The Green Sheet Online Edition

April 27, 2015 • Issue 15:04:02

Dispelling misconceptions about 'high risk'

By Chris O'Donnell
Instabill Corp.

Our newest e-commerce merchant was adamant. "Your company bills itself as a high-risk payment processor," the e-mail said. "Absolutely nothing public." We had recently launched a website dedicated to 300-word featurettes on our merchant customers. Some merchants were happy to participate; others didn't return my calls.

The aforementioned merchant, who had previously been shut down by a major bank, was enthusiastic when I interviewed him. But when I informed him his story would soon go live, he made it clear that, even though he was processing with us, he no longer wanted his story on our website. He despised the tag "high risk," even though it was the proper label for his business. I wanted to explain to him that high risk means startups, subscriptions, high volume and high ticket – not just adult content and gambling – but he wasn't in the right frame of mind for listening.

Merchant accounts 101

Merchants, specifically startups, are usually full of energy and drive when launching an e-commerce business and can overlook the variables involved in accepting payments. Then it hits them, and they ask, "What do you mean I am considered high risk?" And third-party processors are forced to educate them. Level of risk is not just based on industry type.

Sure, industries such as adult/emotional content and online gambling are high risk because banks are leery of associations with them. Alas, however, travel, magazine subscription, technical support and nutraceutical businesses – because of their traditionally high chargeback rates – are also among the industries deemed high risk.

What does high risk really mean?

If a payment processor, banker and credit card employee were asked to define what makes a business high risk, their criteria would likely be the same, though each would have a unique order of importance. Determining a merchant's risk factor hinges upon the processor, bank and credit card issuer protecting themselves financially. And the variables are many.

The three might agree the top criteria would be the industry type. Adult/emotional content and online gambling, which are stigmatized, and tobacco and e-cigarettes, which have health concerns, make banks nervous. Other factors can cause high-risk classifications, too, even for merchants with pristine financial histories, for example:

• Geopolitical factors: Banks and card companies are known for classifying businesses as high risk due to the countries where they are based. Many payment processors and banks refuse to do business in countries experiencing turbulence and political unrest, and several countries in Eastern Europe are known for hacking and fraud.
• High ticket sales: Industries with high ticket sales include travel, chartered airline travel and timeshares. When a consumer cancels an $800 plane ticket arranged by a travel agency, that is a massive blow for the agency. When a company that organizes chartered airline flights cancels a charter, that is a huge loss. Banks protect themselves from such losses with high fees.
• Limited or flawed financial history: To the payment processor, bank and card issuer, imperfect or little financial or credit history is a red flag. Merchants plagued by such should be prepared to pay high fees.
• Industries rife with fraud and/or chargebacks: Online gambling is plagued by friendly fraud. For example, some gamers lose a substantial amount of money, then contact their card issuers to report their card is stolen. Additionally, any product or service that offers a free trial before subscription is considered high risk. Often, consumers opt for the free trial only, then forget about the subscription. As a result, the consumer files for a chargeback.
• High transaction volume: High volume means more revenue, right? Not exactly. According to the banks, high volume can equal a high rate of refunds and chargebacks.

Managing the high-risk label

Weathering the high-risk tag comes down to cohesion between the merchant and third-party processor: the merchant operating legally and legitimately, and the processor educating and monitoring the merchant. It is a delicate balance, but one that can be achieved with due diligence.

Chris O'Donnell is a Senior Copywriter for the Instabill Corp. in Portsmouth, N.H. Instabill is a full service provider of merchant accounts to e-commerce, MO/TO and POS businesses. A resident of coastal New England, O'Donnell is also a contributor to The Daily News (Newburyport, Mass.) and Newburyport magazine.

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