What is a High Risk Merchant?
High risk is a generic term acquiring banks use for industries or businesses which present a greater risk of financial loss than standard risk accounts. There are many reasons for a high risk classification.
The most common reason an industry is classified as high risk is that the industry has a statistically greater number of chargebacks compared to standard risk accounts. Or is prone to higher numbers of fraudulent transactions due to products, services, or targeted markets.
The card brands have chargeback thresholds that must be maintained by merchants. If the ratios are not maintained, processors & banks are liable for fines by the card brands.
Another reason for a high-risk merchant classification is the business model of the merchant. For instance, recurring & subscription billing models represent a higher risk for chargebacks than one-time sales.
How products & services are sold also impacts risk. For example, ecommerce and MOTO merchants are higher risk compared to retail sales. Affiliate marketing, direct sales (MLM), informercials, direct mail, upsells, and other sales methods are considered high risk due to a statistically higher likelihood of chargebacks.
Some acquiring banks refuse to accept certain industries due to “reputational risk”. For example, adult entertainment websites may not be acceptable to certain banks. Even though those banks may accept high risk accounts from merchants in other industries. .
Products, services, and delivery times can also cause a merchant to be classified as high risk. For instance, high ticket sales or high volume merchant accounts have a greater risk than lower tickets or low volume accounts. Digital merchants are higher risk than merchants shipping products. Travel merchants are considered high risk because trips are booked in advance.
Targeted markets can also lead to a high-risk merchant classification. For example, transactions from a subprime market are considered high risk because of higher chargebacks associated with the customer demographic.
Merchants selling internationally are sometimes classified as high risk, depending on products, services and delivery times. If targeted markets include countries that have escalated fraud rates, a high risk classification will apply.