Why are some businesses classified as High Risk Merchant Account

In today’s digital economy, being able to process credit and debit card payments is essential for nearly every business. To do so, companies must obtain a merchant account, which acts as an agreement between a business and a payment processor. However, not all merchant accounts are treated equally. Some businesses are categorized as “high-risk,” requiring special high risk merchant account. But what exactly does this classification mean, and why are certain businesses labeled this way?

Reading the High Risk Merchant Classification

High risk merchant account is for businesses that are at higher risk for chargebacks, fraud, and legal and regulatory problems. This designation isn't necessarily an indicator of the practices of the business, its ethics, or its financial status—it's largely a matter of perceived risk to the payment processor or acquiring bank.

Payment processors take on a financial risk each time they process a payment. When a customer requests a chargeback, the processor tends to bear the brunt. As such, they assess the risk of each business before extending merchant services. When a business belongs in a group that has traditionally registered greater-than-average risk, they are identified as high-risk.

Main Reasons Businesses Are Identified High Risk

1. High Chargeback Ratios

One of the most important risk indicators is chargeback frequency. A chargeback refers to when a customer contests a transaction, and the money is reversed back to their account. High-chargeback industries are usually categorized as high risk since they can translate into significant money loss for payment processors. E-commerce, subscription businesses, and adult entertainment companies usually fall under this category since they tend to have consistent disputes over charges or product/service dissatisfaction.

2. Type of Industry

Some industries are inherently more risk-prone or controversial and, therefore, riskier to banks and processors. These are:

• Travel and ticketing services

• Online gaming and gambling

• Forex and cryptocurrency

• Debt collection and credit repair

These businesses are under greater regulatory scrutiny, oscillating legal statuses, or reputational issues, all of which lead to a high risk designation.

3. International Sales and Multi-Currency Transactions

Foreign-based businesses or those that receive payments in more than one currency are considered to be of higher risk. Currency exchange, foreign fraud, and differences in regional regulations complicate and open up opportunities for loss, so these businesses become less appealing to traditional processors.

4. Subscription or Recurring Billing Models

Recurring payments, like monthly subscriptions, pose a higher risk of chargebacks because of missed payments, long-term dissatisfaction, or auto-renewals in cases where the customer was not explicitly asked. Subscription boxes, streaming sites, and membership sites tend to fall under this high risk category.

5. New or Unproven Businesses

Startups or low-processing history businesses tend to be categorized as high risk merchant accounts. Banks cannot anticipate the firm's stability or probability of chargebacks and fraud without an established processing history. High volume sales in a short time frame can also set warning bells ringing, even for good businesses.

6. Poor Credit History

Just like humans, businesses are also subject to credit ratings. Poor credit, pending debts, or previous bankruptcies can lead to high risk classification. If the business owner has a shaky financial history, that too can affect the classification.

7. High Average Ticket Size or Volume

Companies with exceptionally high transaction values or monthly processing values are defined as high risk because they open processors up to substantial potential loss in case of chargebacks or fraud. High-ticket items such as electronics, high-end products, or custom services are categorized under this issue.

Consequences of Being a High Risk Merchant

Being a high risk company means that the company needs to obtain a high risk merchant account via an expert payment processor. The accounts usually have:

• Increased processing fees

• Rolling reserves (where a percentage of sales is reserved for a specified time)

• Extended settlement periods

• Severe fraud prevention conditions

• Bespoke terms and agreements

  
  

Though these terms appear less favorable, high-risk merchant accounts are usually the only practicable solution for these types of businesses to take card payments and work profitably.

Conclusion

The determination of a business to be high risk is not always an indication of poor business practices. It is an assessment of risk based on industry practice, business model, and past financial activity. Knowing why this determination has been made enables businesses to take a proactive approach—through enhanced practice, openness, and association with experienced high-risk payment processors, they can still survive and establish a strong payment processing base with Trinity Consultings.

In a world where digital payments are the norm, being classified high risk is a problem—but it's one that can be navigated with the right tools, partners, and strategy.