The Payment Risk Handbook: Tips for Managing Merchant Risk ProfilesComplex Merchant Profiles

The Payment Risk Handbook: Tips for Managing Merchant Risk Profiles

Last Updated on March 22, 2024

With more customers buying goods and services online than ever before, the risks associated with payments are higher than ever. It pays to have a comprehensive understanding of merchant risk profiles. But what exactly is a risk profile? How does it impact different merchants based on their varying risk levels?

This informative guide takes an in-depth look at effective tips for mitigating the risks associated with accepting debit and credit payments. Our aim is to help organizations optimize their approach to transactions in order to maximize security levels while minimizing financial loss.

Female astronaut in a futuristic convenience store reaching for products.

Understanding Risk Profiles

In the context of payment processing, risk refers to the chance of financial loss for payment service providers (e.g. merchant account providers, acquiring banks, payment processors, etc.) that are actually processing the transaction. There are many factors that pose a financial threat to payment providers, including the following:

  • Fraud — Fraud is extremely expensive for everyone involved, including consumers, merchants, and banks. Unfortunately, this is one of the most common risks in payment processing.
  • Chargebacks — If a customer disputes a transaction, then the merchant will receive a chargeback from their payment processor. Chargebacks can be expensive and difficult to mitigate.
  • Payment methods — Some payment methods are more susceptible to fraudulent activity. Merchants that accept high volumes of risky payment methods pose greater risk for the payment processor.

In order to protect their financial investment, payment providers will assign a risk profile to each merchant they do business with. Once a merchant’s risk profile has been identified, payment processors can then take appropriate steps to ensure the safety and security of funds.

During the merchant underwriting process, the payment provider will assign a risk level to the merchant account application. Higher risk accounts may have to implement more stringent verification processes or pay higher transaction rates in order to accept payments.

Astronaut kicking on a planet landscape. The image is meant to represent a low-risk activity.

Low-Risk Merchant Accounts

Businesses classified as low-risk typically operate in stable, well-regulated industries with a low probability of chargebacks and fraudulent activities. These may include the following:

  • Brick-and-mortar retailers
  • Restaurants
  • Professional services (accounting, legal, etc.)
  • Healthcare

Because they pose little to no risk for a payment service provider, low-risk merchants enjoy easy access to payment processing services at competitive rates, typically without restrictions.

Nevertheless, even low-risk merchants need to be vigilant. According to the Federal Trade Commission, fraud losses in the US exceeded $8.8 billion in 2022. Every business — even those not considered high-risk — need to employ strategies like secure transaction processing and fraud prevention tools to maintain good standing.

Astronaut hang gliding. The image is meant to represent a medium-risk activity.

Medium-Risk Merchant Accounts

Medium-risk merchants may operate in industries with a moderate degree of regulatory oversight or have a higher chargeback volume. Examples include the following:

  • E-commerce retailers
  • Subscription-based services
  • Ticket sales companies
  • SEO and web design services

Being a medium-risk merchant can pose challenges, particularly around payment processing. These businesses may encounter more stringent merchant underwriting processes, higher processing fees, or be required to maintain a reserve account to cover potential chargebacks or fraud.

Medium-risk merchants should invest in robust fraud prevention tools and employ strategies like customer authentication and proactive chargeback management. The latter is especially crucial, as data from Chargebacks911 states a single chargeback will cost merchants $190.

Female astronaut skydiving. The image is meant to represent a high-risk activity.

High-Risk Merchant Accounts

Merchants labeled high-risk often operate in industries prone to regulatory changes, high chargeback ratios, or increased fraud risk. Examples of high-risk industries include the following:

  • Travel
  • Online dating
  • Multi-level marketing
  • Gambling

High-risk accounts face significant challenges in securing payment processing services. Many payment processors don’t serve these businesses due to the inherent financial risk. Because of this, high-risk merchants have a limited pool of accounts and services to pick from.

Businesses that are deemed high-risk typically have to pay higher fees in order to accept credit and debit card payments. They also must engage in stringent due diligence to meet compliance requirements and maintain good standing with their payment processor.

A stack of papers representing the documents involved in the merchant underwriting process.

Underwriting Process for High-Risk Merchants

The merchant underwriting process is a critical risk management strategy for payment processors, payment facilitators, and acquiring banks. It involves a comprehensive review of a business’s financial stability, processing history, creditworthiness, and compliance with relevant regulations.

Merchants may need to provide a range of documentation, including business licenses, bank statements, and even personal credit information. While the underwriting process can be rigorous, it is a necessary step for high-risk merchants to secure payment processing services.

Avoid common mistakes such as withholding information, improperly registering your business, or being unresponsive to communication and information requests. Transparency and proper documentation are key factors in gaining the trust of financial institutions, and ultimately, securing high-risk accounts. Take the time to ensure that all your business and tax paperwork is in order before submitting your application. It can make all the difference in a smooth approval process.

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Compliance and Risk Management

Maintaining compliance is a must for businesses of all risk levels. This can involve adhering to regulations such as the Payment Card Industry Data Security Standard (PCI DSS) or the General Data Protection Regulation (GDPR). High-risk merchants may also be subject to industry-specific regulations, requiring extra vigilance.

Payment processors offer various tools to aid in compliance, like tokenization and encryption for secure data handling. Merchants can also benefit from fraud detection tools that analyze patterns in transaction data to identify and block potential fraud.

Chargeback management is another crucial aspect of risk management. Merchants can utilize services that provide real-time alerts of chargeback disputes, allowing businesses to address issues promptly and avoid costly fees.

Practical Tips for High-Risk MerchantsAstronaut teach a class.

  • Invest in fraud prevention — Whether you’re a low-risk or high-risk merchant, investing in fraud prevention tools is crucial. Look for solutions that include real-time fraud scoring, device fingerprinting, and machine learning capabilities.
  • Proactively manage chargebacks — Employ a proactive chargeback management strategy. This can involve tracking chargeback reasons, identifying patterns, and addressing recurring issues at their source.
  • Stay compliant — Stay up-to-date with the latest regulations in your industry and ensure your business maintains compliance to avoid penalties and maintain a good standing with your payment processor.
  • Select the right payment processor — Choose a payment processor that understands your industry and can customize solutions to suit your unique business needs, regardless of its risk level.
  • Find secure payment gateways — A secure payment gateway helps ensure customer payment information is securely transmitted. They are compliant with PCI DSS standards, providing another layer of protection.
  • Utilize 3D Secure authentication — 3D Secure (3DS) is a security protocol that adds an extra layer of protection for electronic payments. It helps verify the customer’s identity before they complete their purchase, reducing the likelihood of fraudulent transactions.

Two astronauts shaking hands. The image is meant to represent the relationship between payment processors and merchants

The Role of Payment Service Providers

Payment providers play a critical role in managing risk. They bear the responsibility of conducting due diligence on the merchants they serve. This is a critical task to ensure they’re not facilitating illegal activities or exposing themselves to excessive financial risk.

Payment providers must also maintain their compliance with various regulations and standards, including Anti-Money Laundering (AML) laws and the PCI DSS. This ongoing effort ensures the integrity of their services and protects both merchants and consumers from potential financial loss.

The right payment provider can become an excellent partner for your business. Payment providers have expertise on risk management and fraud prevention. You can learn from their knowledge and experience, and apply it to your own operations. This can help you minimize risk and potential losses while maximizing your profits.

An astronaut rock climbing.

Embrace the Challenges and Opportunities

Understanding your risk level can help guide your strategies and decisions as you look to provide secure and reliable payment processing. Remember, managing risk isn’t just a protective measure — it’s an essential component of maintaining a successful, thriving business.

The truth is, merchants of all risk levels face their own set of challenges when it comes to payment processing. From conducting due diligence to managing chargebacks and maintaining regulatory compliance, navigating these complexities can be demanding.

However, there are also opportunities to turn these challenges into competitive advantages. By investing in robust fraud prevention and chargeback management tools, staying informed about regulatory changes, and building a strong relationship with a reliable payment processor, merchants (especially high-risk merchants) can improve customer trust and grow their business in a secure and compliant manner.

At Nexio, we are committed to supporting businesses as they assess their risk levels and develop strategies that will secure their payment processing activities. For further insights on how we can help you better understand and manage risk in your payment process — contact us today. Let’s ensure successful payments for your business’s peace of mind!

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