High-Risk Merchants: Avoiding the Hot Potato Game
By: Alex Rodgers Director, Compliance Officer, F1 Payments
High-risk merchants can be very attractive additions to your portfolio because they can generate significant financial rewards. However, there’s a lot more to it than just signing these merchants up. Independent sales organizations and sales agents frequently experience funding delays and withholding, steep fines, account terminations, blacklisting, unanticipated operational costs and more associated with their high-risk merchants; and, they invariably become pawns in a game of processing hot potato among acquirers and processors.
So, what can ISOs and agents like you do to keep high-risk merchants up and running, healthy and prosperous? It takes a lot of knowledge and understanding, as well as expert assistance to guide you every step of the way.
High-Risk Defined
Simply stated, a high-risk merchant account presents an escalated probability of financial, reputational, regulatory and/or card brand compliance risk.
Below are some important aspects of high-risk merchant processing that shouldn’t be ignored.
Merchant Category Codes
The International Organization for Standardization maintains a taxonomy of business types commonly known as Merchant Category Codes. MCCs designate the industry and business model merchants operate within, and therefore help to establish a relevant category of risk to assign to individual merchant accounts. Understanding each merchant’s risk designation is important because it 1) governs applicability of card brand rules, requirements, registrations and restrictions, and 2) directly influences the cost of transacting via interchange.
Merchants belonging to certain industries or operating certain business models within certain industries, such as card-not-present versus card present acceptance, are required to be identified or registered with the card brands as high-risk entities.
Proper registration helps ensure essential oversight and governance of processing activity is facilitated by the brands and processors. MCC codes assigned during underwriting must truly reflect a merchant’s business and cannot be augmented or disguised with the intent of circumventing card brand governance or to obtain lower interchange pricing.
Using incorrect MCCs can get merchants placed on the Terminated Merchant File or MATCH list which is the payments industry’s universally accepted blacklist. It can also result in significant fines, as well as processing revocation from the card brands.
Examples of industries or business with high-risk MCC codes include airline travel, travel agencies, money transfer services, direct marketing and subscription services, online tobacco and nutraceutical sales, securities dealers, bail bonds, multi-level marketing, cannabidiol (CBD) sales, and adult entertainment and dating or escort services. This is not an exhaustive list of high-risk MCCs, but it’s helpful in understanding what kinds of businesses are classified in this manner.
Chargebacks
Although chargebacks are beneficial from a consumer protection perspective and can help identify merchant operational weaknesses needing remediation, when excessive, they can be detrimental to bottom-lines and the overall ability to continue payment processing.
Some high-risk acquirers and processors strategically capitalize on chargebacks by assessing expensive merchant chargeback fees. While justifiably assessed according to card brand rules, you can find yourself at substantial financial risk when merchants refuse to fund incoming cardholder disputes; and, when merchants choose to do so, it’s another way for them to be placed on the dreaded MATCH list.
A laissez-faire approach to chargebacks can easily place processors in the crosshairs of card brand-governed programs. Mastercard’s Excessive Chargeback Program (ECP) and Excessive Fraud Merchant (EFM) program, and the Visa Acquirer Monitoring Program (VAMP) and Visa Dispute Monitoring Program (VDMP), establish thresholds both processors and merchants must adhere to — and these programs have teeth. For example, under Visa’s monitoring programs, processors who do not have a handle on dispute management can easily find themselves on the receiving end of punitive fines ranging from $10,000 to $75,000 which can be assessed month after month until a portfolio becomes compliant.
As can be easily deduced, additional earnings generated from assessing merchant chargeback fees can quickly disappear when wave upon wave of card brand issued fines roll in.
Compliance Programs
The card brands take the reputation and integrity of their networks extremely seriously. Mastercard’s Business Risk Assessment and Mitigation (BRAM) performance program and Visa’s Global Brand Protection Program (GBPP) are enforced with the intent to ensure protection against illicit and/or brand-damaging activity.
An inability or ineffectiveness in governing merchant compliance can lead to financially laundered transactions, fraudster attack vulnerability and advertising standards violations such as using unauthorized or prohibited names, likenesses or images of celebrities as endorsements, selling illegal products and more.
This type of behavior is more than frowned upon by the card brands and they make their standards clear through stringent enforcement mechanisms. For instance, a BRAM investigation can result in the assessment of multiple fines, with a maximum potential exposure tallying to $495,000 per inquiry. This type of examination is per merchant entity, so it is not out of the realm of possibility that millions of dollars in fines can quickly be amassed for a poorly managed portfolio.
Compliance fines are a key reason why merchant processing reserves are important, but balances on hand likely won’t make a dent in fines levied if merchant compliance is not taken seriously.
And That’s Not All
MCCs, chargebacks, card brand compliance…it’s only the tip of the iceberg. Understanding and successfully navigating negative option billing, direct marketing continuity requirements, chargeback and fraud thresholds, Payment Card Industry Data Security Standard requirements, advertising best practices and more are crucial to building and managing a lucrative high-risk portfolio without suffering churn and burn turnover.
Key Takeaway
Payment processing is not a one-size-fits-all model and is extremely nuanced, especially when it comes to high-risk. For ISOs and agents entertaining or currently operating in the high-risk arena, it’s imperative to have a comprehensive appreciation of all the requirements that apply to your merchant portfolio. Seeking expert assistance and guidance to keep merchants healthy and processing can eliminate much stress, as well as the hot potato game many merchants endure, while helping you capitalize on the significant financial rewards that high-risk business can bring.
About the Author
Alex Rodgers is a director and compliance officer for F1 Payments. He has deep risk, compliance, chargebacks, sanctions and lending operational experience working for payments companies such as Paysafe, Capital One, Securus and Talus Pay. He can be reached at [email protected].