ETA Expert Insights: Sales Education Guide for High-Risk Verticals

By David Khalaf, Senior Communications Manager, LegitScript

The term “high-risk” broadly encompasses any product or service with an elevated risk for chargebacks, fraud, consumer harm, reputational damage, or illicit activity. Examples of merchants operating in the high-risk vertical (also called enhanced due diligence or EDD) may include ones engaged in transactions for:

• Highly regulated products such as drugs, supplements, alcohol, tobacco, and weapons
• Controversial services offerings such as adult content, gambling, and hate/harm speech
• Business models posing risks for fraud or chargebacks such as negative-option billing, multilevel marketing, and drop-shipping
• Products and services posing an elevated risk for intellectual property infringement
• Services posing an elevated risk for fraud and scams, such as get-rich-quick schemes, investment opportunities, and financial trading
• Merchants such as airlines that operate with a high transaction volume conduct international transactions, and process transactions for future services

Because these merchants pose a higher risk of regulatory scrutiny as well as BRAM and GBPP fines, companies processing payments for them generally subject them to higher fees, including processing and chargeback fees. Processors may subject high-risk merchants to longer contract terms or hold a reserve of the merchant’s ongoing revenue to mitigate losses against fraud or chargebacks.

With increased risk can also come increased reward. Merchants operating in the high-risk vertical often offer significant revenue opportunities. However, additional resources are needed to underwrite and monitor these merchants.

Technology
Merchants operating in high-risk verticals may use any type of processing technology. For example, supplements are often sold both through a POS system at brick-and-mortar stores and online. However, what typically adds to a merchant’s risk level are transactions that make it more challenging to verify a buyer’s identity. For example, online tobacco sales are inherently riskier than in-person sales because it is more difficult to verify the purchaser’s age. For this reason, card-not-present transactions inherently increase a merchant’s risk factor.

Risk mitigation technology is an essential consideration in this vertical. Merchant applications should ask about the merchant’s risk and fraud tools, such as age validation software for adult content or commission tracking for multilevel marketing. Payment service providers may request read-only access to these tools to monitor real-time performance.

Underwriting
Underwriting and/or persistent monitoring are essential components of the high-risk vertical. First, it’s vital to understand fundamental risk factors inherent to any merchant. This can include characteristics such as:

• Large processing volume (either a high volume of transactions or a high average transaction rate)
• Cross-border transactions, which entail more regulatory complexity
• New merchants, or ones with low credit scores
• Charges for products or services offered in the future

The risk associated with these types of merchants can be mitigated by understanding the merchant’s billing terms, reviewing the URL, ensuring goods and services are consistent with the application, validating customer service contact policies, understanding beneficial owner relationships, and more.

Additionally, underwriters should have a fundamental understanding of the various high-risk industries they onboard, whether it is supplements, cosmetics, subscription services, debt collection, or any of the dozens of other high-risk categories. If you lack this expertise, consider working with a third-party expert specializing in categories requiring enhanced due diligence.

Potentially problematic merchants operating in a high-risk industry may seek out payment service providers offering frictionless onboarding to circumvent scrutiny. For this reason, payment service providers should have strong policies for reviewing these merchants and performing persistent monitoring of their activities.

Sales Strategy
The high-risk vertical can be lucrative, partly because of the industries’ profitability and partly because payment service providers typically subject these merchants to higher fees. That’s why some payment service providers specialize in offering high-risk merchant accounts. Even so, the revenue opportunities may be tempered by an increased risk of chargebacks and, in more complex situations, card brand fines or regulatory scrutiny. For this reason, more cautious payment service providers often avoid operating in high-risk industries.

Because there are fewer payment service providers in EDD industries, merchants may be eager to find a reliable payments partner. Sales representatives should have a solid understanding of the risk and compliance issues associated with the industries to which they are selling. They should be able to assess a merchant’s diligence in adhering to rules and regulations guiding the industry and also set the expectation regarding ongoing compliance.

Sales representatives can serve as the first line of defense and, as such, should be well-versed in all aspects of enhanced due diligence, including areas such as advertising, jurisdictional risks, and pending legislation. Participation in related trade groups can help sales reps stay abreast of trends and regulations. Develop relationships with topic-specific attorneys so that you can seek guidance when needed.