High-Risk Businesses: Risks and Strategies
August 25, 2023
High-Risk Businesses: Risks and Strategies
By: Dustin Armstong
[Please note that this article on high-risk businesses only provides informational information. The provided information does not constitute legal or financial advice. Consult with a professional before making any business decisions.]
Financial institutions and credit card processors in the commerce industry deem certain enterprises “high risk.” Although this characterization may seem daunting, it does not automatically imply that your business will fail.
Instead, it is an assessment of the potential hazards that you may present to these establishments. This explanation will clarify the meaning of being labeled as high-risk businesses.
We will also identify some common industries that fall into this category. Additionally, we will examine the factors that lead to this classification. Finally, we will give guidance on handling challenges for high-risk business owners who handle high volume transactions.
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What is a High-Risk Business?
We consider a high-risk business to have an elevated risk of chargebacks, abnormally high sales volume, fraud, or financial failure. Credit card processors evaluate a company’s risk by considering its industry and economic past. Activities such as gambling, adult entertainment, CBD, and tobacco/vaping often have higher levels of fraud. As a result, these activities pose a risk for credit card payments.
Bad personal credit or closed merchant accounts can make people see you as a high-risk factor in personal and business situations. Labeling a business as high-risk can complicate credit card processing, but specialized providers exist for high-risk businesses.
Common High-Risk Industries and Businesses
Numerous industries and businesses fall under the high-risk category because of their susceptibility to chargebacks and fraud. Some examples include:
- 1-800 chat sites
- Adult Industry
- Airlines and Booking
- Amazon Stores
- Attorney Referral Services
- Auto Warranties
- Background Checks
- Bad Credit
- Bankruptcy Attorneys
- Business Consulting
- Business Opportunities
- CBD & Cannabis Products
- Casinos and Gambling
- Coins and Collectibles
- Continuity Billing
- Credit Monitoring
- Crypto or Forex Trading
- Debt Collections
- Event Ticket Brokers
- Fantasy Sports
- Financial Planning & Advisory
- Furniture Stores
- Gentleman’s Clubs
- Government Grants
- Health and Beauty
- High-Ticket Coaching
- Import/Export Businesses
- Magazine Sales & Subscriptions
- Mail Order Businesses
- Male Enhancement
- Membership Organizations
- Merchants on the MATCH list
- Multi-Level Marketing (MLM)
- Offshore Businesses
- Online Gaming
- Pawn Shops
- Pay-Day Lenders
- Prepaid Debit Cards
- Psychic Services
- SEO/SEM Services
- Skin and Hair Care
- Subscription Boxes
- Tour Operators
- Travel & Vacation Services
- Vape & Cigarettes
- Vitamins and Supplements
- VoIP Services
- Web Design and SEO
- Weapons (of any kind)
Factors that Contribute to High-Risk Businesses
Contrary to popular belief, high-risk businesses aren’t solely selling dubious products or services. Several factors can place a company in the high-risk category, including:
- Questionable Products: Businesses that sell items like adult entertainment, drug paraphernalia, or weapons are apparent candidates for high-risk categorization.
- Higher Chargeback Rate: Industries with many chargebacks, like travel and electronics, are often considered high-risk.
- High Legal Regulation: Industries like tobacco and nutraceuticals require stringent legal compliance because of their nature.
- Sales Practices: Some businesses engage in questionable sales practices, like multi-level marketing (MLM) schemes, which can raise concerns.
- Vulnerable Customers: Companies serving clients prone to chargebacks, like debt consolidation services, may be considered high-risk.
- Subscription Models: Subscription companies face chargeback risks if customers forget to cancel or dispute charges after trial periods.
- Online-Only Services: Businesses providing online services without tangible products may encounter higher chargeback risks, particularly with high-value transactions.
- Credit and Transaction Size: Poor personal credit or processing high-dollar transactions can also contribute to a high-risk designation.
- International Sales: Accepting foreign currencies increases risk, especially in regions with higher fraud rates.
Navigating the Consequences of Being High Risk
Designation as a high-risk business doesn’t signify impending failure; however, it does present distinct challenges that demand attention. Here’s a glimpse of what lies ahead to avoid the high-risk label:
Not all doors are open to high-risk businesses in payment processing. Because of their perceived risk, many merchant account providers shy away from these ventures. To navigate this terrain effectively, aligning with specialized providers well-versed in high-risk processing is crucial. These experienced partners comprehend high-risk industries’ unique demands and intricacies, ensuring smoother operations and excellent compatibility.
The journey of a high-risk business involves a more rigorous application process. Providers subject these businesses to heightened scrutiny, requiring thorough documentation and extended underwriting procedures. While this may seem daunting, it’s a necessary step to ensure transparency and risk mitigation. This detailed evaluation guarantees a comprehensive understanding of your business, ultimately contributing to a more secure and sustainable processing arrangement.
Selecting a suitable payment processor is paramount for high-risk enterprises. Avoid using popular providers like Square or Stripe, as they may close your account if you engage in risky industries. Instead, opt for processors catering to the unique demands of high-risk businesses. Additionally, anticipate higher processing rates, reflecting the increased risk of chargebacks and potential financial liabilities.
Additionally, anticipate stricter contract terms, which often entail long-term agreements with early termination fees. It’s a good idea to save money as a backup to protect against chargebacks and financial uncertainties.
Choosing a High-Risk Businesses Merchant Account
When selecting a high-risk merchant account provider, consider the following:
- Customized Quotes: High-risk processors offer personalized quotes based on your business needs.
- Robust Customer Service: Choose providers with dedicated account managers to guide you through setup and ongoing support.
- Payment Methods: Ensure the provider supports all payment methods relevant to your business.
- Fraud Prevention: Opt for processors offering fraud prevention tools to reduce chargebacks.
- Scalability: Choose a provider that can accommodate your growth and evolving needs.
Five Effective Strategies to Avoid Designation As a High-Risk Business.
Taking a proactive approach is essential to avoid being labeled as a high-risk business. Here are five strategies that can help if your business is safe.
- Keep Chargeback Ratio Low: An elevated chargeback ratio is one of the primary markers of a high-risk business. Aim to maintain a chargeback ratio under 1%. Chargebacks occur when customers dispute transactions; a high rate indicates potential issues with your products or services. You can mitigate risks and maintain a favorable ratio by consistently monitoring and addressing the factors contributing to chargebacks.
- Implement Comprehensive Fraud Detection: Invest in robust fraud detection mechanisms to safeguard your business from fraud. Proactive measures, such as real-time transaction monitoring, can help identify and prevent fraudulent transactions before they occur. By swiftly addressing suspicious activities, you protect your business and demonstrate diligence in risk management.
- Embrace PCI Compliance: PCI DSS is necessary for secure credit card transactions. You fortify your business against data breaches and unauthorized access by adhering to PCI compliance standards. Compliance instills customer trust and signals financial institutions that your business takes data security seriously.
- Provide Exceptional Customer Service: The quality of your customer service can directly impact your chargeback rates. A positive customer experience reduces the likelihood of disputes and chargebacks. Promptly addressing customer concerns, offering refunds when warranted, and maintaining clear communication can foster customer satisfaction and loyalty. You create an environment that discourages chargebacks by being attentive to customer needs.
- Manage Credit and Debt Responsibly: A business’s financial health influences its risk profile. Ensure your personal and business credit scores are healthy and in good standing. High individual credit scores reflect financial responsibility and can positively influence how credit card processors perceive your business. Managing debt is essential; too much debt can indicate economic instability, raising concerns about handling chargebacks and financial responsibilities.
By diligently following these five strategies, you can significantly reduce the likelihood of others labeling your business as high-risk. Committing to risk mitigation, fraud prevention, and customer satisfaction positions your business for sustainable success and favorable relationships with financial institutions.
In conclusion, businesses classified as high-risk can effectively manage the associated challenges. It is crucial to understand the reasons underlying high risk and implement measures to mitigate them. It’s important to find specialized high-risk merchant account providers to handle high-risk processing and succeed in your industry.
August 25, 2023 | Merchants | Dustin Armstrong