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I’ve worked with several established ecommerce companies and startups in the years leading up to, during and after the pandemic. When it comes to credit card processing, I can say that the experience has been interesting, and at times, intimidating. One would think that by now, credit card processing would be a piece of cake. That, however, is not the case.
Since the turn of the millennium, ecommerce has been growing at an astounding rate, averaging a healthy growth rate of 17% between the years 2003 and 2016. A number of years later, the pandemic pushed it onto an afterburner-fueled trajectory, and the rest, as they say, is (recent) history.
To clarify, the technology that allows for digital payments is what makes it possible for businesses to conduct transactions online, and this is not going to change anytime soon. It is reasonable to assert that the adoption of digital payment methods has increased both efficiency and accessibility along the value chain.
You need only consider the meteoric rise of online retail, which now allows consumers from the world’s most underdeveloped economies to make purchases from the comfort of their own homes. To conduct their business in-store or online via B2B and B2C platforms, today’s businesses of all sizes have swiftly adapted to the changing landscape by accepting eWallets, credit and debit cards, and other forms of electronic payment.
As much as digital and mobile wallets have taken the world by storm, their use is more prevalent in some areas than others. A survey by statista.com showed that credit cards are still the preferred mode of ecommerce payment in many regions, like the U.S., accounting for 23% of all global ecommerce transactions in 2020. They accounted for 60% of transactions in Asia and only 20% in Latin America. It will be some time before credit cards become obsolete — in fact, card transactions spiked in 2019 (a 42% increase over 2015).
But as with all things financial, prudence always dictates — and what has not changed since time immemorial is “risk!” This is amplified when it comes to credit card processing. Hence, financial institutions (FIs) have an added responsibility of mitigating such risks and do so by adhering strictly to KYC/AML and PCI DSS compliance regulations. As such, it is no surprise that FIs involved in card processing (namely, acquiring and issuing banks, payment aggregators and other third-party processors) prefer low-risk merchants. So, if you have made repeated attempts to open a merchant account and have been rejected, or God forbid, your merchant account gets suspended, you most likely fall into that other category — a high-risk merchant.
What makes you a high-risk merchant?
So, precisely what makes a business high-risk? Typically, it is the nature of your product, the industry you are in, your credit rating and operating efficiency. It’s not surprising that payment processors flinch when they detect high occurrences of chargebacks, returns, refunds and high average transaction values. Excessive chargebacks higher than 0.9% of your transactions automatically put you in the high-risk category. These chargebacks could result from late deliveries or quality issues, though the causes are external in many cases. To avoid falling into this category, merchants can preemptively take appropriate preventive or remedial measures.
It’s challenging enough to run a business without having to worry about payment processing; having your merchant account suspended or closed is the last thing you need. To add to your woes, getting another account approved is a daunting and uphill task. To put things in a better perspective, it helps to know how payment processors evaluate prospective merchants.
When it comes to specific industries, like online gambling, dating sites or adult entertainment, it isn’t unusual for these enterprises to get red-flagged as high-risk. Processors are reluctant to jeopardize their relationships with FIs and generally prune their merchant lists with this in mind.
High-risk merchant accounts
Credit card processing involves much more than a simple transfer of funds. Customer payments are held in your merchant account in advance, even before goods and services are delivered and without knowing if the product meets the customer’s satisfaction. As with any line of credit, if you, as the business owner, cannot provide the money for the chargeback, then it falls to the account provider.
There is a risk associated with the merchant, who will incur a chargeback fee. If you’re a small business, you may be charged a different rate along with a rolling reserve. Therefore, the provider of the merchant account is taking a risk.
Why it makes sense to consider a high-risk credit card processor
Certain industries simply carry inherent risks, but in many cases, the potential upside on revenue derived from credit card purchases makes it worth the extra cost of using high-risk processing.
Relationships matter to high-risk processors, and you could get a quote in 24 hours. But there is a category of payment processors specializing in providing services to merchants, known as high-risk credit processors. A random search for names like Shark Processing, PaymentCloud or SecurionPay will result in a quote in 24 hours.
The level of risk this group of processors takes may vary, and some even find a niche in very high-risk merchants. Shark Processing, for instance, has an interesting take on the subject and opines that there isn’t a single framework applied across the industry. However, common factors encapsulated in the bank’s risk assessment criteria mean that some factors affecting a particular industry may increase a merchant’s risk profile in an altogether different industry. In this regard, the company assists high-risk merchants by leveraging its network of acquiring banks.
Many ratings and reviews of high-risk processors by third-party reviewers are reputable and well-researched. However, they often seem to make recommendations that contradict one another. Therefore, merchants benefit most when they analyze these reviews collectively with a clear objective. With more clarity, they could then explore credit card processors that focus and specialize on high-risk factors that directly affect your business — for example, high-risk industries.
The final takeaway is that businesses must do their due diligence and be mindful of the cost implications when selecting their processing partner.