How are industries categorized by payment processors?
The level of financial and social risk will vary greatly for different kinds of financial transactions and by industry sectors. It can also be decided by factors such as scale and location and magnitude of potential financial and social impacts.
The financial institution has made a financial and social risk categorization system to every single transaction in a methodical and consistent approach. A standard system includes three financial and social risk categories, designated as high, medium, and low risk
- High Risk: When Transactions are conducted by clients who are involved in business activities which can affect financial institutions adversely or hurt the laws of the country.
- Medium Risk: Transactions typically involve customers with business activities with specific financial and social impacts that are few or less adverse as compared to high-risk industries.
- Low Risk: Transactions normally involve clients with business interests with minimal or zero adverse financial and social impacts.
As per payment processor, three main factors decide, the business is coming under which industry
- The intensity of business
- Monthly sales size
- Chargeback rates
If a merchant is in a high-risk industry, still a merchant can secure lower merchant fees if he can prove strength in the other three areas.
The Intensity of Business
When evaluating a business, a merchant services provider may take into account factors like merchant’s credit score and the number of years the merchant is in the business. New business is always subjected to go through a more scrutinized process.
Monthly Sales Volume
If a business is involved in a high volume transaction, it will fall automatically under high-risk industry. Hence, monthly sales plays an important role here.
Your Chargeback Rate
Once again, it’s not sufficient to belong to an industry with a low or average chargeback rate. To keep your rates low, merchants must make sure that the chargeback ratio remains low to zero. Or Else, merchant accounts may be positioned in a higher-risk category or terminated altogether.
Reasons behind a company being considered as a high-risk:
- Blocking of accounts due to personal credit or financial companies cannot support the sales size that you are requesting for.
- If you offer a recurring payment service.
- You function in an industry that has a potential high chargeback ratio. Banks believe they are spending unnecessary excessive resources on handling your account and, eventually, are forced to disconnect you, regardless of whether you go above thresholds for chargebacks.
- An industry which has a “repute” risk account is dealing with that industry i.e adult industry.
- Your organization is working on the blacklist of merchants.
- The company conducts high-volume transactions.
- The Whole Card-Not-Present businesses are also high-risk.
- Start-ups do not have sufficient credit history or a poor credit history.
- Geographical constraints. If you operate in a country with inadequate internet security or a high level of credit card frauds.
What is Mid risk? Difference between mid-risk and high risk?
Generally, merchants are familiar with the word “high risk” as they relate with their credit card processing, but they are unaware of the “mid risk” category. Basically, merchants classified as “mid risk” may have one or more of the following features:
- unusual or very high-ticket sales
- involved in an industry with a record of high chargebacks
- involved in an industry which large banks “politically” don’t support or
- involved in a highly regulated industry.
The distinction between the two categories is usually one of degree. For example, a business may indicate slightly-higher-than-average chargeback ratio, the business cannot be classified as either “low risk,” or “high Risk”, so it can be categorised as mid risk.
What is a low risk industry?
An industry is deemed to be a low-risk industry if it has the capability to give a consistent return on investment. From the point of view of the merchant services provider, they can confidently extend service as they know it won’t be flooded with chargebacks or complaints and consequently, the merchant is unlikely to vanish with unpaid fees.
Few examples of low risk industries:
Consulting
Direct Sales
Tutoring
Virtual Assistant
Direct Sales
Conclusion
A financial and social risk categorization system allows a financial institution to scrutinize and evaluate its exposure to financial and social risk accumulated at the portfolio level. A financial institution can set internal ceiling levels for its overall exposure as a function of the financial and social risk category. This permits the financial institution to better control and pursue changes in the overall risk profile of its client’s portfolio and the associated financial and social impacts of its clients.
