Why Do Merchant Service Providers Label Businesses as High-Risk?

Thursday, January 6th, 2022

High-risk business, what is it? Companies classified as high-risk” face some challenges, extra costs, and possible hurdles. 

But what makes someone’s business high risk? And how can you tell if your company is high risk? Let’s go through the most common things that make a high business risk and how to survive in the merchant services space.

What is a High-risk Business? What is a High-risk Merchant Account?

A high-risk business has a greater potential for chargebacks (due to the business structure) and thus poses a higher level of risk for your merchant account provider.

High-risk merchant accounts are a form of payment processing set up for businesses with a history of chargebacks, fraudulent transactions, and other account issues. 

Industries typically use these types of accounts with a higher rate of chargebacks like online adult entertainment, debt consolidation, travel, and gaming.

Why Would Your Company Be Deemed High-Risk?

Industry reputation

A merchant’s business model can be considered high risk. For example, businesses that sell easily counterfeited or stolen products, such as clothing, cosmetics, electronics, and supplements, can be more susceptible to losses due to fraudsters using stolen credit cards. 

Additionally, businesses that provide online gambling and pharmaceuticals services are also considered high-risk industries.

Offshore businesses 

These are businesses that operate outside of the country that they are physically located in. So, for example, if a business is operating from a country outside of the United States but is also accepting payments from American customers, it is considered offshore. 

This term does not necessarily mean that it is illegal to accept payment from an American customer, but it implies a greater chance of fraud and chargebacks.

Questionable legality

Any business that deals with products or services of questionable legality will often be labeled as high risk. This includes any business that sells narcotics or certain types of pornography products. 

Often, these types of businesses do not even secure a merchant account unless they have been screened by their banking institution first and been given permission to do so.

Questionable marketing habits

Businesses that have poor sales practices can also be considered high-risk. This includes businesses that market their products and services aggressively (such as by making false claims about the benefits of their products or by using deceptive marketing methods). 

Last Words

Depending on the service provider, there are plenty of other reasons a business would be considered risky. Nevertheless, a risky naming does not mean the end of the world–you can still enjoy reliable merchant services from reputable service providers.