Why High Risk?
Most payment processing agents are fishing for deals in their own back yard. Low risk accounts from local stores, restaurants, gas stations, etc. are easy to find, but typically low margin. Its not uncommon to see just 20-30bps (0.02-0.03%) of margin on a low risk deal, and that’s before the agent’s split with the bank.
What most agents don’t know is that there is a whole world of high-risk, high-margin merchants out there, looking for help to find a ‘risk-friendly’ bank. On high risk deals, its typical to see 100-200bps (1-2%) of margin on a high risk deal. For the math geeks out there, that’s 70-180bps more than a low risk deal… in other words, high risk deals can be 3-10 times more profitable than low risk deals.
What is High Risk?
In payment processing, the term ‘high risk’ refers to the perceived financial, regulatory, or reputational risk for an acquiring bank. When an acquiring bank issues a merchant account, they are extending their risk. If, for instance, a merchant accrues chargebacks and then goes out of business, the acquiring bank is responsible for paying any outstanding chargebacks and fees.
High risk can be defined by the vertical. Some verticals are more likely to see chargebacks than others. For example, merchants in the following verticals would be considered high risk, due to the business they are in:
- Nutraceuticals
- Diet pills
- CBD
- MLM
- Gadgets
- Adult
High risk can also be defined by the billing model. Products sold on trial basis have some of the highest chargeback rates. When a product is sold on “trial”, it means the consumer purchases a sample for a small fee (usually $3-10), and then is automatically enrolled in a subscription to receive the product monthly for a higher price (usually $70-120 monthly). Consumers are often caught off guard by the subscription billing and call their bank to chargeback.
Finally, high risk can be defined by regulatory or reputational risk. Merchants selling restricted or regulated products, like CBD, vape, online gaming, firearms and the like are often considered high risk due to the regulations surrounding their business.
High Risk vs Low Risk
| Low Risk | High Risk | |
|---|---|---|
| Profitability | 20-30bps (0.20-0.30%) | 100-200bps (1.0-2.0%) |
| Pricing | 2-4% + $0.25 | 4-10% + $0.25 |
| Location | Local. Restaurants, stores, gas stations and kiosks. | Global. |
| Deployment | Can be complicated and time consuming to deploy a POS. | Done in under an hour, unless a custom deployment is needed. |
| Longevity | Low risk accounts typically last until the merchant closes, or is offered a lower price from another agent. | High risk accounts are closed more often; usually due to chargebacks. Proper chargeback management can extend the life and profitability of these accounts. |
| Upsell Opportunities | Agents can generate additional profits by selling POS systems, but often these are given away for free or at cost to close a deal. | Profit from upsells, like gateway fees, chargeback management, 3DS, and fraud prevention tools can exceed the profit made from the merchant account. |
High Risk Challenges
This is one market where there are barriers to entry. To begin, you need a bank (or preferably many) that understands and accepts high risk merchants. Some main stream banks will say they can accept some high risk, but in the end, these deals always go south – and typically after weeks of underwriting and paperwork. So the acquiring partner you choose is critical here.
Chargebacks and terminations are the second biggest challenge. As mentioned earlier, high risk merchants tend to generate high chargebacks. If the chargebacks exceed the bank or card brand threshold, the merchant account may be terminated. However, with chargeback management in place, chargebacks can be kept relatively low, reducing the frequency of terminations and other issues.
High Risk Opportunities
As illustrated above, high risk provides much better ROI than low risk. As if a 3x-10x increase in your profits wasn’t enough, adding a service like chargeback management can actually generate more revenue than the profits made from the merchant account fees.
With the right high-risk banks and tools in your arsenal, your agency can ascend out of the low-risk/low-profit weeds and onto higher ground. Tools like chargeback representment, chargeback alerts, fraud prevention, and 3D Secure can not only add to your bottom line, but also stabilize your portfolio. Our chargeback management service is robust, easy to deploy, and commissionable. So is our 3D Secure fraud prevention service. As a Helios Payments agent, you have access to resell our chargeback and fraud prevention services, and immediate access to our squadron of 35 risk-friendly acquiring partners.
Contact us to start selling High Risk merchant services today.