Why High-Risk Payments Are Difficult and the Need for High-Risk Payment Processors

In today’s digital-first world, businesses rely heavily on payment processors to accept and manage transactions from customers. Whether through credit cards, debit cards, or online banking, smooth and secure payment processing is critical to any company’s success. However, not all businesses fit neatly into the mold of traditional, low-risk operations. Many companies—especially those involved in certain industries like online gaming, adult entertainment, CBD, and firearms—are classified as high-risk. For these businesses, payment processing becomes a complex challenge, necessitating the use of specialized high-risk payment processors.

In this blog post, we will dive into what constitutes a high-risk business, why high-risk payments are difficult, and why such businesses need dedicated high-risk payment processors to succeed.

What Is a High-Risk Business?

Before discussing why high-risk payments are difficult, it’s important to understand what classifies a business as “high-risk.” High-risk businesses are typically those that, due to their nature or industry, face a higher likelihood of payment disputes, chargebacks, fraud, or regulatory issues. Payment processors and financial institutions categorize businesses as high-risk based on factors such as:

1. Industry Type: Certain industries, such as adult entertainment, gambling, CBD and cannabis, firearms, and travel, are often classified as high-risk due to the high chargeback rates or legal gray areas they operate in.
2. Transaction Volume: Businesses that process a large number of transactions, or high-dollar amounts per transaction, are more susceptible to fraud and disputes, putting them into the high-risk category.
3. Chargeback Rate: A chargeback occurs when a customer disputes a charge and the transaction is reversed. Businesses with a high rate of chargebacks are viewed as riskier by payment processors because frequent chargebacks can indicate poor customer service or fraud.
4. Credit Risk: Businesses that have a history of financial instability, poor credit, or bankruptcy may be flagged as high-risk by payment processors.
5. Legal and Regulatory Risks: Companies operating in industries with complicated or unclear legal regulations, such as CBD or online gambling, are often categorized as high-risk because of the possibility of legal complications, sudden regulatory changes, or government intervention.
6. International Sales: Businesses that operate internationally, especially in countries with high fraud rates, are often considered high-risk due to the increased likelihood of fraudulent transactions.

Why High-Risk Payments Are Difficult

High-risk businesses face a number of challenges when it comes to payment processing. Unlike traditional low-risk businesses, they must navigate a variety of obstacles that can make managing payments more difficult, expensive, and uncertain. Below are some of the key reasons why high-risk payments are so challenging:

1. Higher Chargeback Risk

Chargebacks are one of the biggest headaches for high-risk businesses. When a customer disputes a charge, the payment processor reverses the transaction and refunds the customer. Chargebacks can happen for several reasons, including fraud, customer dissatisfaction, or even friendly fraud (when a customer disputes a charge they actually made). While all businesses face the risk of chargebacks, high-risk industries—such as online gaming, travel, and subscription services—tend to have higher-than-average chargeback rates.

For high-risk businesses, frequent chargebacks can damage their reputation and lead to penalties from payment processors, including higher fees or even termination of service. Managing chargebacks requires significant resources, time, and expertise, making payment processing more difficult and risky for high-risk merchants.

2. Fraud and Security Concerns

High-risk businesses are often more susceptible to fraudulent transactions, particularly in industries where large sums of money are involved, or where digital goods and services are sold. Fraud can take many forms, including identity theft, card-not-present (CNP) fraud, and account takeover fraud. Online retailers, in particular, face a significant risk of CNP fraud because customers do not physically present their payment cards at the time of the transaction, making it harder to verify the legitimacy of the transaction.

Fraudulent transactions not only lead to financial losses but also increase the likelihood of chargebacks and can damage the business’s relationship with its payment processor. High-risk businesses must invest heavily in fraud prevention tools and strategies to protect themselves, adding another layer of complexity to payment processing.

3. Increased Scrutiny from Financial Institutions

Traditional payment processors and financial institutions often view high-risk businesses with skepticism due to their perceived instability and increased risk of legal or financial issues. As a result, these businesses face greater scrutiny during the underwriting process. Payment processors may require extensive documentation, including financial statements, business plans, and evidence of regulatory compliance, before approving a high-risk merchant account. This process can take weeks or even months, delaying the ability of the business to start accepting payments.

Once approved, high-risk businesses often face ongoing monitoring from their payment processor to ensure that they are adhering to the terms of their merchant account. Any deviations, such as an increase in chargebacks or suspected fraud, can result in penalties or account termination.

4. Legal and Regulatory Challenges

High-risk businesses often operate in industries with complex legal and regulatory frameworks. For example, online gambling is legal in some jurisdictions but illegal in others, creating a patchwork of regulations that businesses must navigate. Similarly, the sale of CBD and cannabis products is subject to varying state and federal regulations in the United States, making compliance a constant challenge.

Payment processors are wary of businesses that operate in legally ambiguous industries because they do not want to risk violating laws or regulations themselves. As a result, high-risk businesses may have limited options for payment processing and may face higher fees or stricter terms to compensate for the perceived legal risk.

5. Limited Access to Payment Processors

Many mainstream payment processors, including large companies like PayPal, Square, and Stripe, refuse to work with high-risk businesses due to the increased risk of fraud, chargebacks, and legal complications. This leaves high-risk businesses with fewer options for payment processing and forces them to seek out specialized high-risk payment processors.

These specialized processors are willing to work with high-risk businesses, but they often charge higher fees to offset the increased risk they take on. This can make payment processing significantly more expensive for high-risk merchants, eating into profit margins and making it more difficult to compete with low-risk businesses.

6. Higher Processing Fees

High-risk payment processors typically charge higher fees than traditional processors to compensate for the increased risk they take on by working with high-risk businesses. These fees can include:

• Higher Transaction Fees: High-risk businesses often pay higher per-transaction fees, which can range from 3% to 5% or more, compared to the 2% to 3% fees typically charged to low-risk merchants.
• Monthly or Annual Fees: Some high-risk payment processors charge monthly or annual fees for maintaining a high-risk merchant account, which can further increase the cost of payment processing.
• Rolling Reserves: Many high-risk payment processors require businesses to maintain a rolling reserve, which is a portion of the business’s sales revenue that is held in reserve by the processor as a safeguard against potential chargebacks or disputes. This can limit cash flow for the business and create additional financial strain.
• Setup and Termination Fees: High-risk businesses may also face setup fees when opening a merchant account and termination fees if the account is closed prematurely.

7. Difficulty Scaling Internationally

For businesses looking to expand internationally, payment processing becomes even more challenging. International high-risk businesses must navigate varying laws, regulations, and fraud risks in different countries. Many high-risk payment processors may not support international transactions or may charge exorbitant fees for cross-border payments.

Additionally, high-risk businesses that operate internationally are more vulnerable to fraud due to differences in security standards and fraud detection systems across countries. International expansion requires specialized knowledge and resources to manage the increased risk of fraud and chargebacks, making it a daunting prospect for many high-risk merchants.

The Role of High-Risk Payment Processors

Given the unique challenges that high-risk businesses face, traditional payment processors often refuse to work with them. This is where specialized high-risk payment processors come in. These processors are designed to cater to businesses that operate in high-risk industries, offering the tools and services needed to manage the complexities of payment processing in a compliant and secure manner. Here’s why high-risk businesses need dedicated high-risk payment processors:

1. Expertise in High-Risk Industries

High-risk payment processors specialize in working with businesses in high-risk industries. They understand the unique challenges these businesses face, from managing chargebacks to navigating complex legal and regulatory requirements. This expertise allows high-risk payment processors to provide tailored solutions that meet the specific needs of high-risk businesses.

2. Fraud Prevention Tools

Fraud prevention is a top priority for high-risk businesses, and high-risk payment processors offer advanced fraud detection and prevention tools to help mitigate the risk of fraudulent transactions. These tools may include:

• Real-Time Transaction Monitoring: High-risk payment processors often provide real-time monitoring of transactions to detect and flag potentially fraudulent activity.
• Address Verification System (AVS): AVS compares the billing address provided by the customer with the address on file with the credit card issuer to help verify the legitimacy of the transaction.
• 3D Secure Authentication: This additional layer of security requires customers to enter a password or verification code to complete a transaction, reducing the risk of fraud.

3. Chargeback Management

Managing chargebacks is one of the biggest challenges for high-risk businesses, and high-risk payment processors offer tools and services to help merchants reduce chargebacks and respond to disputes more effectively. These services may include:

• Chargeback Alerts: High-risk payment processors can provide real-time alerts when a chargeback is filed, allowing businesses to respond quickly and potentially prevent the chargeback from being processed.
• Chargeback Prevention Services: