When it comes to opening a merchant account, business owners must understand the risk category under which their business comes. Banks classify businesses under three basic risk categories- high risk, mid risk and low-risk categories. Businesses classified as high-risk merchants are the ones that have a greater risk of financial failure. For example, stockbrokers, forex, gambling industries are high-risk businesses as they can go into financial loss at any time. Therefore, banks need to think twice before sanctioning loans for such businesses.
Similarly, there are mid risk and low-risk businesses. Mid risk businesses are those that involve medium risk, and low-risk businesses are the ones that involve minimum financial risk. Banks need to consider the level of risk while offering a loan to businesses.
Which industries are considered as a High risk?
Some businesses have a low rate of potential success and are considered high-risk ventures. The credit score of the business does not matter. A business with an excellent credit score can be in the high-risk category. There are multiple reasons for which an industry of business can be considered as under the high-risk category.
Here are some factors on the basis of which banks categorize businesses and merchants into a risk category.
Changes in Regulations
Industries such as alcohol and firearms are considered highly risky due to their precarious relationship with the law. Governments and regulating authorities change the regulations for such industries regularly that raise their operating costs and lower the chances of profit-making.
Businesses like food businesses need to follow strict regulations as their products can directly affect people’s health. Moreover, their revenue can also vary a lot depending on the life and competition of the business. Restaurants are considered high-risk businesses, while small food shops are considered medium risk businesses depending upon some other factors like competition, location and their popularity in the area.
The regulations for apparel, grocery and departmental stores are not so strict, and they have a higher probability of making money and are therefore considered as low-risk businesses by banks.
Plenty of competitors
A business falls into the high, medium or low-risk category depending upon the competition it faces in the market. For example, beauty salons, food joints, gyms, and grocery stores are highly competitive and have a risk of low profits. Therefore, banks are hesitant to offer loans to these businesses unless they can show a history of profitability.
Some businesses like gift shops, stationery shops, and used car dealers have medium competition and are therefore considered as medium risk businesses. Stores that sell antique items and spiritual items are unique and have the lowest competition, therefore considered low-risk businesses.
Inconsistent or consistent revenue
Some businesses like photography, wedding planners, and catering have a season when they have most orders. It means they experience a high and low in different seasons and times of the year and therefore earn inconsistent revenue. On the other hand, departmental stores, apparel stores and merchants that use products daily earn consistent revenue and, therefore, are considered low-risk businesses.
Technology has forced us to change the way people do business. Many businesses have turned online and have created an online presence. Big ecommerce retailers are giving offline stores tough competition.
Merchants that are selling online on their own platform or on popular ecommerce platforms like Amazon are believed to sustain in the long term. On the other hand, businesses operating offline are supposed to be replaced sooner or later, therefore, are considered high-risk businesses.
Businesses that take care of the competition, the requirements of their target audience, and the changes in the market are likely to sustain and replace the ones that ignore these factors. Businesses that are easily replaceable are considered high-risk businesses.
How do payment processors consider high-risk businesses?
Processors may be concerned about high-risk product categories. This is based on industry trends. They calculate factors such as fraud, returns, debit card chargebacks, credit card chargebacks, and sales volume. This information is used to classify the types of companies. The category to which your business belongs is identified by a reseller or customer service centre category code.
Some Risk Factors You Can Control
Even if your industry is not considered a high-risk industry, your business can still be classified as a high-risk business, regardless of which MCC it is in. Processors and financial institutions study the performance of typical companies in their industry, but they also study your company specifically. They want to know that working with you is a reasonably safe investment.
There are several factors that can contribute to your business being classified as high risk:
- Your business has been listed on the MATCH (blacklisted merchant) list for the past five years.
- It is a new company with a very low credit card processing history.
- You have a bad credit card history (late payments, insufficient loan guarantee, etc.).
- They sell products or services that normally result in high-value transactions.
- You experience a higher than an average number of returns/refunds.
- Your chargeback rate is too high.
Is it bad for a business to be high risk?
A high-risk business may not necessarily be bad. A business can be considered as high risk due to the industry it belongs to or due to its short credit history. The real negative about such businesses is that services for high-risk merchant accounts cost more than the same services for low-risk merchant accounts. Transaction fees, monthly fees, and all other service payments tend to be higher. Again, the reason is the lack of trust in high-risk trading accounts.
Acquiring banks typically charge more, require long-term contracts, and require a lot of paperwork. For the owner of a high-risk business account, a payment service provider may be the best option.
No matter under which risk category your business falls into, payment service providers like PayPound offer a variety of merchant services for high-risk businesses, including merchant accounts, payment processors, and payment gateways at lower prices and with no high commitments.