You can be considered a high risk merchant for any number of reasons, but what it really comes down to is that you are at a risk for higher than average chargeback rates. Sometimes this is probably the case, as in, say, online casinos. Other times it may, arguably, be more of a stigma attached to a certain product or service. And that stigma might or might not be fair, but merchant services do have to take calculated risks with all of their clients nonetheless. There are ways to address your status as high-risk, fortunately, and you may be able to make some adjustments to bring your monthly bills down when it comes to merchant services.
Are You A High Risk Merchant?
A number of factors will play into whether or not you are regarded as a high risk merchant. One of the first thing payment processing services will look at is what industry you’re in. These industries include, but are not totally limited to…
- Travel agencies and airlines Hospitality, hotels, diners etc.
- Cigarettes and tobacco, including e-Cigarettes
- Electronic goods
- Guns and weapons
- Furniture and appliances
- The entertainment industry
- Gambling, online or otherwise
- The adult industry
With some of these the high chargeback rate isn’t surprising. With others it has a lot to do with the stigma associated with the field or product. A gun seller may or may not have a higher chargeback rate than someone who sells, say, candy and beef jerky, but people come to these industries with certain assumptions and expectations. Whether or not these assumptions are fair is a debate for another day. The bottom line, right now, is how merchant service providers perceive an industry, and they regard things like strip clubs and tobacco shops as being more high risk than many other industries. Although it might not get you a better deal on merchant services, you can lower your risk in certain ways.
Lowering Your Chances of Being A High Risk Merchant
Here are some things you can do to lower your chargeback rate:
- Make your free trials free. Don’t ask for a credit card number, don’t auto-bill the user on the second month. When you sign customers up for your service automatically just because they took the free trial, not all of them will cancel at the end of the first month. Rather, they’ll see the money being taken out of their account and get on the phone with their bank or credit card company, asking that the money be returned and all payments stopped. It’s a cheap trick, anyway, using a free trial to get an accidental subscription, so if you avoid doing this you’re going to have fewer chargebacks.
- Double check suspicious orders. Does anyone really need that much creamed corn? Why are the shipping and billing addresses in two different countries? Any time something looks a little fishy, go ahead and give the customer a call. You could be looking at a stolen credit card or an attempt at “friendly fraud” or any number of things. If you call the buyer and feel them out, you should be able to get enough information to yay or nay the purchase.
- Honest marketing helps. Businesses can be regarded as high risk just because their advertising is deemed hyperbolic or “fluffy.” Your marketing content should be detailed and to the point to avoid a high risk merchant classification. To put that one way: There are certain products that promise to be life-changing, and when they turn out not to be life-changing, the customer wants their money back. Make clear promises and deliver on them and you’re less likely to have to deal with a high rate of chargebacks. That is to say: Let the customer know exactly what they’re getting.
- Provide tracking numbers. Just about everyone does this now, but if your customer’s order is being held up at a post office for a week, this will let them know that you did ship the item, it’s on its way, and there’s no reason for them to ask for their money back. Make sure that all of your shipments have tracking numbers on them, and that you let the customer know what those tracking numbers are. Don’t keep them in the dark or they might get the wrong idea, and then your chargeback rate will go up.
- Stay in touch. The more time you spend talking to your customers, the more resources you devote to customer service, the lower your risk will be. Something as simple as sending people a thank you email for their purchase can personalize the shopping experience for them and make chargebacks less likely. Likewise by getting in touch with customers you can help them to make the right purchase the first time, you can keep them informed, let them know when an order might arrive a few days late and generally stay on the same page with them so that you never get a chargeback over a misunderstanding.
You might do all of these, bring your chargebacks down to just about zero, and still be labelled a high risk merchant. But there are a lot of benefits to keeping your chargeback rate down besides just not being regarded as a high risk merchant. For starters there’s the simple fact that all of your income is yours to keep as long as nobody is asking for their money back.
Secondly you’ll have a stronger reputation among customers if they’re not frequently disappointed with their orders. The lower your rate of chargebacks, the more successful you will generally be in your business.
Are There Any Upsides To Being A High Risk Merchant?
So if being a high risk merchant is such a pain in the neck, why do people continue selling in these industries?
Well, there are actually some upsides to being a high risk merchant, but they don’t really pay off unless you’re working in high enough volume to make up for the downsides of being a high risk merchant. Merchant services will cost you a little more regardless, and you’re probably going to have to go with a specialty provider, but there are some benefits that other merchants do not get to enjoy, including…
- You can work in a higher volume allowance. When you’re a high risk merchant it doesn’t matter how many sales you make in a month or if people are buying in bulk, you’re already paying for high risk merchant services, so there’s no downside to expanding your business and trying to reach more people. Not all small businesses have an interest in this. If you’re doing all the packing and shipping yourself, that can get to be overwhelming. But once you have all of those tasks outsourced or automated, a high risk merchant status will allow you to sell in higher volume.
- High risk merchants can use multiple currencies in their business. If you want to avoid being a high risk merchant you generally want to avoid accepting currency from other countries. This isn’t a concern for high risk merchants. Essentially being a “high risk merchant” isn’t something shady, it’s more like owning a sports car and buying insurance for it. If you can afford a sports car, then we know you’re probably not some irresponsible criminal type, but a higher risk comes with ownership of that sports car, all the same, and the cost to cover your auto will reflect that.
- Recurring billing is easier for high risk merchants. If you run a subscription based service then recurring billing is, obviously, a must. It’s hard to keep subscribers around when they have to make manual payments at the start of every month. This is the main reason to consider being a high risk merchant for many sellers. Some products and services are just harder to sell outside of a subscription based service which includes month to monty recurring billing. It is more convenient for customers and it’s more convenient for the merchant.
Can You Be A Low Risk Merchant?
Yes, you can! Being a low risk merchant, at the opposite end of being a high risk merchant, comes with its own set of criteria. Low risk merchants generally enjoy lower rates for many merchant services. Here’s how you can be a low risk merchant:
- You make less than twenty thousand dollars in sales each month
- Your average “ticket size” is less than fifty dollars
- You have your payments page hosted through your payment service provider You work in a low risk industry, like clothing, books and so on
- You operate in low risk regions like the US and Canada
- You only operate in a single currency
If you already make more than twenty thousand a month or you have established your brand in a high risk market, then it might be too late to turn back. But if you operate a small or medium sized business, it may be worth taking this into account when considering whether or not you want to expand or open up that second location.
The Most Common Reason…
The most common reason for merchants being classified as high risk actually has less to do with the industry they’re in than with their chargebacks. You can do everything else right, but if you have a high rate of chargebacks, you will be classified as high risk, and that is why it is so important to try to keep your chargeback rate low. Again: Be honest with your customers, use clear, detailed copy in your marketing, and make sure that you deliver on your promises. You may still be subject to fraud from time to time, but you can keep your chargebacks low by simply treating your customers with the respect you’d hope to be treated if you were the one making the purchase.
If You Are Classified A High Risk Merchant…
If you do wind up being classified as a high risk merchant, it’s not the end of the world. The higher cost of processing services for high risk merchants is mostly down to the chargeback monitoring program that most payment processing providers will add you to. The program can actually help you to improve your business by letting you know where you’re getting chargebacks and why so that you can adjust your approach accordingly. In fact, it’s not a bad service even if you’re not a high risk merchant.
So yes, there is an added cost to doing business as a high risk merchant, but it’s not as if your vendors license will be suspended until an investigation and an audit can take place or anything like that. It’s not as if your factory suppliers will refuse to do business with you. Being a high risk merchant just means that you’re at a higher risk for chargebacks. If you address the issue, and you do not work in one of the high risk industries listed at the top of this article, then you can easily get yourself off of the high risk merchant list.