The global payment processing industry has been rapidly expanding, with credit card payments making up a significant portion of daily transactions. According to a Statista report, credit card payments accounted for over $4 trillion in transactions worldwide in 2023, highlighting their dominant role in modern commerce. However, for businesses classified as high-risk, credit card payment processing comes with several challenges that can jeopardize their success.

High-risk merchants – businesses operating in sectors such as gambling, adult entertainment, and online gaming – face higher risks in credit card processing, including chargebacks, fraud, and regulatory scrutiny. These risks can lead to account closures, high processing fees, or even financial penalties if not properly managed.

In this article, we’ll explore the three major risks associated with credit card processing for high-risk merchants and offer practical strategies for mitigating these risks using solutions such as a high-risk payment gateway. Read on.

1. Chargebacks: A Major Threat to High-Risk Merchants

The Problem: High Chargeback Rates:

Chargebacks are one of the biggest challenges high-risk businesses face in credit card processing. A chargeback occurs when a customer disputes a transaction, resulting in the reversal of funds. While chargebacks are designed to protect consumers from fraud, they can be detrimental to high-risk merchants, particularly if they occur frequently.

According to Chargebacks911, the chargeback ratio for high-risk industries can exceed 1%, which is much higher than the acceptable industry standard of 0.9%. If chargebacks go beyond a certain threshold, acquiring banks may terminate the merchant account, cutting off a business’s ability to process credit card payments altogether.

High-risk businesses often experience elevated chargeback rates due to:

• Customer disputes: Customers may contest charges, especially in industries such as gambling or subscription services where recurring charges or misunderstandings are common.
• Fraud: Fraudulent transactions, either due to stolen credit cards or dishonest customers, can increase chargebacks.
• Unsatisfactory service or product: If a customer feels misled or unsatisfied with the product or service, they may initiate a chargeback.

The Solution: Proactive Chargeback Management

The key to mitigating chargeback risks is to adopt a proactive approach to dispute management and fraud prevention. High-risk businesses should:

• Monitor transactions in real-time: Use fraud detection tools that monitor transactions and flag potentially fraudulent activity before it results in a chargeback.
• Offer clear refund policies: Having transparent and customer-friendly refund policies can help reduce the number of disputes that escalate to chargebacks.
• Communicate clearly with customers: Ensure that billing descriptors are clear, so customers recognize your charges on their credit card statements, reducing the likelihood of disputes.

Working with a high-risk merchant services can provide businesses with chargeback protection services that include automatic alerts, dispute mediation, and fraud detection tools. For example, the use of 3D Secure technology adds an extra layer of authentication, helping to prevent unauthorized transactions that often lead to chargebacks.

2. Fraudulent Transactions: A Growing Concern for High-Risk Merchants

The Problem: Increased Exposure to Fraud:

High-risk businesses are frequently targeted by fraudsters due to the nature of the industries they operate in. Industries like online gaming, pharmaceuticals, and travel are often susceptible to fraudulent transactions because of their high volume of card-not-present (CNP) transactions. According to the Federal Trade Commission (FTC), U.S. businesses lost over $5.8 billion to fraud in 2022, and this number continues to rise each year.

Fraudulent transactions can take many forms, including:

• Stolen credit cards: Fraudsters use stolen or compromised credit cards to make purchases or payments, leaving the merchant to absorb the loss when the cardholder disputes the charge.
• Friendly fraud: This occurs when legitimate customers falsely claim that they didn’t authorize a transaction, leading to chargebacks and lost revenue for the business.
• Synthetic identity fraud: Fraudsters use a combination of real and fake information to create false identities and commit fraud, making it difficult for businesses to detect.

The Solution: Robust Fraud Prevention Tools:

To mitigate the risks associated with fraud, high-risk merchants should invest in advanced fraud prevention systems. A high-risk payment gateway offers several fraud prevention features, including:

• Real-time fraud monitoring: Detect and flag suspicious transactions in real-time to prevent unauthorized charges.
• Tokenization and encryption: Ensure sensitive credit card data is encrypted and stored securely to protect it from being stolen by cybercriminals.
• AI and machine learning tools: These technologies analyze transaction patterns and flag unusual activity that may indicate fraud.

Additionally, using Address Verification Systems (AVS) and Card Verification Value (CVV) codes can help verify the legitimacy of a transaction. By implementing these tools, high-risk merchants can significantly reduce their exposure to fraudulent activities.

3. Regulatory and Compliance Risks: A Complex Landscape

The Problem: Navigating Complex Regulations:

High-risk merchants face increased scrutiny from regulators due to the nature of their industries. Governments and financial institutions impose strict regulations on sectors such as gambling, pharmaceuticals, and adult entertainment to prevent illegal activity, such as money laundering or the sale of prohibited goods. Non-compliance can result in hefty fines, legal action, or even the shutdown of the business.

For example, in the gambling industry, businesses must comply with strict anti-money laundering (AML) regulations. Failure to adhere to these rules can result in severe penalties. In 2021, the U.K. Gambling Commission fined a major gambling operator £17 million for AML failures, showing just how high the stakes can be for businesses that don’t comply with regulations.

The Solution: Compliance Assistance and Monitoring:

Navigating the complex regulatory landscape can be daunting, but working with a high-risk payment gateway that specializes in high-risk industries can provide much-needed support. These gateways often have built-in compliance tools and reporting features that help businesses meet regulatory requirements.

Here are a few strategies to mitigate regulatory risks:

• AML and KYC protocols: Implement stringent Know Your Customer (KYC) and Anti-Money Laundering (AML) checks to verify the identity of your customers and prevent illicit transactions.
• Regular audits: Conduct regular internal audits to ensure compliance with industry regulations and prepare for potential external audits by regulators.
• Compliance training: Ensure that your staff is well-trained in the latest regulations and compliance procedures.

High-risk payment processing gateways also offer reporting tools that make it easy for businesses to maintain detailed transaction records, which are often required during regulatory audits.

Wrapping it up

In short, the risks associated with credit card processing high-risk merchants such as chargebacks, fraud, and regulatory scrutiny – are more pronounced than in other industries. However, with the right tools and strategies, these risks can be effectively managed. Utilizing a high-risk payment processing gateway equipped with robust fraud prevention, chargeback management, and compliance tools is essential to mitigate these challenges. At PAYCLY, we provide specialized solutions tailored to the unique needs of high-risk merchants. Contact us today to learn how we can help your business thrive while reducing the risks associated with credit card processing.

Visit us at: Best high-risk merchant account

Originally published on: Medium