September 6th, 2005 by Jamie Estep
What is a high risk business?
Filed in: International, Merchant Accounts | 11 comments
Often businesses run into the problem of being labeled as a high risk business for processing electronic payments and are forced into unconventional processing agreements. Many business owners have no idea that their industry falls into a high risk category.
Shades of Grey and Red:
High Risk businesses fall into either the gray area between a normal business and a definitive high risk business, or fall into the red zone for truly high risk businesses.
What determines if a business is high risk?
There are several factors that determine if a business is to be considered high risk for credit card processing. The main reason that a business is considered high risk, is the type of business that it is. Risk is based on the merchants probability of chargebacks, returns, the businesses history, and the planned method to accept credit cards. Yes, returns are a large factor in determining the risk of a certain business type. Processors assume that if there is a lot of returned merchandise, then the merchant isn’t doing something right.
I believe the exact opposite of this, as merchants who accept returns are doing what is required, to keep their customers happy. To me this equates a lower risk business.
Certain business types are considered high risk no matter what the individual businesses history is. These businesses are in the red zone. They must find an international method to help them accept credit cards. Businesses that land in the gray area, are either high risk due to their own processing history or their business is determined to be high risk on a case by case basis.
Businesses that fall into the gray area that have good processing and financial history can usually find an American provider to help them accept credit cards, while new businesses or businesses with poor history are more likely to be considered high risk.
Common High Risk Businesses (Red Zone):
Travel and Advanced Booking
Products requiring a long term commitment (magazines, subscriptions, etc.)
Adult Products
Online Pharmacies and Supplement Websites
Telemarketing
Debt Collection
Gaming, Gambling, and Sports Booking
International Businesses
Common High Risk Businesses (Gray Area):
Electronics
Custom Products
Inbound Telemarketing
Ecommerce & Card-Not-Present (in general)
Short Term Businesses
If a business lands in the gray area, the businesses history is going to play a large roll in what types of credit card processing is going to be available to them. New businesses are always at a disadvantage, especially for card-not-present businesses. Fraud on the internet has created close scrutiny of all potential online businesses.
The most unfortunate incidence for an existing business is for their business type to be changed to high risk even though they are currently processing and have a successful, honest history. While rare, this does happen from time to time and is generally applied for all businesses within a certain industry.
If you are high risk:
If you are a high risk business, your options are a third party processor or using an offshore merchant service provider. Either way, make sure that you shop around to find the best possible solution for your business. If you business is in the gray area and you are having trouble at one place, check all of your domestic options before moving onto an offshore provider. The most expensive domestic provider is generally cheaper than the cheapest offshore provider.
Few Payment processors such as ChronoPay.com are specealized to manage high risk business, they offer all clients its proprietary fraud screening system, known as “ChronoMethod”, which is one of the most efficient fraud filters ever built.
Dave…
Interesting topic… I’m working in this industry myself and I don’t agree about this in 100%, but I added your page to my bookmarks and hope to see more interesting articles in the future…
It’s about time that these credit card processors came down from their ivory towers and got in touch with the reality of life. Instead of doing their damdest to make things difficult for honest hardworking people to make a living.
The issue with 2rd party processors are pricing and reputation / trustability.
We are in the custom product business.
Would you say that there has been any change to the red zone / grey zone in the year 2008?
Great info. Do you think that the more businesses that go online each year will change the risk factors?
I agree with you that the fact businesses are customer focused and make refunds should not be a key risk element. Wouldnt the card processor charge for this anyway?
I agree – some of my businesses are decidedly low risk in my opinion but I’ve had to use third party processing for many of them. Even then, third party processors can be picky so shopping around is a MUST.
I agree when you say that a company that accepts returns is likely to be a lower risk, as they genuinely want the customer to have a good service.
I guess it depends on how many returns they are getting. If the returnsare high then either the goods are of poor quality or not as described in the advertising.
There are various reasons that business owners find themselves in need of high risk merchant accounts. One of the most common causes is the type of business they wish to run. There is actually a rather large list of businesses that are classified as high risk.
I work for an internet payment service provider that services both ‘red’ and ‘grey’ merchant types as you describe. We call the grey accounts medium risk accounts. At the moment many banks are pushing more and more accounts into the high risk ‘red’ box which is making it even tougher for merchants. Our comapny needs to have people working full time just to track down those few banks internationally who are still happy to take on ‘red’ high risk merchants. It is a tough space for merchants to be in all the time underwriting by banks has become so tough.
I’m not sure debt collection is the red zone. It would depend on what kind of collections they are. Debt repair would be a red zone I believe.
Banking. Why is banking not posted as high risk? We experienced a recent bank here at our local place that is going bankruptcy. The depositors are now in protest.