subject: High Risk Processing: What is the Risk? [print this page] High Risk Processing: What is the Risk? High Risk Processing: What is the Risk?
High risk processing presents greater risk of loss than standard merchant payment processing. High risk processing is a term used by an acquiring bank to describe a merchant payment processing account which presents a greater likelihood of contingent liabilities for the bank.
From a banking perspective, a merchant payment processing account is a line of credit. The bank extends credit which allows a business to accept card payments. If a business defaults on a merchant payment processing account, the bank is ultimately responsible financial losses if the business does not have the financial wherewithal to cover them.
High Risk Processing Chargebacks
One of the most common reasons for classification as a high risk processing merchant is a statistically greater than normal number of chargebacks associated with a particular business type. A chargeback can occur for many reasons, some legitimate and some fraudulent. Regardless of the reason, businesses with high risk merchant payment processing accounts are responsible for chargebacks.
High risk merchants are often the target of cybercriminals who initiate fraudulent transactions. Sometimes fraudsters buy high ticket items with stolen cards. Other times, cybercriminals buy low ticket digital goods to determine if there is credit remaining on a stolen card.
In addition, high risk processing accounts are targets for "friendly fraud". In these cases, consumers buy goods or services. The consumers then call their issuing banks to dispute the charges. Some commonly reasons given for chargebacks is that the goods or services were not received or were not ordered. Savvy consumers know that most of the time, issuing banks will be on their side and initiate a chargeback against the merchant.
Naturally, sometimes a merchant is at fault for a chargeback. For example, the merchant may not deliver the goods as promised, or the merchant may refuse to issue a refund on a legitimate request.
Bank Concerns about High Risk Processing Chargebacks
Acquiring banks have two primary concerns about chargebacks for high risk processing merchants. First, the card brands have strict standards about the numbers of chargebacks which are allowed. If a high risk processing account exceeds the chargeback thresholds on an ongoing basis, the banks risk hefty fines and may even lose charters to offer merchant payment processing.
Secondly, if the merchant has high chargebacks and then goes out of business, the bank is left holding the bag. The bank is responsible to cover the chargebacks for the high risk processing account. If the company is out of business or financially unable to meet its responsibilities, the bank is liable.
Underwriting a High Risk Processing Merchant Account
In order to mitigate risk, acquiring banks carefully examine a business before accepting for a payment processing merchant account. For high risk accounts, here are some of the criteria that underwriters consider
How many years has the company been in business? Naturally, a high risk processing account with business history presents less risk than a company with no established banking or financial history.
What do the financial statements indicate? For a high risk processing account, the acquiring bank looks at business P&L and Balance Sheets. Underwriters check ratios such as debt-to-equity; along with positive and negative cash flows; funding sources, and the amount of money the business requesting high risk processing has in bank accounts.
What is the industry classification of the high risk processing account? Some industries have more incidents of chargebacks and fraud. These high risk merchant categories signal a greater potential for loss for the high risk processing acquiring banks.
What is the billing model of the high risk processing account? For example, billing upon delivery is has less risk compared to billing in advance. And billing for monthly subscription or recurring payments is less risky than billing quarterly or yearly.
For more information on high risk processing or establishing a merchant payment processing account contact info@paynetsecure.net
