The Challenges Facing High Risk Merchants
Merchants operating in certain industries or offering certain types of services are typically classified as high-risk due to the higher risk of fraud, returns or chargebacks. These industries include travel, electronics, subscription-based services, the adult entertainment industry, gambling and online dating. The card schemes also classify certain merchant category codes (MCCs) as high risk, but individual merchants in any industry may be classified as high risk by the schemes if they process a high volume of transactions or have high chargeback rates.
Impacts on High Risk Merchants
These high risk merchants face unique challenges. They generally need to pay higher processing fees as a result of the higher risk associated with their transactions, and some payment service providers may be unwilling to take on these merchants as clients. They also risk having their payment contracts terminated due to a change in the provider’s risk appetite or by surpassing thresholds for chargebacks. This can leave merchants completely unable to process payments if they do not have suitable fallback options in place.
Merchants operating in high risk industries therefore need to take a number requirements into consideration:
- PSPs may not be willing to take on high risk merchants. Furthermore, processing fees will generally be higher.
- Fallback options need to be in place to mitigate the risk of a PSP terminating the merchant’s contract. The infrastructure required to re-route payments to an alternative provider also needs to be in place.
- Customers may be less willing or unable to meet payment obligations, and more likely to make chargebacks, leaving the merchant out of pocket. Given the overall higher level of chargebacks, it is important for merchants to minimize the number of preventable chargebacks from fraudulent transactions.
- Regulation can affect where and how some merchants can conduct business. These regulations differ from jurisdiction to jurisdiction.
- Merchants may need to be able to pay out winnings or earnings. Not all PSPs support payouts, further restricting the pool of PSPs available.
High Risk MCCs according to Visa
5122 - Drugs, Drug Proprietaries, Druggist Sundries
5912 - Drug Stores and Pharmacies
5962 - Direct Marketing – Travel-Related Arrangement Services
5966 - Direct Marketing – Outbound Telemarketing Merchant
5967 - Direct Marketing – Inbound Teleservices Merchant (Digital Adult Content)
5993 - Cigar Stores and Stands
7273 - Dating Services
7995 - Betting, including Lottery Tickets, Casino Gaming Chips, Off-Track Betting, and Wagers at Race Tracks
Only particular activities are designated as high risk for the following MCCs:
4816 - Computer Network / Information Services: Cyberlockers, digital file sharing, sites paying uploaders for content
5816 - Digital Goods - Games: Games of skill rather than luck where players pay to compete
6051 - Non-Financial Institutions: Crypto/ICOs
High Risk Merchants and Payment Orchestration Go Hand in Hand
Many of the first forays into what we would now call payment orchestration were pioneered by high risk merchants. This included having fallback options in place in case the merchant’s account is terminated and by extension, the ability to route transactions to different payment providers depending on circumstances. Payment orchestration builds upon these ideas, while simplifying the process of connecting to multiple PSPs. Rather than integrating each connection individually and dealing with multiple proprietary APIs, payment orchestration platforms offer a single API that connects to all integrated payment providers. This makes adding new providers much easier and reduces maintenance overheads significantly. As a result, merchants are far more agile and able to quickly react to changing circumstances. If a merchant’s account is terminated by one provider, a new provider can be brought online quickly using the same infrastructure as before.
Having fallback options in place ahead of time - rather than a merchant putting all their eggs in one basket - is key. This not only protects merchants from contract terminations, but provides additional advantages. One advantage is mitigating the risk from provider outages. If a payment provider is temporarily unavailable, transactions can automatically be routed to an alternative PSP without end customers being affected. This process, known as cascading, can also be used to retry transactions rejected by one provider with another. This can lead to a significant number of transactions being recovered, and is part and parcel of a smart routing strategy.
A multi-acquirer setup also allows for load balancing, where merchants spread transactions across multiple payment providers. This allows for A/B testing of providers to see which performs best, while spreading chargebacks among providers and ensuring contractual thresholds are not exceeded. Furthermore, contracts may also specify a minimum or maximum transaction volume. Spreading the load between PSPs ensures these contract requirements are met, keeping the merchant in good standing with their PSPs.
Keeping PSPs and Card Schemes Onside
Keeping in good standing with PSPs reduces the risk of losing a merchant account. The primary means of doing so is to keep chargeback rates low, and below any thresholds resulting in sanctions. Chargebacks can have a range of causes, such as buyer’s remorse or not recognizing a charge on a statement, e.g. from an adult entertainment site, where service names are often obscured for reasons of discretion. Subscribers may forget to cancel a service they no longer use - timely reminders of an upcoming renewal can reduce these chargebacks. Conversely, burying renewal terms in the T&Cs or EULA may give merchants a legal right to collect these payments without notification, but puts them at risk of experiencing far more chargebacks.
Other chargebacks are the result of actual fraud. The best way of tackling fraud is to prevent it from occuring before the transaction is processed. Using a risk and fraud management solution is therefore best practice. No matter whether chargebacks are caused by actual or friendly fraud, exceeding the thresholds for chargebacks can result in fines or merchants being placed in a chargeback monitoring program.
| Chargeback Reason | Description | Preventive Measures |
|---|---|---|
| Buyer’s Remorse | The customer cancels a charge after deciding they no longer want the goods or services |
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| Free goods and services | The customer had no intention of paying and wanted to acquire free goods or services |
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| Fraudulent transaction | The purchase was initiated by someone other than the account holder, e.g. by acquiring card data via a data breach or lost/stolen card. |
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| Subscription to unwanted service | The customer’s subscription was automatically renewed or they were billed once the trial period ended |
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| Unrecognized charge | The customer issues a chargeback due to not recognizing the recipient |
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Proactive steps towards reducing various types of chargebacks
Additional Challenges: Regulation and Business-specific Requirements
Some high-risk merchants face additional regulatory requirements. Gambling licenses are only issued for a particular geographic region and gambling is illegal in many jurisdictions. Similarly, adult entertainment services are also illegal in some jurisdictions. These merchants need to be able to automatically reject payments from regions they are not allowed to operate in, which can be handled automatically by risk management solutions such as IXOPAY’s in-built risk engine.
Merchants in some industries also need to be able to make payouts. Gambling sites are again a prime example, as players need the ability to cash out their winnings. But other merchants may also need the ability to pay out earnings to content uploaders or affiliates. Not all PSPs offer the ability to make payouts, further restricting the pool of available PSPs, especially with many PSPs wary of working with high risk merchants in the first place.
To make it easier to find a provider offering these capabilities, IXOPAY provides a list of all integrated payment providers that support payouts in our adapter catalog. IXOPAY’s in-house experts can also advise you on suitable providers to work with in various regions around the world, as well as how to optimize your payments setup. If you would like to find out more about how the IXOPAY payment orchestration platform can benefit your business, get in touch with us!
About IXOPAY
IXOPAY is a best-of-breed payment orchestration platform offering flexible and independent global payment processing options. Fully PCI-DSS Level 1 certified and highly scalable, IXOPAY caters to the needs of enterprise merchants and white label clients, including payment service providers (PSPs), acquirers and independent sales organizations (ISOs). Built upon modern, easily extendable architecture, IXOPAY provides smart transaction routing with cascading, state-of-the-art risk and fraud management, fully automated reconciliation and settlements processing, comprehensive reporting and access to hundreds of acquirers, payment service providers and alternative payment methods.
IXOPAY is trusted by national and international enterprises and has offices in Austria and the USA. The owner-led and financed company has grown from 2 to nearly 100 employees by delivering innovative eCommerce solutions.
For more information, visit: https://www.ixopay.com