The Difference Between High and Low-Risk Businesses
Business is a risky adventure. While all businesses are fraught with risks, financial institutions use many factors to help them distinguish between high and low-risk businesses. Industry type, business viability, and credit history all determine how risky a business is. The extent of risk your business is exposed to will influence the relationship you have with your acquiring bank and payment processors.
Many acquirers and payment processors refuse to provide a merchant account to high-risk businesses, or terminate their services abruptly to mitigate financial loss. Many small, legitimate businesses operate in high-risk industries. The growth and contribution of these businesses to the economy is hampered by financial institutions that deprive these companies of access to payment services.
How are companies classified as high or low-risk businesses?
When a new business is established, it needs a merchant account in order to be able to process customers’ debit and credit card payments. The new business must apply for a merchant account at an acquiring bank. The acquiring bank will analyze the business in order to determine the profitability of extending a merchant account to the new company.
An acquirer will use many factors to classify companies as high or low-risk businesses. Financial service providers will perceive a business to be high-risk if the company operates in an industry that is legally regulated, or has a higher than average chargeback ratio. Other factors that categorize companies as high-risk include high probability of failure, bad credit history, and poor financial standing.
If a financial institution perceives a company to be a high-risk business, it might refuse to provide the business with a merchant account to minimize financial risk, or offer the business an account with exorbitant fees and unfavorable terms and conditions.
Difference Between High-Risk and Low-Risk Businesses
While all types of business operations involve some degree of risk, some businesses are inherently riskier than others. Businesses that are categorized as high-risk generally operate in industries with tight regulations, higher incidence of fraud, higher frequency of chargebacks, and high risk of financial failure.
Businesses that are not restricted by regulations, and experience average or below average rates of fraud and chargebacks in their industry are categorized as low-risk businesses. Examples of businesses that are classified as low-risk include those that sell books, pet supplies, and household goods.
Common examples of businesses that are categorized as high-risk include travel and booking agencies, and companies operating in the vape and cannabidiol (CBD) industries. The travel industry experiences higher than average rates of chargebacks and fraud, making these types of businesses very financially risky. The vape and CBD industries, on the other hand, are tightly regulated by state and federal authorities.
Why do high-risk businesses need a specialized payment processor?
Traditional financial institutions refuse to provide merchant accounts and payment services to businesses they classify as high-risk to reduce their exposure to financial loss. Further, most traditional acquirers and payment processors do not have the adequate expertise needed to work with businesses operating in high-risk industries.
Businesses that operate in high-risk industries must employ the services of payment processors that specialize in providing merchant accounts and payment services to high-risk businesses. High-risk payment processors possess the know-how and expertise needed to minimize financial risk to your business.
Specialized high-risk payment service providers use advanced fraud detection tools and a secure payment gateway to keep your merchant account safe, monitor and safeguard your transactions, and keep your business’s chargeback ratio to a minimum. These strategies will help your company fight fraud and illegitimate chargebacks, promoting a thriving and prosperous business.
Hire a High-Risk Payment Processor for Your Business
If other financial service providers refused to offer your business a merchant account, or you need a payment processor that specializes in providing payment services to companies in high-risk industries, you should hire a specialized payment processor to address your needs. Call High Risk Merchant Pay now to consult with one of our experts to learn how we can help your high-risk business grow and reach its full potential.