How does a high-risk credit card processing work?

Ever wonder why some companies are classified as high-risk and have to face more limitations and fees from payment processors? In this article, we will explore the reasons why some businesses are considered riskier than others and what is PSPs rationale for putting more restrictions on them. We’ll also discuss how card processing works for high-risk companies.
But before going through all the aspects of card processing, let us first explain, what does “high-risk” mean for companies and merchants.

What is a high-risk business?

In banking, a company that wants to open a bank account usually falls under one out of two categories: low-risk or high risk. This blog post about the latter one. Here are the main factors that determine a business as a high-risk one:
Your company is a part of a high-risk industry. An industry may be classified as such because of the chargebacks. As a rule, chargebacks should not exceed 1% of all orders of a low-risk company. To put it simply, you’re only allowed to get one chargeback every 100 successful orders. If the number of chargebacks you get is higher, you’ll most likely be considered a high-risk business. Commonly, online casinos and gambling, dating and adult services, online gaming, tourism, healthcare supplements, drugs, tobacco-related products, telemarketing and MLM are classed as high-risk.

Your credit card history. Your company is likely to be deemed high-risk if you’ve missed paying the bills a couple of times. Unfortunately, you are not immune to being classified as a high-risk merchant if you’re just starting the company, or your credit card processing history is rather short. 

A downgrade because of chargebacks. You may have a low-risk company but still get more than 1% of chargebacks. Your bank or a Third Party Provider (TPP) will usually issue several warnings, but if the situation stays the same, your business will be switched to the high-risk category.

Your country of operation. Some countries as a whole have a high chargeback risk, and your company may be labeled high-risk because of that. Usually, the EU, Singapore, the US, Canada, and Japan are considered to be safe options, but chargeback statistics change each year. The 2019 Year in Chargebacks report showed that the highest chargeback-to-transaction ratios were recorded in Bahrain, Bhutan and Guatemala, and the lowest – in Switzerland, Norway, and Sweden.

You are selling products and services that are subscription-based. Unfortunately, these types of businesses are also classified as high-risk. The thing is, your clients can unsubscribe at any moment, which often leads to a high number of chargebacks.

What is a high-risk payment processor?

A payment processor – aka a payment service provider (PSP) – is a third-party company that enables the communication between a card-issuing bank and a merchant’s bank. A PSP helps to verify a transaction between a customer and a seller by sending a payment request to a card association, which, in turn, refers to a card-issuing bank. The latter than approves or denies the money transfer from customer’s to merchant’s account.

Payment processors can service both low-risk and high-risk businesses, but in the case of the latter, there are conditions. High-risk companies are having a greater rate of possible chargebacks and fraudulent transactions, which is why payment processing services will cost them more. We talking higher setup, monthly, annual, and even termination fees.

You may also face a PCI Compliance fee. Let us explain: a business owner needs to adhere to the Payment Card Industry Data Security Standard (PCI DSS), which ensures the safety of customers’ data. A payment processor may require this fee and in exchange provide a merchant with PCI compliant services.

As a high-risk company, you may be required to have a rolling reserve to protect yourself from an excessive number of chargebacks. The size of a rolling reserve is calculated based on a 5-to-15 percentage of every transaction. Basically, its merchant’s earned money which can’t be accessed for some period of time – not more than half a year.

Knowing all that, what are the main things to pay attention to while choosing a PSP for high-risk business:
Fees and limitations. Make sure that the fees you pay for payment processor services are justified and guarantee transactions’ security. Confirm that the limitations are not severe and won’t damage your business in the long run.
Chargeback protection and fraud-prevention system. That’s a self-explanatory one – a PSP should provide technical solutions to protect a merchant’s account from fraudulent transactions and chargebacks. A payment processor should also be compliant with common regulations, like PCI DSS, PSD2, and GDPR.
Multiple MID accounts. Using a PSP that supports multiple MIDs might benefit a high-risk business a lot. Not only you can distribute the load between accounts to avoid the transaction limit, but you will avoid a critical situation if one of the accounts is blocked or terminated by the bank.
Payment gateway. It’s better when a payment processor has its own payment gateway that will cover security tools for both buyers and merchants.
Customer support service. Lastly, you want to make sure that a PSP has active and functional customer support, as there are might be situations in which you’ll need to contact payment gateway staff ASAP.

How does an online high-risk credit card processing work?

Unfortunately, eCommerce is much more vulnerable to fraudulent transactions than real-life shopping, as you can’t really see your customer and the chargeback rates are high. Hence, we’re going to focus on online transaction processing. Credit card processing is similar when dealing with both low-risk and high-risk businesses, but the latter has an extra level of security.
Basically, an online credit card processing has a specific scheme: customer – online store – payment gateway – PSP – card association – card issuing bank – issuer’s processor. Let’s go through this scheme step by step.
A cardholder finds an online shop/service provider, chooses a product/service, and puts it into a shopping card. To complete a purchase, they need to enter the card information. That’s when they face a payment gateway.

A payment gateway is a service used to check the customer’s credit card data to ensure their identity. A payment gateway is extremely important for the merchant’s safety as it verifies that the card really belongs to a person using it, which significantly decreases the possibility for a chargeback.
A high-risk merchant should choose a payment gateway that supports a 3D-secure protocol, which allows for two-factor authentication. Here’s how it works: a customer will first enter a card number, an expiry date, and a CVV. Then they will be redirected to a separate browser window to enter their permanent 3D-secure service password or a one-time password sent to their phone. Another good news for a high-risk merchant is that if a customer disputes this kind of a transaction as fraudulent, the liability for the chargeback will shift from a seller to a card-issuing bank.

Also, payment service providers may offer additional security features for high-risk business at the payment gateway stage: from different levels of data encryption and card verification to manual reviews and personalized filters to eliminate risky transactions. But keep in mind that some of these functions may result in additional fees.

After the card owner was verified, a payment request is sent to a payment processor (acquiring bank), which then redirects it to a card association (Visa/Mastercard, etc.). Keep in mind that PSP may limit the number of payment transactions that high-risk merchant accepts monthly. Moreover, a payment processor may deny any transaction which exceeds a set amount of money to receive from customers.

A card association forwards a payment request to a card-issuing bank, which in turn allows or denies the transaction. The results of a financial operation are then sent back to the buyer.
Usually, the money will be transferred to a merchant’s account within two days. But, as we’ve mentioned earlier, if you’re a high-risk business owner, 5 to 15% of every transaction may be used for a rolling reserve.
We have listed a fair amount of struggles a high-risk company may encounter, but it doesn’t mean that every service provider is cost-intensive and discouraging to work with.