When setting up a merchant account, business owners should be aware of whether their business might fall into the high-risk category. This classification can significantly impact how banks and payment service providers handle their accounts and transactions.

What Is a High-Risk Merchant?

A high-risk merchant is defined as a business that payment service providers and banks consider financially risky. These businesses are prone to challenges such as chargebacks and potential fraud, or they may have an unstable financial profile. The high-risk designation can result from the type of industry or the business’s transaction and credit history.

Reasons Why Businesses Are Considered High-Risk

A business can be labeled high-risk for a variety of reasons, including:

• Operating in international or high-chargeback markets.

• Conducting business outside well-established regions such as the US, EU, and similar countries.

• Belonging to industries known for a high frequency of chargebacks.

• Offering subscription-based products or services.

• Having limited or no credit card processing history.

• Engaging in multi-currency transactions.

• Selling high-value items.

• Holding poor credit history or losing a previous merchant account due to chargebacks.

Even businesses that operate legitimately can fall into this category if they exceed certain chargeback limits or provide subscription-based services.

Why Banks Label Businesses as High-Risk

Banks are cautious when it comes to working with high-risk businesses. Low-risk businesses are more secure as they typically have fewer chargebacks, better credit history, and lower chances of fraud. In contrast, high-risk businesses often face financial instability, increasing the risk for banks. Consequently, banks charge higher fees and place stricter conditions on high-risk merchant accounts.

Is Being Labeled High-Risk Always Negative?

Being labeled as high-risk does come with challenges but isn’t inherently bad. While it can lead to higher transaction fees and stricter requirements, it doesn’t mean a business is operating improperly. In many cases, it’s simply a result of the industry or the business’s history. Payment service providers can often offer better terms and more flexible solutions than traditional banks, making them a valuable resource for high-risk businesses.