What is a High Risk Merchant?
The term high risk is used generically by acquiring banks to describe industries or businesses that present a greater risk of financial loss than standard risk merchant accounts. Businesses are classified as high risk for a variety of reasons.
Chargebacks are the most common reason a company is classified as high risk. Some businesses are in industry segments which have a statistically greater likelihood of chargebacks compared to standard risk accounts. And some companies are at greater statistical risk for fraudulent transactions due products and services being sold or targeted markets.
The card brands require acquiring banks to keep chargebacks under control. When required chargeback ratios are not maintained, banks and processors can be assessed fines by the card brands.
Another reason for a high-risk merchant classification is the business model used by the company. For example, businesses with recurring & subscription billing models face a higher risk for chargebacks than one-time sales because chargebacks can be initiated over a longer time period.
The way in which products & services are sold can also cause a business to be classified as a high risk merchant. For example, ecommerce and MOTO merchants are higher risk compared to retail sales.
Some acquiring banks accept high risk merchants in certain industries but not others. For example, adult entertainment websites may not be acceptable to some banks that are concerned about “reputational risk”. Even though these same acquiring banks accept high risk accounts from merchants in other industries. .
Products, services, and delivery times also can cause a business to be classified as a high risk merchant. For example, high ticket sales and high-volume merchant accounts can present a greater risk for chargebacks than lower tickets or low volume accounts.
Digital businesses are considered higher risk than companies shipping products. Travel businesses are classified as high risk merchants because trips are booked in advance.
The markets being targeted by companies can also cause a business to be considered a high risk merchant. For example, companies selling to subprime markets are high risk merchants due to the higher chargebacks associated with the customer demographic.
Companies selling globally are sometimes classified as high-risk merchants, depending on products or services. When targeted markets include countries which historically have escalated incidences of fraud, a high risk merchant classification will apply.