Profitability is the most important part of any business. It drives our business goals. To help keep business on track, we need to be analytical and accountable by keeping an eye on the income statement, balance sheet and cash flow statement.
The income statement shows the revenues from operations (sale of goods or services from continuing operations), cost and expenses incurred in connection with such revenues and the profit or loss resulting therefrom.
The balance sheet shows the financial position of a business, usually the end of a period (year, month, quarter), being a critical tool for any business.
The cashflow statement is important because the survival and success of any business is determined not by accounting profits alone but it’s ability to generate cash income in excess of cash outflows.
Coming back to payment processing and how it relates to profitability, we should keep these angles in mind:
- industry type
- protecting the business to improve long term profitability
- expense management
- AI and digital tools
- new markets
High risk industries are difficult to underwrite for credit card processing. The acquiring bank takes on increased risk of losses due to chargebacks, potential fines from the card brands (Visa, MasterCard, etc) and reputational risk. The reward (profit) for the bank needs to be high enough for them to tolerate and manage the risk. As a result, high risk industries have higher fees for payment processing.
Generally, processing fees for all transactions will be higher, sometimes more than double that low-risk merchant accounts. We should be aware that it is a direct connection between the risk and return. As high-risk merchants we should expect higher revenue and profitability from our industry. Industry type profitability is important, and we need to keep this in mind, especially for business cycle, threats of new entrants, products, players (buyers and suppliers). Opportunities will appear if you are thinking for medium (2 years) to long term business.
Profitability is the blood of every economic activity. Every P&L has a source. When it comes to payment processing, as merchants, we need to balance short term cashflow with long term profitability. We need to look beyond the fees, and into what value we’re receiving from our payment processing partner. If I choose a payment processor purely because they are ‘cheaper’, only to have my merchant account terminated and funds held several months later because the processor I selected isn’t capable of handling high risk merchants, have I really made the profitable choice?
High risk processing profitability is based on the payments partner you choose. I use the word partner because human touch in this industry is very important. You should choose your payment processing service partner based on their experience, customer-oriented attitude, values, multiservice opportunities, and their level of experience.
Don’t search for short time revenues – look for long time profitability. It is important to distinguish between your sales volume (total revenues) and your end profitability. Look at your profit margin (how much money are you making from $1 in sales?). What is your profit margin? 10% 25%? 40%?
High risk processing fees vary widely bank to bank. Most merchants in high-risk industries will pay 5%-8% to process their payments. The good news is that good processing history can get you lower fees, lower reserves, improve business continuity and lower your risk.
So, keep an eye on your merchant account health by managing your chargebacks, using fraud tools and analytics. Work with banks that understand your industry, banks that understand how to manage the risk. Selecting a bank that knows high risk, even at higher near-term cost, will offer you better long-term profitability as long as you take care of your merchant account.
Have questions about which high risk bank is best for your business? Our experts can help you find the right bank. Let’s chat.