We – entrepreneurs – think about ourselves as businessmen. Trustworthy people, who believe in our idea and the business model we have in our heads. Then someone tells us that we are a high risk merchant. Us?! No! Of course not. It has to be some mistake. Unfortunately it’s not.
All kinds of financial institutions, e.g. payment service providers, acquirers, banks – they all process money. And when it comes to processing money – they are obligated by regulators to classify merchants at at least one of three levels:
- low risk merchants
- medium risk merchants
- high risk merchants
They need to do it. And they do it.
Because even if you think that you are absolutely low risk – you may be classified as a medium or even high risk merchant. Why? Because in reality you may be more risky than you think.
Let me show you a few examples…
Yeah, I know – everyone uses recurring payments. Especially in the world of SaaS businesses. So why is it more risky? For two reasons:
1. You are charging your customers automatically
A customer may not know that you want to process automatically on regular basis and he might be surprised once he sees your charge on his bank statement.
2. Customer has more time for a chargeback
Typically your customer has 6 months since the purchase to file for a chargeback. In fact, in the case of digital goods (let’s say in a SaaS business) it’s 6 months since the delivering of the service. So, if the customer pays for a monthly plan – you are obliged to provide him with your service for the whole month. So the completion of delivery took place at the last day of the whole period (month). In such a situation the customer has 6 months since the last day of the period, so in fact – 7 months since the purchase. Now try to calculate how long it is e.g. for an annual plan.
Such businesses are always classified as high risk merchants. Why? Because it’s hard to verify what’s going on there. There could be everything. Let say a file sharing facility. Where there’s file sharing – there may be some porn or some illegal files involved.
In case of such businesses it’s also a huge risk of money laundering.
Let’s say you have a web business and you sell tickets for some great events, e.g. concerts. You accept payments in advance, because you sell tickets for concerts that will take place in the next couple of weeks or months.
Now let’s say you sell tickets for a Madonna concert that will take place in 6 month’s time. First of all… your customer have more time to request a chargeback (the delivery of the service took place on the day of the event). Secondly… 6 months till the event. Wow! So many things can happen in such a long time. The customer may change his mind. He may be sick at that time. Madonna could be sick on that date and cancel the concert. And so many other things may happen…
Just like in case of selling tickets… a customer has more time to request a chargeback + lots of things could happen while he’s waiting for the trip.
In addition, there’s one more risk here: people could be disappointed with the trip they bought. In the photos from the travel agency there might be a brand-new white house with a brown roof and as the customer arrives – he may see not-so-new yellow house with a black roof. He may buy a sunny-summer-trip and once he’s there – it may rain all the time. He might buy a stay in a suite near a swimming pool and the swimming pool may be permanently closed. There are lots of “mays” in case of travel services. And if people are disappointed, they want to receive their money back.
Is it legal to sell alcohol online? Honestly, no one knows. Some may say it’s legal if the merchant has a licence to sell alcohol in his shop/bar/pub. Some may say it’s not, because a licence is for this particular place and if someone buys through the web – the purchase takes place wherever this person is at the moment of purchasing.
It’s even hard to say if it’s legal in some particular country (because domestic regulations are unclear). Now try to imagine you’re a merchant who wants to sell internationally and you need to comply with all the confusing regulations from all the countries you wanna sell.
High average ticket amount
Again… it’s all about chargebacks. The bigger average ticket/transaction amount is – the bigger the risk. Huge transaction amounts in case of chargebacks mean huge amounts that the merchant has to send back to the customer.
A start-up businesses with no credit card processing history
Yeah, even typical brand-new start-up may be classified as a high risk merchant. Why? Because no one knows him. No one knows what to expect.
Let’s say you’re a start-up business. You have no processing history. You have never had to handle chargebacks before. More than that… you didn’t sell before, so the PSP doesn’t even know if you are able to deliver service (will you have any chargebacks?) or how good your product/service is (will you have complaining customers?)
Ok, let’s say you’re a high (or medium) risk merchant. What now?
Don’t worry. It’s not a bad thing. It’s just a classification.
If you’re a trustworthy merchant – you will find the PSP that will be able to offer you services you need. It may be a little more expansive, you may need to agree to a rolling reserve or you may need to send some more documents during the onboarding process… but you’ll be able to process.
First of all you need to find the PSP that is able to cooperate with such merchants. For instance PayLane loves to cooperate with merchants that offer recurring payments, as well as with startups. However, we do not cooperate with merchants that sell alcohol.
And secondly… you need to be careful in your business, because this risk – it’s the risk that hits you first.