Why are high-risk industries considered as high risk?
A Business entity earns profit by selling goods or services and Accumulated profit of all business entities contributes to the development of the global economy. All business entities require to receive payment as soon as possible from their clients for the goods or services he sold. Consequently, they depend on the banking systems, which are the only authorized entities to process the payment.
Merchants who are dealing with international clients require an international banking system to get their payment and bank. Banking industry also extend their facilities to the merchants who can satisfy their terms and conditions.
Banks divide merchants into three categories depending on time and probabilities to complete the payment settlement: low-risk, medium-risk, and high-risk.
The aim of the banking institution is that all parties, both the customer and the seller, receive goods/money as per the agreement. Also, it is not desired by the banking system that any of the involved parties in the transaction dispute the transaction. The main goal of the merchant is to get the full amount at the right time, as the buyer promised or did.
Financial institutions always try to avoid dealing with high-risk industries. Dealing with the same becomes very costly, in terms of both time and money, if the merchant has excessive chargebacks.
In maximum cases, whenever chargeback is won, the seller faces a heavy fine. The fine can be 25-30$ for each chargeback, but if their ratio is too lofty, this amount can be 100$ for each. It may lead to the termination of the merchant account and the failure to accept payment by credit card.
How chargebacks kill High Risk businesses?
Each customer who purchases a product or service expects the price to match the quality of the product. In other words, they are concerned about receiving the product that they ordered. Hence, sometimes mismatching the expectation of a client with the delivered product and services lead to dispute and clients want to return the product to the seller.
Here, Visa and Mastercard set stringent limits on the highest number of return transactions that an online store owner can finish in 1 month. If these constraints are exceeded, the merchant falls under a certain monitoring program by the payment system and the acquirer bank. To be scrutinized by Visa and Mastercard, it is adequate for the merchant to receive more than 2% of chargebacks from the total trade turnover.
If, after falling under supervision, a merchant does not take actions to reduce the percentage of chargeback transactions, their merchant account will be blocked.
How to define a High-Risk industry?
As per Government and financial institutions, high-risk industries refer to industries that attract a significant number of commercial disputes and legal constraints.
The primary obligation for conducting high-risk transactions lies with payment providers and other financial institutions. They thoroughly study company documents and evaluate each company. But in high-risk industries, everything is not transparent, either not the same in each country. The same type of activity in various countries may have a distinct level of risk.
Your company may be considered as a high-risk due to the following reasons:
- Blocking the 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 organisation 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.
The list of high-risk verticals
- Pharmacy business.
- The organisation of leisure.
- Telemarketing and IP-telephony.
- Electronic cigarettes.
- Adult products.
- Psychologist services.
- Software business.
- Fortune telling.
- Marketing services
- Web design.
- Hotel reservation, organisation of travel agencies, and pawnshops.
- The provision of investment and financial services.
Above indicated industries are not always rated as high-risk categories. It all depends on the specific indicators of the financial activity of the business entity. Aspects such as financial, legal attributes, the possibility of repayment of costs, and the advent of credit obligations related to the sale of certain goods and services, the necessity to launch advertising campaigns are also evaluated.