In today's world, every company must be able to process electronic payments to remain viable. Some companies, though, whether due to credit concerns or industry-wide stigmas, can only gain access to processing as high-risk businesses. This designation, usually a result of financial institutions identifying them as having a higher risk of chargebacks, brings with it some drawbacks that must be built in to the business plans and budgeting expectations.
Still, for some high-risk businesses, the processing services can actually provide benefits unavailable with traditional payment processing. Depending on the circumstances and the business goals, a high-risk label can create advantages for the bottom line.
Pro: A Higher Top End for Revenue
There are more direct benefits to operating under the high-risk umbrella. One comes with the opening up of revenue. Typically, low risk processing providers cap the transaction amounts a merchant can process each month, thus imposing a cap on the available money that company can earn. High risk businesses, while they do face higher fees per transaction, ultimately find that they can achieve close to unlimited revenue without the processing provider imposing an arbitrary cut-off.
The reserve requirements in place help the processing provider manage the risk in high volumes of transactions, and the fees charged further protect it from incurring losses on this work. But in exchange for those financial protections, merchants in the high-risk category can gain as much revenue as they are willing and able to learn.
Con: Higher Reserves Required
Beyond the start-up costs and fees, high risk businesses often face higher reserve requirements than more traditional, lower-risk companies would face. This comes at a different inflection point than the fees, because reserves are money that still belongs to the business in question. But the reserves typically roll over time, with the funds not accessible for the company for months on end. While ordinarily the money represents profits a business owner can
either pocket, use to pay employees raises or bonuses, or use to invest back into the organization, reserves must remain untouched as a buffer against default or chargebacks.
Of course, one potential upside here is that it forces the company to manage finances in a way that provides more margin. Over time, these reserves do become available, essentially working as a savings line for high risk businesses. Liquidity is usually better, but it does build in a need to manage finances carefully for these companies.
Pro: Greater Operational Freedom
The freedom to earn more is only part of the equation. High risk businesses also avoid some of the close monitoring that lower risk businesses face. Because risk categorization comes largely from chargeback potential, companies deemed low risk must be careful to avoid problems that can shift them into the higher risk category. More than one percent of transaction volume being charged back can lead to a higher risk designation that sends fees higher or even forces a company to shop for a new payment processing provider.
High risk businesses, while still needing to be careful to avoid the costs of chargebacks, do not face this ongoing challenge. They are already placed in that category and can instead focus on driving transaction volume. More transactions may create more chargebacks, but the end result is higher revenue without fees increasing along the way.
A business that avoids risky transactions or industries will be charged less for payment processing. Still, that hurdle may prove small for high risk businesses with models that maximize sales volume and generate high revenue. Over time, the high-risk designation should not prevent solid companies from processing transactions and operating successfully.
Con: Higher Fees for Services
High risk businesses include companies with a risk of defaults and charge-backs for a variety of reasons. Online businesses, for example, carry greater risk of stolen payment methods from which funds must be reimbursed. And some kinds of companies like travel agencies have higher payment cancellations than others, placing the chargeback risks even higher. Payment processing providers often either refuse to work with companies at these risk levels or charge amounts to help cover the risk.
Out of the gate, high risk businesses pay more for their processing services. The setup fee will usually be higher for these companies, and monthly fees will be higher as well. These cost differences put companies at a financial disadvantage from the very beginning. Further, each time a payment must be charged back, the fee assessed against the merchant is higher. Just by virtue of the kind of business a company runs, the cost of doing business can increase dramatically over lower-risk companies.