What is a High-Risk Merchant?

A high-risk merchant is one considered by card networks and their designates (payment gateways, Payment Service Providers (PSPs) and so forth) to be less safe than their normal clientele. A merchant may be considered high-risk for various reasons, including actual evidence like high chargeback rates, or guilt by association, such as by being involved in industries payments networks associated with risk, like gambling, CBD, and, surprisingly, e-commerce.

How Does Being A High-Risk Merchant Hurt a Business?

Merchants designated as high-risk endure longer, more complex application periods for merchant accounts, and pay higher fees once they are on-boarded by payment processing partners. Generally speaking, fees for these merchants will be approximately 1.5% higher than normal transaction costs. To add insult to injury, high-risk merchants are often required to maintain merchant account reserves: their PSP may hold as much as 5% of each transaction for a designated period prior to payout in order to cover anticipated chargebacks.

Looking at the broader payments ecosystem, it can be arduous for a high-risk merchant to acquire an account. Only the largest merchants are able to connect directly to card networks, so most companies must engage with one or more PSPs, which operate as Payment Gateways, or intermediaries, passing information to and from the card networks. High-risk merchants must, therefore, not only pass muster with the card networks, but also with the payment gateways who will essentially represent them in all payment transactions. 

Can a High-Risk Merchant Become a Low-Risk Merchant?

The short answer is - yes, absolutely. There is theoretically nothing permanent about a high-risk merchant designation. The longer answer, however, is….it depends. If the designation is due to "risky" activities on the account, reducing those risks could re-classify the merchant. 

Reducing a High Chargeback Rate

Businesses that attain a high-risk designation by causing excessive chargebacks (normally defined as 1% or more of all transactions) can win their way back into the good graces of the payment ecosystem by tightening their processes and pushing their chargeback numbers back down. Even those in the e-commerce business that may enter into their payment relationships listed as high-risk merchants can move into a lower-risk designation by maintaining low chargebacks ratios over a reasonable period of time. And, of course, working with their PSP to remove the designation when the time is right.

High-Risk Industries and MCCs

By contrast, merchants designated as high-risk due to their industry - gambling, tobacco, and CBD products are prime examples - are likely to remain in this category for as long as the payment industry regards those industries with mistrust. Merchants in these industries are classified into high-risk merchant category codes (MCCs) by the card networks. In some instances, merchants are required to pre-register their business if it operates in specific high-risk MCC categories.

Escaping the mantle of high-risk merchant is most effectively executed by having relationships with multiple PSPs. Some specialize in high-risk merchant accounts, delivering services that actually help offset the real risks merchants face, such as fraud. However, they may not offer a low-risk option, meaning that even if the merchant is released from the high-risk designation by the card networks, they still cannot reduce their fees or eliminate the reserve fund.

How Can a High-Risk Merchant Hedge Their Risk?

Assuming the merchant isn’t engaged in a business that the payments industry considers inherently and inescapably high-risk, there are a number of things they can do, including:

• Ensure processes, including refund and cancellation rules, are clearly communicated and executed to reduce chargebacks
• Protect cardholder information by employing a tokenization strategy that keeps all cardholder data safely stored in a secure third party vault
• Create and maintain a multi-PSP strategy, gaining more control over costs, customer information, and solution innovation

While a PSP that specializes in servicing high-risk merchants is a must early on, their elevated cost structure is unlikely to make them the ideal long-term partner. For this reason, it is important for the merchant to also partner with a tokenization service provider like Basis Theory, so that they can switch between PSPs while maintaining access to their existing customers’ cardholder data.