What is a high-risk merchant?

It’s important for online merchants to understand why they might be categorized as high-risk, what challenges they face, and how they can mitigate them in order to maximize revenue potential.

When someone hears the phrase “high-risk” in the context of online merchants, it’s understandable to be cautious. After all, risk sounds dangerous. Yet, the high-risk category is a wide spectrum that  includes businesses like Netflix and airlines, which may not appear at first glance to be in the high-risk category.

Examples of High-Risk Merchants

The industries we typically have in mind when thinking about risk include:

  • guns
  • gambling
  • adult content
  • tobacco
  • CBD

These industries are all subject to governmental regulations, and often face high instances of chargebacks. An increased incidence of chargebacks, which are the return of charged amounts back to the credit/debit card, may be initiated by the issuing bank or the customer.

This is one reason why subscription streaming services like Netflix, Hulu, and Spotify fall into the high-risk category. Why? People routinely sign up for a free or a reduced subscription trial and forget to cancel—which then leads to complaints and a high number of chargebacks.

Overhead view of person in front of open laptop with one hand on the keys.

Another element is the risk of change. For example, if you buy tickets to a sporting event ten months in advance, a lot can happen between now and then. The same applies for concerts, theater events, and plane tickets

Jewelry and luxury goods represent another type of business considered as high-risk, due to the ticket prices of these items. Companies that operate in certain locations, like tax havens or offshore territories, and those incorporated in countries like Iran and China, are also categorized as high-risk. 

How a Merchant Becomes High-Risk

A high-risk designation arises due to certain circumstances that affect a business, not necessarily the type of business it is. Credit card companies (VISA, Mastercard, etc.) are the entities that determine whether or not a merchant is high-risk. They then monitor those businesses via a four-digit Merchant Category Code (MCC). The MCC code allows credit card companies, issuing banks, and acquiring banks to categorize, track, and potentially restrict transactions. 

Once a merchant becomes designated as high-risk, it is very difficult to shed the MCC code assigned to them. It could be possible, by shuttering the business and incorporating again. However, if that merchant is selling the same type of products or services, it’s likely they will still be considered high-risk. 

Therefore, to keep in good standing with the credit card companies, merchants need to adhere to very strict regulations–and these regulations are very dynamic and updated regularly. 

An example of these regulations is the recent requirement for subscription-based merchants to alert their subscribers by email when a trial period is ending. This arose out of the common subscriber experience of not remembering (or knowing) when they needed to cancel to avoid the post-trial period expense. A $1 trial would suddenly turn into a $40/month charge. 

Now, the credit card companies mandate that the trial-ending email notification must be deployed. Merchants that don’t abide by these regulations risk losing their ability to accept transactions with credit card companies.

Challenges Specific to High-Risk Merchants

High-risk merchants encounter specific challenges that non-high-risk merchants never have to consider. It’s important for these sellers to understand how to mitigate those challenges in the most effective and efficient way possible. 

For example, high-risk merchants experience barriers to transaction acceptance by the issuing bank. The acceptance rate is typically 20-25% lower than “normal” transactions—a significant reduction. Certain mitigation strategies can help on the merchant side, such as 3D Secure. However, that puts an additional burden on the customer and may lead to a poor customer experience, which can impact revenue.

Many banks hesitate to work with high-risk merchants, especially if they are smaller merchants that don’t have the financial backing or bandwidth of larger companies like an airline. Payment portals such as Stripe and PayPal may refuse to work with high-risk merchants. Even if a bank is willing to consider a partnership with a high-risk merchant, it involves extensive documentation, all of which takes more time and more money. 

Perhaps the biggest challenge for any merchant, especially a high-risk merchant, is keeping up with all of the rules issued by the credit card companies. A merchant may think they are in compliance one day, but the next day they suddenly have to update various aspects of their business operations.

Man climbing cliffside to depict concept of high-risk merchant
4 Strategies for High-Risk Merchants

High-risk merchants can proactively minimize the downsides of the designation and improve acceptance rates by proving themselves to be trustworthy brands. Here are four strategies:

  1. Comply with credit card company mandates. It is in the best interest of merchants to have as few claims and chargebacks as possible. All merchants, but high-risk merchants in particular, should ensure it’s easy for their customers to request a refund or cancel a membership. If a customer sends a message asking for support, merchants should strive to reply in less than 24 hours.
  2. Work with a payment processor who understands the needs of high-risk merchants and supports them through challenges. For example, at Vendo we provide merchant support to manage compliance requirements. We monitor the payments ecosystem and ensure our merchants are compliant with the latest rules. The Vendo customer support team is being constantly updated and trained on the dynamic regulatory shifts.
  3. Explore alternative payment methods. Most high-risk merchants typically accept only VISA and Mastercard because many other payment methods will not accept high-risk transactions. At Vendo, we use our expertise with innovative payment options, including cryptocurrency, SEPA, and PIX e-payment in Brazil, to provide our high-risk merchants with alternative payment options.
  4. Maintain good banking relationships. While larger merchants may be able to handle this, most high-risk merchants opt to use a payment processor to support them because it’s often difficult to secure banking partnerships. At Vendo, our team has both the expertise and relationships to reduce barriers in credit card processing for high-risk merchants. 
The Bottom Line

It may seem daunting to operate in the high-risk merchant space, and that’s understandable. With the right expert guidance and knowledge on your side, you can overcome the challenges of the high-risk designation.

Contact us if you’re interested in exploring your payment processing options as a high-risk merchant. We also have a number of revenue growth tools that all merchants can benefit from.

About Vendo: Vendo offers comprehensive payment processing services to high-risk e-commerce merchants. Our innovative, AI-powered tools offer merchants simple, secure, and seamless payment solutions, along with expert customer support from integration to end-user concerns. Our expert team works 24/7 to shape your vision into reality.