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Merchants applying for merchant accounts must go through a bank's underwriting process; This allows the bank to assess the degree of financial risk the merchant presents to the institution — specifically, how susceptible the merchant is to fraud and chargebacks.
If, during this underwriting process, the bank determines that your business is high-risk, your application for a merchant account may be rejected.
You may not even realize that you are a high-risk merchant until you apply for a credit card merchant account or processor. There's no rule that says that you must be notified of a high-risk designation, but some factors can help predict whether your business will be flagged.
Generally, two central factors constitute a high-risk classification:
Your business may be considered high-risk due to the industry you are in or your specific business practices as a merchant.
It should be noted that "high-risk” is a catch-all term used by card associations to identify business models and merchant types that have been disproportionately susceptible to fraud and chargebacks.
Payments made without a face-to-face interaction pose greater risk, so most card-not-present (CNP) business models get flagged as high-risk,, hitting e-commerce businesses especially hard.
When you’re deemed high-risk, your associated bank has to take higher risks with your business, and here's why:
The merchant bank pays the merchant for sales before the consumer receives their statement (i.e., before the consumer pays their bill). Therefore, merchant banks are essentially extending credit, making them subject to any refunds, disputes, and chargebacks. That's why banks closely scrutinize revenue opportunities against inherent risks for high-risk merchants.
High-risk businesses also face higher fees because the services provided must be highly specialized to help merchants stay in good standing. A relatively small number of banks offer high-risk merchant services, but qualified ISOs can simplify the process of obtaining a high-risk merchant account.
Coupled with the two main issues pointed out earlier, the following are generally flagged as high-risk:
Operating as a high-risk merchant carries with it significant drawbacks, but the nature of some verticals mean that every business operating in that industry is considered high-risk. Some examples are adult content providers, cannabis, gambling and pawn shops.
ISOs and processors specializing in high-risk merchants are willing to accept the increased risk that comes with these industries and merchant types. ISOs with high-risk specialty help manage the relationship with the payment processor, navigating any issues that arise due to high chargebacks or fraud.
High-risk merchants can do the following to improve their odds:
Certain MCC codes are designated as high-risk due to their history of higher fraud rates and chargeback ratios. These industries and billing models are categorized as high-risk by default.
4722, Travel Agencies and Tour Operators
Travel arrangements, tours, charters
4812, Telecom Sales and Equipment
Telecommunication devices
4814, Telecom Services
Telecommunication services
4816, Computer Network Services
Internet service providers
4829, Wire Transfers and Money Orders
5122, Drugs, Proprietaries & Sundries
5912, Drug Stores and Pharmacies
5962, Direct Marketing – Travel
Includes discount clubs
5964, Direct Marketing – Catalog
Mail and telephone orders
5966, Direct Marketing – Outbound
Mail and telephone orders
5967, Direct Marketing – Inbound
Telesevices, audio & videotext
5968, Direct Marketing – Subscription
Recurring subscriptions
5969, Direct Marketing – Other
Radio and TV sales
5993, Cigars, Tobacco
7021, Timeshares
Rentals, leases and sales
7273, Adult Dating and Escort
Various dating services
7841, Video Tape Rental Stores
Adult content
7922, Ticketing Agencies
Secondary ticketing
7994, Video Games and Arcades
7995, Betting and Casino Gambling
Online casino, lottery, wagers
9399, Government Services, State Lottery
If you're high-risk, you probably can't.
PayPal and Stripe are some of the most-used PSPs examples and, although expeditious, tend to be favorable only to those deemed low-risk.
A Payment Service Provider (PSP) may seem like an easy option when you want to start accepting online payments without establishing your own merchant account. However, PSPs aggregate transactions from tens, hundreds, or even thousands of different merchants under a single account. Because of this, you will be held to collective responsibility; the misdoings of another merchant can affect all the merchants under that account. Too many chargebacks for one merchant may cause their transactions to be declined, but your transactions to also be declined if you share a MID.
Having a high-risk designation means your business will be best served by merchant service providers who specialize in high-risk. The right partnership will allow you to continue to conduct business and stay in good standing with your merchant bank once an account has been acquired.
If your business is in a high-risk industry, if your billing or business models are historically high-risk, or if you've already been placed on the MATCH list or TMF, you should be looking at merchant service providers who can guide you to the right merchant bank with a strong application package. High-risk merchant service providers will also be able to help you mitigate risk and monitor any activity that could be flagged on your account. Find out more about high-risk merchant service providers on our high-risk merchant service providers page.