What Most Businesses Don't Understand About "High-Risk" Processing

In the world of credit card processing, there are two types of companies: low-risk and high-risk. While finding the right processing company can be a nuisance for any merchant, those that operate businesses that fall into the high-risk category may find that their path has a few more obstacles than their low-risk counterparts.

In the world of credit card processing, there are two types of companies: low-risk and high-risk. While finding the right processing company can be a nuisance for any merchant, those that operate businesses that fall into the high-risk category may find that their path has a few more obstacles than their low-risk counterparts.Too often, merchants in high-risk industries aren’t knowledgeable about the barriers they face with processing companies. Because each processor can set their own standards for high-risk clients, finding the right one can be a challenge. A simple google search isn’t going to cut it. Not all high-risk processors are the same, so business owners shouldn’t just accept the first processor that agrees to process payments for them. Here are a few tips that can help business owners determine which high-risk processor will work best for them:

What is high-risk processing?  

High-risk processing is the processing of payments for businesses in a high-risk industry. A high-risk industry is one that is more prone to fraud or chargebacks than others. As a result, high-risk companies usually face more obstacles to receive their money. It’s not uncommon for purchases to be flagged or funds to be held to reduce that chances of a chargeback. A few examples of a high-risk company are:

  • Pharmaceuticals
  • Adult entertainment
  • Gambling
  • Firearms
  • Multi-level-marketing companies

Compared to a low-risk industry, high-risk industries often involve regulated material, a history of fraud, and high average ticket sales. A company may also be placed into the high-risk category if a merchant has a bad credit score. However, whether or not your company is placed in the high-risk category, depends on which processing company you choose.

What does it mean for your company?

If you’ve just learned your company falls into the high-risk category, you probably have a lot of questions. Most notably, how much is this going to cost me?The payment processing industry is already a minefield of hidden fees and tricky pricing structures. Even low-risk companies need to be on their toes as to not get charged extra costs they either didn’t know existed or they weren’t aware were negotiable. However, high-risk companies have even less bargaining power. To start, high-risk companies can expect a longer contract with early termination fees. Low-risk processors are moving towards monthly contracts more and more, but if you fall in the high-risk category, you can expect at least a three-year deal with an automatic renewal clause. High-risk companies will also have higher recurring and account fees on top of chargeback fees. Most likely, processors will also offer high-risk companies a tiered pricing plan versus an interchange-plus pricing plan that is known to cost companies less in the long run. An expense that’s unique to high-risk companies is a rolling reserve. A rolling reserve is a sum set aside from a transaction to cover unexpected setbacks like chargebacks, which can seriously affect cash flow. High-risk merchants can also expect to pay a higher percentage markup and a higher per-transaction charge. This may seem unfair but it’s important to remember that there is a reason a company is placed in the high-risk category. A large portion of a processors job is to protect clients from fraud so the processor is not only minimizing a companies risk at harm but taking on additional risks of their own.

How can I pay less?

As a high-risk company, you’ll just have to accept some fees (like chargeback fees). But there are certain steps a merchant can take to lower their processing costs.

1. Be aware of pricing structures.

As mentioned above, processors will try to stick you with a tiered pricing structure. This will almost definitely end up costing you more. Be sure to ask about other pricing plans and see if you can’t negotiate an interchange-plus pricing structure.

2. Negotiate contract lengths.

Watch out for early termination fees and automatic renewal clauses. High-risk companies may not be able to score a month-to-month deal but that doesn’t mean they have to be stuck with a processor indefinitely.

3. Plan ahead

Incorporating the costs and obstacles of high-risk processing into your business plan is a good way to be prepared and to ensure your company won’t take major losses simply for accepting credit cards. Your high-risk business should not be relying on immediate deposits to stay afloat. Be prepared for held funds and chargebacks to be a regular occurrence by creating your own internal rolling reserve.

4. Do your homework.

This step is important for both high-risk and low-risk companies. There are several different processors on the market and they all have their good and bad points. Beware of those that are looking to take advantage of your high-risk status. It’s important to find a processor that specializes in high-risk industries. These processors will understand your industry and be more willing to work with you. At SwipeSum, we help our clients through this process. We’ll do all the research to find companies the best processor at the best price. The payment processing industry presents obstacles no matter what kind of industry they’re working with, but for high-risk companies, the obstacles are a bit higher. The best line of defense is to be knowledgeable about what your company’s needs are and what different processing companies are offering. High-risk companies can still have a good working relationship with their processor, even with the extra hoops they have to jump through.

Taft Anderson

Taft Anderson is the former Product Marketing Manager of Swipesum. A graduate of Washington University in St. Louis' Olin Business School, Taft is a content and branding expert.

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