Here’s How a High-Risk Designation Could Impact Your Business

For better or worse, a high-risk designation is a major risk for businesses. Under certain circumstances, a credit card processor could designate a business as “high-risk,” which could result in increased processing fees. In some cases, payment processors could even decline to work with the high-risk retailer outright.

Given the higher costs and other challenges, avoiding high-risk designation (when possible) is vital. Fortunately, there are some proactive steps you can take to protect your business. Let’s take a look at how and why merchants can be designated high-risk and what such a designation means.

Here’s How a High-Risk Designation Could Impact Your Business

Chargebacks and High-Risk Designations

Often, companies are designated high risk because they are the target of higher-than-normal chargebacks, returns, and fraud. Chargebacks are expensive and difficult to manage for both the payment processor and the retailer. Since the processor must shoulder additional costs, risks, and hassles, they charge the merchant higher fees.

Chargebacks occur when a cardholder asks their issuing bank to refund a payment made with their card. Customers could do this for a variety of reasons. The products delivered, for example, might not match up with expectations. Or, the customer may have tried to return the product but found the process too confusing.

Customers may also file for chargebacks if their card has been misused. Let’s say a cardholder is targeted by a pickpocket who steals their wallet. The thief could then use the holder’s credit cards to make purchases. When the individual learns what happened, they may file a chargeback. Unfortunately, businesses typically end up on the hook for the fraudulent transaction through no fault of their own.

In many cases, however, unscrupulous customers engage in “friendly fraud.” With friendly fraud, a cardholder will make a legitimate, intentional purchase. But when they receive the product, they’ll file a chargeback anyway. Even if the customer loves their goods, they may try to leverage the chargeback process to net a refund while also keeping their purchase. This way, they can score free products.

Chargebacks, among other things, may lead to companies being classified as high-risk. Let’s look at some other factors that could result in such designation.

High-Risk Industries Can Lead to High-Risk Designations Too

In some cases, merchants may be designated high-risk owing to the industry they operate in. Quite simply, some industries are riskier than others, so payment processors charge higher fees to account for the increased liabilities. High-risk industries include:

  • Adult content sites
  • Fantasy sports and online gambling
  • Autographed collectibles
  • Drug paraphernalia

Merchants who operate in such industries, among others, are more likely to be classified as high-risk. Also, retailers who accept international transactions, have a low credit score, or are simply new, may be designated high risk.

Those retailers that are classified as high risk will have to shell out more in fees. In fact, processing fees could cost twice as much as usual. And if a merchant gets hit with chargebacks, they’ll end up paying chargeback fees. High-risk merchants who are frequently the target of chargebacks may also pay higher chargeback fees.

Let’s take a closer look at what a high-risk designation means for companies.

A Closer Look at How High-Risk Merchant Accounts Affect Businesses

Just like the organizations they serve, payment processors want to make a profit. If certain transactions present more risk, the processor will account for this by charging higher fees. This way, even if a few high-risk transactions fall apart, the processor can still net a profit.

If your business is designated as high-risk, higher fees are only one of the challenges you’ll face. Your company may also be required to set aside rolling reserves, which means setting aside a portion of your daily payments. The payments will only be released when enough time has expired. Often, processors require merchants to set aside 10 percent of their incoming revenue, with the money only released after 90 days have elapsed.

Merchants might also be required to set up a minimum reserve. With this reserve, you’ll need to have a set amount of funds set aside at all times. Payments will not be released until the reserve is met.

Further, even as you set aside reserves, you may still see processing fees increase. As a result, a high-risk designation could have a big impact on your cashflow and also your profit margins.

Here’s How You Can Manage and Avoid High-Risk Designations (and Chargebacks Too!)

It’s important for merchants to proactively manage high-risk designations and disputes too. A proactive approach will protect your company and help you build a foundation for further growth. A lax approach, on the other hand, could lead to a lot of headaches, lost revenues, and other issues.

It helps to set up a dispute management program, like ChargebackHelp Plus, to manage chargebacks and other issues. These platforms offer tools for preventing chargebacks and winning disputes when prevention doesn’t work.

You should also carefully research payment processors. You may want to simply sign up for the first decent payment processor you come across. However, some processors will offer better rates than others, and sometimes service-providers that specialize in high-risk industries and serving higher-risk merchants will extend better terms.

Specific steps you can take to reduce chargebacks and avoid high-risk designation:

Offer shipment tracking– Disputes can arise if customers don’t know where their shipment is. They may think it was never shipped or got lost. Tracking data provides clarity.

Use Ethoca, Verifi, and other fraud prevention tools- Mastercard’s Ethoca and Visa’s Verifi are two programs that can reduce the risks associated with chargebacks.

Offer a simple return policy– If merchants don’t offer a return policy, or their policy is overly cumbersome, customers may turn to their bank to resolve the issue. This typically means filing a chargeback

Set aside ample capital– You’ll want to have plenty of liquid cash so that you can absorb lost revenues and process returns, among other things.

Use alerts to prevent chargebacks- Chargeback alert services let you know of pending chargebacks and afford you an opportunity to resolve the issue before it’s filed.

Use dispute management platforms– The right solution will provide merchants with diverse tools for combating chargebacks and managing risks.

The above suggestions are far from exhaustive. Many other strategies can also prevent or at least reduce chargebacks. For example, simply ensuring that your product descriptions and product photos match the actual goods can go a long way. If merchants fail to meet customer expectations by promising the stars but only delivering the moon, they may face more chargebacks.

A Proactive Risk Management Program is a Must

Disputes are all but a fact of doing business. Most businesses will deal with chargebacks and other disputes at some point. Many retailers will also be at risk of being designated “high risk.” If you operate in a high-risk industry, it’s difficult, if not impossible, to avoid a high-risk designation.

By proactively managing disputes using a service like Chargeback Help, however, companies keep their chargeback ratio low and avoid chargeback fees. You can help ensure customer delight and build trust with your clients as well. And if you can ward off high-risk designation, you may avoid higher processing fees.

FG Editorial Team
The Founder's Guide Team - Asian Associates with dynamic elements out to make a change.Thank you for visiting our site! If you do have any questions or inquiry, feel free to contact us through our links and please don't forget to follow our social media accounts. It would be our pleasure to help you in any way we can. Always Remember: "Proceed to Succeed". Hoping to hear from you soon!

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