What is the Definition of a High-Risk Merchant?
While payment facilitators are known for their ability to reduce friction and to quickly underwrite and onboard new merchants, not all merchants are created equal. Some require more due diligence and ongoing risk monitoring than others.
The payments industry considers certain types of merchants “high-risk” because they are more prone to chargebacks or fraud or are more likely to cause reputational harm to those who are processing their transactions. High-risk merchants are a category that requires special attention from their payment providers.
Payment companies are responsible for protecting the system from bad actors and consumers from harm. The card networks, such as Mastercard and Visa, even prohibit transaction processing for certain types of merchants, such as those that are dealing with counterfeit goods.
Within certain merchant categories they designate as high-risk, the networks allow transaction processing, but require the merchants to register with them. These categories include drug stores and pharmacies as well as gambling businesses.
Beyond the merchants that are required to register with Mastercard and Visa, there are still others that some acquiring banks consider high-risk as well. Some common high-risk categories include nutraceuticals and direct marketing as well as future service businesses such as ticketing agencies.
Acquiring banks may choose whether they will process transactions for high-risk merchants, and whether they will sponsor payment facilitators who want to work in this category. Serving high-risk merchants is more labor-intensive, as they are more likely to require manual oversight, full underwriting, and more use of tools such as reserves.
PFs operating in this category need to follow enhanced due diligence underwriting best practices to make sure they’re separating legitimate businesses from those that are not.
“When you’re underwriting businesses in high-risk categories, you can’t do frictionless underwriting,” Deana Rich, co-founder and co-CEO of Infinicept told PaymentFacilitator. “You need to do more in-depth underwriting. For example, pay close attention to who truly owns the business. Make sure the owner is the beneficial owner and not a nominee owner.”
Working with high-risk merchants as a payment provider is not a job for new PFs, as it requires expertise and experience.