What Makes a Business Or Merchant “HIGH RISK”?

High risk has to do more with the charge back exposure since the acquiring/sponsoring bank is responsible for all charge backs if a business were to cease business and close for any reason. A better way to characterize a business as high risk is ‘harder to place’. Why then is a business “harder to place” for taking credit cards? 

This is because an acquiring/sponsoring bank will not even consider or approve a business based on various details that are not in line with their underwriting guidelines. Most of the time its about the financial expose and loss. As an underwriter, they look at worst case scenarios in regards to financial expose and loss. For example, if a business has their processing account stopped abruptly, this will have a serious consequence to their cash flow which might affect delivery of product or service on payments taken previously. This in turn causes customers to dispute credit card transactions when the product or service is delayed and everything for the business spirals out of control. 

Let’s examine travel agents. There are several factors that make this type of business ‘high risk’ or ‘hard to place’. The vast majority of travel agents are good people who run legitimate sales through their business, but the problem lies with what is outside of their control. They can do an excellence job booking a vacation well below market price, but a last minute deals from hotel or an airlines that significantly drop their rates the week before the vacation starts due to a surplus of rooms / seats. In this example the customer books this last minute deal and goes to the issuing bank and disputes the original credit card charge and will likely win the dispute. Also consider the travel agent has no control over how their vendor operates and if the customer has a bad experience for any number of reasons they are likely to get buyer’s remorse and dispute the charges. 

Another example is e-cigarette business. Most acquiring / sponsoring banks will reject this type of business on principle alone citing it is “too easy for a minor to purchase the product online”. It’s the potential of taking part in facilitating the sale of nicotine products to minors that the acquiring / sponsoring bank is avoiding due to nothing in regards to financial expose and loss.
Banks having been doing this a lot longer than you have been in business and have enough experience and history to know that even a good business can go bad. They look at the long term, “how much do we stand to lose if this company closes its doors tomorrow?” Acquiring / sponsoring bank are typically on the hook for charge backs for six months after the delivery of a product or service. 

We hope this blog post has helped to give you a better understanding into this subject. Wether your business is “high risk” or not, we can help.

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