Top Challenges for High-Risk Merchant Services (and Legal Solutions)

Legitimate business owners are sometimes labeled “high risk” because of a perceived potential for higher rates of fraud or regulatory scrutiny. Often, the label is the result of a blanket categorization of an industry. Operations in the eCommerce, travel, supplements, CBD, digital goods, and adult products industries are some examples of “high-risk” consumer markets.

In the payments industry, a “high-risk merchant” might have challenges partnering with a processor because of the perceived risk. This can leave merchants restricted in their ability to take certain payments, thereby reducing their revenue stream and the health of their business.

There are legal solutions that can mitigate some of the substantial challenges “high-risk” merchants face. This article outlines what your company might face if it gets the “high-risk” label, and how a payments industry lawyer can provide essential solutions. 

What Makes a Business “High-Risk”?

Payment processors and banks look at several factors to determine whether a merchant is “high risk.” In addition to reviewing the identity and history of the business owner, they look at the operation itself. If your business is high risk instead of low risk, you will have to go through more stages of review before there is approval of your merchant account.

Some factors that help determine risk include:

• Chargeback ratios, or the number of transactions that customers dispute compared to overall volume
• Industry type, such as eCommerce, travel, and CBD
• Processing volume, as a higher volume increases the chances of chargebacks and fraud
• Regulatory scrutiny, as industries “under the microscope” are subject to more stringent regulations and therefore higher risk

Even with a high-risk merchant label, you can have your payment account approved by a bank or processor. This approval nonetheless comes with substantial challenges for your business. Working with a payments industry attorney can help you meet these challenges in a proactive and efficient manner. 

Common Challenges High-Risk Merchants Face

Payment processing as a high-risk merchant can be more expensive and more uncertain than for a low-risk business. Let’s break down some of the challenges operations encounter. 

Account Terminations and Freezes

Payment processors can suddenly shut down your merchant account, often without warning. This means you’re suddenly unable to take payments on the network. This has a direct impact on revenue stream, customer satisfaction, and business reputation. Depending on the reason for the shutdown, you might have trouble opening a new payment account elsewhere. As an example, placement on the Member Alert to Control High-Risk Merchants (MATCH) list, once known as the Terminated Merchant File (TMF) list, can make it hard for you to find an alternate provider. Switching to a “cash only” business damages your reputation, and isn’t feasible if you do most of your transactions online.

Excessive Chargebacks

High-risk merchants may have a significantly high chargeback ratio. Chargebacks occur when customers dispute charges, and sales transactions are reversed. A high chargeback ratio not only impacts your incoming revenue but also sends a red flag to payment processors. An excessive chargeback merchant (ECM) with a rate of 1.50% to 2.99% per month, or a high excessive chargeback merchant (HCM) ratio of 3%, are examples of extraordinary chargeback rates. Too many chargebacks can get your business placed on the MATCH list, where your business is considered too risky for payment processors. Since many card providers access the MATCH list, maintained by Mastercard, you can end up in a payments “dead zone” where no processor or bank will give you access to their systems.

Rolling Reserves and Withheld Funds

High-risk merchants can sometimes secure contracts with banks or payment processors. However, those contracts come at a cost. Because of the “high-risk” label, these parties want to protect against potential losses. They set terms in the contract that help mitigate their own risk by requiring the merchant to wait for funds or pay in advance. In practice, this means a merchant might have a “rolling reserve” fund, where processors keep some of the merchant’s cash on reserve. The processors might also withhold a percentage of funds or a number of transactions for a certain period of time before releasing the money to the merchant. In other words, even though you’ve made a sale, you might not get paid right away, until the processor has some assurance that the transactions won’t be negated by chargebacks or fraud.

High Fees and Limited Processing Options

One unfortunate challenge that high-risk merchants face is the limited number of options for payment processing contracts. Banks and processors know that high-risk merchants usually struggle to find a provider that will agree to let them process credit cards through their system. Therefore, those that do often offer predatory contracts that charge high fees to merchants. This means your business takes home less money than a low-risk business, even if your product price and volume are identical, because the fees are so high. High-risk merchants are typically stuck, since they can’t run a successful operation without accepting major credit cards. They simply have to eat the cost because they have no other processor who will accept their business. 

Fraud and Compliance Risks

Another hurdle is meeting the substantial regulatory requirements of all businesses that take credit cards. A high-risk merchant might have limited options when it comes to processors, and therefore might have substandard technology to maintain data security. Part of a business’s obligation is to offer secure credit card transactions that protect customer financial information. The Payment Card Industry Data Security Standard (PCI DSS) standards are critical to this standard of security, and without them, a merchant might be vulnerable to data breaches. Merchants can face fines for failing to protect consumers and loss of business reputation because of those substandard operations. 

Besides data security, companies need to adhere to anti-money laundering (AML) standards. Because they are largely at the mercy of the processor, they might struggle to meet those legal safeguards. Simple steps, such as taking the CVV of a credit card and implementing address verification for online ordering, can help reduce fraud. With the limitations you experience as a high-risk merchant, it might be hard to put in place even these basic checks. 

Legal Solutions for High-Risk Merchants

High-risk merchants have options to overcome these substantial challenges. A payments industry attorney can use legal, strategic means to support high-risk merchants, such as:

• Negotiating contracts to fight for fair terms and merchant protections
• Recovering withheld funds so merchants can maintain healthy cash flow
• Challenging unfair account terminations so merchants can retain their payment processing capacity

A payments lawyer can draft and review agreements to minimize merchant liability. This means that you’re protected from predatory contracts and you can rest assured that your agreement has terms that are working in your favor. It is critical to work with a law firm with proven results in the payments industry space, as merchant contracts are often highly specialized to the industry. An attorney can help identify terms in contracts that work against your interests as a high-risk merchant and negotiate a fairer agreement. 

An attorney can also be an invaluable advocate if your business has been placed on the MATCH/TMF list, colloquially known as “being MATCH’d.” Since this action can make it significantly more difficult to find a payment processor, removal from the list is a priority for businesses. Your attorney can help determine why you were placed on the list and represent your interests in dispute resolution, stages of appeal, and through to removal.

How Global Legal Law Firm Supports High-Risk Merchants

Global Legal Law Firm is a leader in the niche area of payments industry litigation and fintech law. The services our attorneys provide include:

• Contract negotiation, so you can get the best legal terms for your business
• Fraud defense, so you can dispute allegations that you have permitted fraudulent transactions
• Compliance consulting, so you can be proactive in setting up compliant systems that withstand regulatory scrutiny
• Chargeback litigation, so you can effectively dispute chargeback requests and MATCH list payment because of excessive chargeback ratios

Global Legal has represented clients across fintech, merchant processing, and eCommerce verticals. As a national law firm, it has built a reputation for its diligence, professionalism, and commitment to client success. Global Legal’s results include success in federal court in complex electronic payments litigation.

Your Next Steps as a High Risk Merchant

Critically, “high risk” does not mean “bad” or “illegitimate.” It simply means your business needs the right legal ally to safeguard its interests. This means taking defensive legal action when appropriate, but also means working towards regulatory compliance at all levels. It can mean reviewing and renegotiating contracts and finding the right terms for you. 

At all stages of your business cycle, Global Legal is here to provide proactive, sophisticated advice and guidance. In the event of a dispute, our attorneys can stand at your side. If your business has faced a terminated account or frozen funds, contact Global Legal’s high-risk merchant attorneys today.