business loans, credit card processing solutions, and business insurance; this is especially true for eCommerce entrepreneurs that rely exclusively on credit and debit card transactions to get paid.
Let’s dive into the ways a “high-risk” designation affects your business’s ability to operate, our recommendations for high-risk payment processing, insurance, and financing providers, and review some tips to avoid some not-so-high-quality providers that prey on high-risk businesses like yours.
Table of Contents
- What Is A High-Risk Business?
- How To Determine Whether Your Business Is High-Risk
- How To Avoid Being A High-Risk Merchant
- Choosing Merchant Services Providers For High-Risk Businesses
- 3 Tips To Avoid Predatory High-Risk Credit Card Processing Providers
- Navigating Other Aspects of Business When You’re In A High-Risk Industry
- I’m On The High-Risk Merchant List, Now What?
- High-Risk Merchant FAQ
What Is A High-Risk Business?
A high-risk business is considered likely to fail financially by card processors and banks. Businesses operating in financially risky industries, such as the gambling, adult entertainment, cannabis, and international shipping industries, may be prone to high chargeback rates and labeled as high-risk businesses by card processors and financial institutions.
In general, a business may be deemed high-risk based on its industry, any international operations it performs, monthly processing volume, and financial history/current status.
High-Risk Merchants & Credit Card Processors [Video]
What Factors Determine Risk Level For Businesses?
Banks, credit card processors, and insurance companies look at a few factors to determine whether a business is high-risk. They may, for instance, consider how heavily a business’s industry is regulated at the federal, state, or local level, a business’s likelihood of defaulting on loans or incurring chargebacks, and the extent to which a business’s market sector is saturated by similar business types.
Ultimately, a high-risk designation is predicated on your business type as well as the policies of processing providers; whereas one payment processor may say your business is high-risk, another provider with different high-risk categories may not. Just be wary of high-risk merchant account providers with instant approval that offer you incentives to apply, just to overcharge you later with exorbitant fees and processing rates.
Payment processors typically use the following factors to determine whether your business is high-risk:
- Chargeback & Fraud Rates: A high chargeback or fraud rate is one of the most common reasons banks and payment processors designate a business as high-risk. Merchant accounts, business insurance, and loan providers review your customers’ behavior patterns to say whether you have a high chargeback rate.
- International Operations In The United States: Are you headquartered overseas but primarily sell to US customers? Do you accept payment in foreign currency? If so, US financial institutions may consider the relatively lax banking regulations in your home country or other countries as reason enough to flag you as high-risk.
- Products Or Services With Legal Risks: Products and services of questionable legality, like pornography and drug paraphernalia, may indicate that you have unstable streams of revenue, and they’re often associated with questionable sales and marketing practices.
- High Average Ticket Sales: If your business routinely accepts high-cost purchases via credit card transactions, financial institutions may consider you high-risk. This factor primarily affects businesses that process a high volume of B2B transactions.
- Low Personal Credit Score: This factor focuses on you, the business owner: if you have a low personal credit score, banks and payment processors are more likely to place you in their high-risk categories.
- Unfavorable Business Models: Processors tend to see businesses with non-traditional business models as financially risky. For example, operating a business under a multi-level marketing model or time-share sales may be enough to be labeled high-risk.
- Many Large Transactions: Small businesses processing large ticket items or with a very high monthly processing volume may be deemed as high-risk, solely because these situations pose a greater risk of chargebacks.
- Financially Unreliability Customer Base: Businesses operating in an industry serving customers with unreliable financial situations (think: loan modification or debt collection services) may be deemed high-risk due to the financial unreliability of their customer base.
Why Does Risk Level Matter?
You now have a solid grasp of the most common reasons why entities like banks and payment processing providers flag businesses as high-risk. But why does risk level matter? What’s the impact on high-risk companies that need payment processing solutions?
- High-Risk Merchant Account Services Are Expensive: Merchant accounts for high-risk businesses are more expensive than those for non-high-risk businesses. You’ll pay more for your account fees and processing charges, and you’ll probably be stuck in long contracts with hefty early termination fees.
- Your Business Type May Inspire Guilt By Association: It’s not uncommon for merchant account providers to consider the sales and marketing practices of high-risk businesses as questionable, at best. Especially if your products and/or services are of questionable legality, you’ll have to contend with the principle of guilt by association simply because of the public perception of your business type.
- Compliance Requirements Are Stricter: High-risk businesses and businesses operating in high-risk industries typically need to meet a greater number of compliance requirements. These requirements (OSHA standards are the most common example) may be at the local, state, or even federal level, and are often related to high-risk business types.
- Higher Chance Of Landing On The MATCH List: High-risk businesses tend to have higher chargeback rates which could lead to a business ending up on the MATCH list. That’s not to say that all high-risk businesses will end up on the MATCH list, just those deemed to have excessive chargebacks (even for a high-risk business).
- May Be Required To Maintain Rolling Reserves: High-risk businesses pose a financial risk to banks and processors. To reduce their odds of financial losses, you may be required to pay a portion of your profits into a rolling reserve. While you’ll receive those profits back eventually, most businesses would prefer their payouts as they earn them.
How To Determine Whether Your Business Is High-Risk
Not sure if your business is considered high-risk? We’ve put together an exhaustive list of the most common high-risk industries:
How To Avoid Being A High-Risk Merchant
As credit card processors and financial institutions determine which industries and businesses are considered high-risk, there’s no real way to avoid being labeled as a high-risk merchant if your business has already been labeled one. However, there are a few ways to avoid the high-risk merchant label.
- Switch Processors: While most processors have similar definitions of high-risk businesses and industries, there are some cases in which your business may be defined as a high-risk business by one processor and not another. Shop around for processors to determine whether there is one that doesn’t consider your business high-risk.
- Avoid Certain Business Models: Some business models, such as multi-level marketing models, are considered high-risk businesses regardless of their industry. If at all possible, avoid engaging in this business model when starting a new business.
- Get Off The MATCH List: If you or your business has been placed on the MATCH list, you’ll likely be labeled as a high-risk business regardless of the processor you choose. You can wait the standard five years for your business to be taken off the MATCH list, or you can dispute your MATCH list status if you have been put on there by mistake.
- Prioritize PCI Compliance: If your business fails to adhere to PCI compliance standards, you can easily land yourself on the MATCH list, so it’s essential to prioritize PCI compliance.
- Reduce Chargebacks: Excessive chargebacks can land your business on the MATCH list, so work hard at preventing chargebacks. Clearly, displaying a strict return policy can help to reduce chargebacks, as customers may be more wary of buying something they can’t afford.
Choosing Merchant Services Providers For High-Risk Businesses
Even if your business is considered high-risk, you still have options when it comes to payment processing providers. There are plenty of providers willing to work with your business type, such as high-risk specialists and providers that work with both high-risk and “regular-risk” businesses.
Looking for specific examples of service providers for high-risk businesses? Check out our picks for the best high-risk payment processors, contact some of the providers we chose, and see if they jibe with your business plan.
Consider Payment Processor Fees & Rates For High-Risk Industries
High processing costs are an unfortunate reality for high-risk merchants. While the actual rates you pay can vary between processors, you should expect to pay close to twice as much as what a comparable non-high-risk business with the same sales volume would.
You’ll also need to consider the fact that high-risk accounts have to deal with rolling reserves and trying to avoid merchant account holds. High-risk contracts usually include an early termination fee that kicks in if you close your account before your contract term is up. You may even have a liquidated damages clause in your contract that also raises the price of breaking it.
Understand The Dangers of Chargebacks For High-Risk Companies
Excessive chargebacks that may pervade your industry are almost guaranteed to contribute to your high-risk designation. Remember that the standard chargeback threshold is 1% — that is, if 1% or more of your transactions ultimately get charged back, you’re likely to get penalized by your payment network. You may benefit from asking your processor for a review of your processing history every so often. If you can show a good track record of preventing chargebacks, you may be able to shake off your high-risk designation.
The Federal Reserve Bank of Kansas City found in 2016 that merchants were only able to successfully dispute 20%-30% of fraud-related chargeback claims, highlighting the importance of using a payment gateway with strong fraud detection tools to minimize the damage that fraud-related chargebacks can cause. Data from midigator.com indicates that both Visa and Mastercard have seen fraud-related chargebacks growing each year since 2017.
3 Tips To Avoid Predatory High-Risk Credit Card Processing Providers
If you’re a high-risk merchant, know that while some providers may treat you fairly and charge you reasonable fees, countless others seek to take advantage of you by charging highly inflated rates and fees. To avoid predatory high-risk credit card processing as a high-risk merchant, consider the following tips:
Review The Company’s Website
Small businesses’ payment processors should make it easy to find products and services like payment gateways and virtual terminals that facilitate eCommerce operations on their websites. If a company doesn’t mention much about whether they offer features to streamline business for high-risk eCommerce companies, they may be interested in binding you into a contract with lots of hidden clauses.
Keep your eyes open for processor websites with clear, actionable information that indicates a business model that’s focused on high-risk businesses.
Check The Company’s Online Reputation
Research what others are saying about the company online. If the reviews are generally bad, it’s a good bet that your experience with that company won’t be much different from the experiences of others. If you can’t find any reviews, that’s a strong indication that you should avoid the company in question.
Remember to check out consumer protection sites such as the Better Business Bureau (BBB) and Ripoff Report for feedback from merchants who’ve done business with the company you’re thinking of choosing.
Consider how the company responds to disgruntled users. A lack of meaningful responses to such complaints is a definite red flag!
Look For The Company’s Terms & Conditions or Merchant Application
Relatively few providers offer sample contracts online, but if you can obtain a copy of the company’s standard Terms & Conditions or Merchant Application, review it thoroughly.
It’s usually in the fine print of these documents that you’ll uncover the many ways the company can rip you off. The less information of this sort you can find, the more reason to be concerned about the company’s potential practices.
As a high-risk business owner, you know your options for payment processing are limited. Unfortunately, so too are your options for business financing and insurance limited. If you’re running a startup, have low revenue or bad personal credit, or operate in an unstable industry, loan vendors may be loath to strike an arrangement with you.
We recommend that you contact online lenders that offer high-risk business loans like short-term loans, invoice financing, asset-backed loans, personal loans, and business credit cards.
Your high-risk business classification also impacts options for business insurance. It’s a good idea to contact business insurance agencies that specialize in the high-risk sector since certain providers may hesitate to offer you a fair deal.
Factors like chargeback-related fraud and unstable streams of revenue also make it much riskier for high-risk businesses to pay for a general liability out-of-pocket, so choosing a high-risk specialist that offers general liability insurance without overcharging you is a must.
I’m On The High-Risk Merchant List, Now What?
Finding business services that suit your particular business is never easy, but it’s far more difficult for high-risk merchants. While you’ll have to pay higher fees and processing rates, you shouldn’t have to settle for subpar customer service and support. Thankfully, there are providers on the market that offer high-quality service and fair pricing to the high-risk community, although your choices are more limited than they are for non-high-risk merchants.
As a high-risk merchant, there’s a good chance that you maintain your business via eCommerce sales. Why not check out our top choices for eCommerce platforms to streamline the way you do business while you look for an account provider?