Different Types Of Risks in High Risk Industry
When a business owner opens a merchant account with a bank, he or she must consider the possibilities of the account becoming a high-risk account. But what exactly is the high-risk industry, and what are the various types of risks that drive a business into the high-risk category? This article will help you understand the key factors that label a business as ‘high-risk’.
Let us first get down to basics and understand what the high-risk industry is.
The High Risk Industry
Fundamentally, merchant accounts can be divided into three categories: low-risk, medium-risk and high-risk. Banks might see a business owner or merchant as a threat if they are suspicious that the loan might not be repaid. This might be due to a number of reasons, some of them being- poor credit store of the merchant, if the business owner requests for a loan with little or no capital, or even if the merchant does not have any collateral to offer to the bank. In simpler words, a business that may have a lower rate for potential success can be considered as a ‘high-risk business’.
By definition, government and financial institutions refer to high-risk industries as industries that attract a large number of commercial disputes and legal restrictions. Most banks and financial institutions try to steer clear of the high-risk industries. But that does not mean the bank or financial institution will not offer them a loan. The lender may grant them a loan, but it is advised to be aware that as a security precaution, they may demand a higher interest rate. They may also modify the terms of loan repayment.
Businesses in the High Risk Industry
Some of the most common industries that can be flagged under ‘high-risk’ are mentioned below:
- Online Gambling, Online Gaming and Casinos
- Online Dating and Adult Services
- E-cigarettes, Tobacco, and Alcoholic beverages
- Pharmaceutical Industry
- Travel Agencies
- Cryptocurrency and Forex Trading
- Subscription Based Services
- Telemarketing Services
- Financial Services
- And many more…
The high-risk bracket is not usually applied to all the sectors listed above. It all relies on the different indications of a company’s financial operations. Financial and legal concerns, as well as the ability to return payments and the creation of credit obligations in connection with the sale of specific goods and services, as well as the necessity to begin advertising campaigns, are all examined.
Risks Faced by the High Risk Industry
As a business operating in the high-risk industry, you may find yourself being subjected to certain restrictions and challenges, like significantly higher processing fees. Let’s learn what are some of the risks that one might face in this industry.
- High Level of Chargebacks – One of the most significant risks that a high-risk business can encounter is a high chargeback ratio (number of chargebacks-to-transactions). Chargebacks are an inexorable part of doing business, and all business owners experience some number of chargebacks during the lifetime of their business. But the problem arises when your chargebacks are more than 1% of your overall sales transactions, as this may lead to the processing bank cancelling your account. There is no way a merchant can bring the number of chargebacks to zero, but they need to proactively adopt necessary measures and frame a course of action to reduce and to some extent prevent chargebacks.
- Getting marked as a Terminated Merchant (TMF) or ending up in the MATCH List – The MATCH (Member Alert to Control High-Risk Merchants) List is a comprehensive database, created and managed by Mastercard. Acquiring banks may refer the MATCH List to screen merchant applicants and determine the risk they pose prior to providing a merchant account. Businesses may end up landing in the MATCH List if one or more of their merchant accounts get terminated by the acquiring bank. A merchant can end up on the list for a number of reasons, some of them being high volume of chargebacks, insufficient security measures, or indulging into fraudulent activities like transaction laundering. If your business lands in this list, you may have to face challenges in setting up a merchant account and may even have to pay a relatively higher processing fee.
- Changes in Legislation – Regulations for the businesses running in the high-risk industry are subject to constant changes and modifications, because of which they may suffer higher business costs and lower profits. Changes in policies and other actions of the government of a particular country have a direct impact on the operation of the business. Industries related to Alcohol, Gambling and Adult services are most susceptible to this risk.
- Inconsistent Revenue – Another significant risk for a business exercising in the high-risk industry is inconsistent revenue streams. Due to several changes in laws, chargebacks, seasonal nature of some businesses, geographical restrictions and many such reasons, merchants may not have a stable income statement, which also makes it hard for them plan the course of action of their business. Profits are unpredictable, which again becomes a hurdle in obtaining loans from banks and having an acquiring bank onboard with the merchants.
Any firm that credit card processors believe has a higher-than-average chance of financial failure is classified as a high-risk business. Although traditional acquirers and banks often avoid high-risk sectors, this should not be the end of your firm. Many high-risk merchant providers have responded to the demand to assist these firms as many high risk sectors continue to develop in their respective professions. If your firm is classified as a high-risk business because of its industry, you must first make sure that it is in compliance with the local, state, and federal rules and regulations governing high-risk businesses, such as fulfilling the Occupational Safety & Health Administration (OSHA) standards.