News, Education and Events Decoding Digital Payments & Fraud

News, Education and Events Decoding Digital Payments & Fraud

Guest Perspective: ‘What Do You Mean I’m Considered High-Risk?’

To e-commerce entrepreneurs, being classified as a high-risk business often comes as a surprise

By Chris O’Donnell, Senior Copywriter, Instabill

What Do You Mean I’m Considered High-Risk? In the merchant acquiring world, it’s a scenario that’s all too common.

An entrepreneur has an idea for an e-commerce startup. With big plans in his head and dollar signs in his eyes, he applies for a merchant account and is about to launch. Then, however, he gets the news: The business is classified as high risk and, as such, finds its application either declined or approved with substantial trading restrictions.

Most e-commerce businesses are deemed high risk, especially startups, and therefore end up paying higher transaction fees, have substantial reserve deposit requirements imposed and may have limited processing allowance/capability.

It often comes as a shock to e-commerce business owners.

“We get that reaction probably two or three times a week even though we are known as a credit-card processor of high-risk merchants,” said Wendy Jacques, sales manager at Instabill, a global credit-card processor based in Portsmouth, N.H. “Merchants are often unaware they are considered high risk. So we do our best to explain to them that anytime a merchant is dealing with e-commerce, where there is never a credit card present, they’re going to be considered high risk. This includes point-of-sale merchants that expand their sales via the internet.”

What is it About Being Categorized as High Risk?

When merchants and payments-industry professionals are confronted with the term “high risk,” certain industries immediately come to mind: adult content, Internet gambling and online pharmacies, usually in that order.

The very term is subjective. And there is no doubt a stigma attached. “Some merchants might be a little embarrassed to think their business is considered high risk,” Jacques said. “They have this great idea for a business, but then they’re told they’re considered high risk, and that brings them down to Earth a bit.”

Sure, adult content, Internet gambling and pharmacy are considered high-risk industries. However, so is a travel or timeshare agency. So are subscription-based services like online dating or magazines; hospitality-related industries, such as a bed and breakfast. Even technical support, for a number of reasons.

Defining the ‘High-Risk’ Label

What makes a merchant high-risk? The most common answer is financial and reputational peril. Acquiring banks believe certain high risk e-commerce businesses come with threats of high chargeback rates (such as travel-related industries or technical support) or high instances of fraud (online casinos).

Nevertheless, a merchant who works in hospitality or tech support usually doesn’t realize they operate in a high-risk capacity. “Most e-commerce merchants feel that high risk is based solely on industry,” Jacques said.

Level of risk has everything to do with the acquiring bank protecting itself.

“Since card holders can easily notify their bank after a purchase and say, ‘It wasn’t me,’ and dispute their e-commerce card transaction, both Internet merchants and acquiring banks are at great financial risk,” said Jason Field, CEO and founder of Instabill. “Issuing banks charge these transactions back against the merchants’ trading account. Acquiring banks therefore must limit their risk exposure by requiring fixed money deposits, delayed payouts and six-rolling reserve deposits until the bank feels that the threat of chargebacks has greatly diminished.

“Limiting the dollar amount new e-commerce merchants can process on a monthly basis is another restriction that most domestic banks impose,” Field added.

Industry type is another common reason a merchant is classified as high risk. Adult-related websites or medical-marijuana dispensaries are a prime example. Many banks view these industries as societal taboos, a connection to which could damage a bank’s reputation. Hence, the bank won’t process credit-card transactions for them, forcing many merchants to turn to an offshore bank for credit-card processing.

Startups and new businesses that typically have little or no credit history are automatically categorized as high risk. Why? The lack of credit history is seen as a red flag. To a bank, startup businesses are akin to individuals applying for a loan or a mortgage who have no history of credit, who have only paid for goods using cash. As outlandish as that analogy may sound, the bank feels it must protect itself.

Online businesses that process large-ticket transactions, such as airline tickets, are considered high risk. Why? Payment settlement takes months, and during those months, consumers change their travel plans. Flights get cancelled. The instances of a customer issuing a refund on a $500 plane ticket are common.

Think Like a Criminal

Jacques offers this advice for merchants trying to understand the concept of high risk: Think like a criminal.

“When you’re a business owner, especially a new one, you don’t think of the many ways you can get scammed,” she explained. “I’m talking about friendly fraud and chargebacks. If you don’t look at your business with a criminal mind, it’s hard to envision what consumers can actually do.”

This is particularly true for online casinos, which suffer from an abundance of chargebacks due to friendly fraud—players logging on, losing money and disputing the charges on their credit cards.

Can a Merchant Lower Its Risk Profile?

Yes, and it is all about the protective measures a merchant takes against fraud and chargebacks. For example, 3D Secure processing, which enables the acquiring bank and credit card issuing bank to connect with one another to verify each transaction.

3D Secure processing is among a number of measures a merchant can take to combat fraud and chargebacks. Instabill also works with MaxMind, a database that identifies and alerts merchants of suspicious activity; and SSL certificates which secure online transactions.

Chris O’Donnell is a senior copywriter at Instabill, a global merchant services firm in Portsmouth, N.H. Founded in 2001 by CEO Jason Field, Instabill provides credit card processing for e-commerce, mail order/telephone order (MOTO) and point-of-sale (POS) businesses worldwide. For more information, visit .

Daniel Leibovitch