Why Banks Don’t Like High Risk Merchant Businesses

Do you own a high-risk merchant business? Are there times when your bank is reluctant to work with you and provide financial services for your day-to-day needs? The primary reason behind banks’ hesitation in providing these services might be because of the risk associated with them.

High risk merchants, such as those involved in gambling or cryptocurrencies, carry more considerable fees and require specialized attention from banks that many institutions are unable or unwilling to offer—which means it can be more challenging for businesses like yours to get off the ground. In this article, we’ll explore some of the reasons why banks sometimes don’t want to do business with high risk merchants so that you can better understand their mindset.

What is a high risk merchant business, and why are they considered risky for banks?

A high risk merchant business is a type of company that involves increased financial risk for the bank and payment processor due to the products or services they offer. These businesses are associated with online gambling, adult entertainment, e-cigarette sales, ticket sales, and cryptocurrency trading.

Banks consider them high risk since there can be significant costs related to fraud control, legal fees, and reputational issues that may arise in unusual circumstances. Traditional banking institutions typically will not partner with high risk merchant businesses due to these factors, but thankfully specialized banks understand their needs and provide compliant payment solutions.

The different types of risks associated with high risk merchant businesses

High risk merchant businesses come with a unique set of risks that require careful consideration when starting up. Credit card fraud and chargebacks are two major risks for merchants, as losses could be incurred if proper due diligence is not taken upfront. Data security breaches and identity theft also pose great threats, especially in industries with high volumes of confidential client information.

As though those weren’t enough to worry about, other implementation challenges may result from a country or industry-specific regulations — from geotargeting restrictions to specific fund processing requirements.

Setting up a successful high risk business entails understanding the landscape and preparing for all these scenarios beforehand to avert significant losses down the line. While these risks should not deter anyone from their entrepreneurial pursuits, educating oneself and planning carefully before taking on such a venture is wise!

How to reduce the risk for banks and make them more likely to work with your business?

Reducing risk is of utmost importance for merchants looking to partner with banks and other financial institutions. The best way to reduce risk is through transparency, open communication, and proactive safety measures with all transactions.

Setting up strong fraud-detection algorithms for incoming payments and implementing dual-step authentication processes can help protect both the merchant’s interests as well as those of the bank or other financial institution.

Additionally, having a clear understanding of the fluctuations in customers’ activity with spending patterns, payment methods used, merchant status changes, and more can help mitigate potential issues that may arise.

By proactively monitoring your business operations and maintaining appropriate cash reserves, you’ll be able to demonstrate a commitment to safety that banks and other banking partners will highly value.

Most banks tend to be wary of high risk merchant businesses due to too many chargebacks that often come with them. An excessive amount of chargebacks causes a bank’s cash reserve to deplete quickly, something they prefer to avoid.

Banks have more excellent standards for these businesses as they have a higher chance of experiencing financial losses through failed transactions and refunds. For this reason, many banks try to mitigate their losses by charging higher fees or requiring more collateral from such business owners.

While it can be hard for them to qualify for banking services, high risk merchant businesses can feel encouraged as alternative solutions are available. They need to research and find the best fit for their situation.

Final Thoughts

High risk merchant businesses are a thorn in the side of banks because they are less secure and reliable than other types of businesses. However, there are ways to work around this issue if you need to get a high risk merchant account. You can use a third-party processor or work with a bank specializing in high-risk merchant accounts. With a bit of research, you can find the right solution for your business.