THE RISK AND REWARD OF HIGH RISK MERCHANTS
ISOS and agents don’t need to shy away from these merchant accounts
Americans made 33.8 billion credit card transactions in 2015 with a value of $3.16 trillion, up $6.9 billion since 2012, according to the Federal Reserve Payments Study 2016. The number of credit card payments grew at an annual rate of 8%, the highest growth rate of any payment type the Federal Reserve studied.
Credit cards are more popular than ever, so accepting credit cards is obviously critically important for merchants. But for those merchants considered high risk, being able to process and accept credit card payments is challenging. Often these merchants struggle to find a merchant account provider that will do business with them.
For ISOS and agents, high-risk merchants could be a lucrative market and a few providers, including Payment Cloud, Inc., have even specialized in working with high-risk merchants. Other ISOS and agents service a few high-risk niches. However, many ISOS and agents are scared away by the regulatory and financial threat that high-risk businesses present. But with a bit of education and a lot of due diligence, an ISO or agent may want to reconsider reaching out to high risk merchants.
What is a High Risk Merchant?
Whether or not a merchant is high-risk is typically determined by the merchant’s industry and their financial history. Certain industries are subject to stringent regulations, whether from the Occupational Safety and Health Administration (OSHA) or the Federal Trade Commission (FTC), and pose a higher regulatory risk. These industries include hazardous waste clean-up firms, ecigarettes, and the adult entertainment industry.
Even those merchants that have perfect credit, no complaints with the Better Business Bureau, and a stellar record of customer satisfaction can be labeled as high risk due to regulatory concerns.
Financial risk may be due to a high level of chargeback’s, refunds, and returns; high levels of credit card fraud; companies that have irregular high ticket sales such as furniture stores; and companies with bad or non-existent credit histories or that lack collateral.
A merchant with a chargeback ratio that exceeds 2% is typically considered high risk. A chargeback, regardless of whether the merchant won or lost, contributes to the chargeback ratio.
There’s no standard definition of what constitutes a highrisk merchant, leading processors to individually determine if a business is high risk. “The most conservative processors look at companies that we onboard every day as high risk but that we view as low risk,” says Lou Honick, CEO of Host Merchant Services.
From Low Risk to High Risk
Low risk merchants are those that process transactions in person, such as retail merchants and restaurants. About 20% of Host Merchant Services’ business is with high-risk merchants.
It didn’t start out that way, says Honick. The firm invested in online marketing and began generating a lot of leads from high-risk merchants. Rather than continually turn these leads away, Honick decided to begin working with high risk merchants, first in the web hosting industry.
“Generating leads is expensive, and leads are precious,” says Honick. “If merchants are coming to you, you don’t want to pass up that business even if you make a smaller percentage of the overall revenue.”
Honick’s team takes the merchant application and works to get the approval. The key to approvals is working with a variety of bank sponsors, he notes. “Different bank sponsors work with different merchant types in the high-risk space so having a broad selection of partners means you’re more likely to monetize the leads you get,” says Honick.
That approach is very different than in the low risk space, where ISOS and agents may prefer to develop deep relationships with only one or two partners. “High risk is all about options,” notes Honick.
Before Taking the Leap
Shawn Silver, Vice President and Managing Partner for Payment Cloud, has always focused on high-risk merchants. Being able to thrive in the industry requires a keen understanding of the merchants business model, your portfolio, and the regulatory environment those merchants do business in, says Silver. “If you manage your business properly, it’s a good business.”
But it’s also a business ISOS and agents need to do their homework in. Silver recommends that ISOS and agents take a very deep dive into the high-risk business, including consulting with the acquirers they work with and their own legal counsel. Silver says that Payment Cloud has not been challenged with finding acquirers to work with. Since Payment Cloud incurs any risk, it’s a matter of making the business case to acquirers.
Silver also recommends that ISOS and agents start slowly.
“Build your high risk merchant business up over time, learning as you go,” he says. “You want to understand the dos and don’ts of the SIC codes you may decide to aggressively pursue.”
Within the high-risk merchant market, Honick warns ISOS and agents to be wary. “There are merchants that don’t stand a chance of approval due to banking regulations but they will apply to every ISO and agent they can find on Google,” he says. “They are desperate, and they will hound you.” Some of these currently “untouchable” merchants include cannabidiol (CBD), medical marijuana, and offshore technology support.
But overall, Honick and Silver both believe that there are opportunities for ISOS and agents willing to take the steps necessary to effectively work with merchants that pose greater financial, regulatory, and even reputational risk.
You do need to have the financial wherewithal though to address problems, collaborate with regulatory authorities, and work through proper legal channels, Silver adds.
“Remember, high risk merchant accounts are not the Wild West,” says Silver. “If you do right by merchants and have the resources to rectify any problems that occur, it’s a win/ win situation.”