More customers are shopping online, creating more significant opportunities and risks. As merchants process more transactions in more industries, assessing and managing risk becomes more complicated. Fortunately, quite a few tools and strategies can help them understand and mitigate risks for merchant services portfolios.
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Risk Profiles and Underwriting
Every business must establish a merchant account to accept payments from credit cards, bank deposits, or other methods. Underwriters, such as payment processing services, must thoroughly vet merchants to assess risk. A merchant account may be considered more or less risky based on many factors.
- The financial history of the company as well as the individuals running it.
- How many transactions does the business process?
- The average value of transactions. The higher the average sale, the greater the risk. A sale under around $50 per average is considered low risk.
- Types of payments. Bank transfers are considered low risk, while credit and debit card payments carry higher risk. As a rule, more convenient methods for consumers represent a higher risk for payment processors.
- Fraud. Fraudulent transactions always occur, and practices such as hacking, phishing, and identity theft are serious threats. Some industries are more prone to fraud than others.
- There are a lot of chargebacks. Customers may dispute transactions either in good faith or in an attempt to defraud merchants. Either way, they are expensive.
Risk Levels Based on Business Types
While every business is unique and needs to be considered individually, risk assessment requires considering the industry and business type of every company in your merchant services portfolio. Note that risk in this context is related to issues such as fraud and chargebacks. A business like a restaurant may be risky for owners or investors but still represent a low risk for payment processors.
High Risk
These businesses are in high-risk industries. This may be due to high fraud, highly regulated industries, or high chargeback rates. Payment processors often avoid working with such businesses. If they do serve them, they charge higher fees due to the risk.
- Online gambling. The gambling industry, with complicated and fast-changing rules in different states and nations, is inherently risky.
- Travel and hospitality. These industries have high chargeback rates due to travelers canceling or changing their plans.
- Legal cannabis (in states where cannabis is legal, such as California and Colorado).
- Dating and matchmaking.
- Multilevel or network marketing.
- Online trading services, such as platforms that provide services related to cryptocurrency, Forex, and futures.
Moderate Risk
These businesses are in industries with moderate risk. There may be some regulatory uncertainty, chargebacks, or fraud, but not as much as in high-risk industries.
- Digital services companies include marketing, SEO, and web design. Also included here are SaaS (software as a service) businesses that use a subscription model, which customers can cancel anytime.
- Telecommunications services.
- Political organizations.
Low Risk
These are companies in industries considered safe and low-risk in a merchant services portfolio.
- Businesses with brick-and-mortar locations, such as retail, include restaurants, coffee shops, beauty salons, and auto repair shops.
- Professional services include healthcare providers, attorneys, and accountants in established fields.
- E-commerce sites that deal primarily with low-ticket products such as apparel, health & beauty, or pet supplies.
While it depends on the business (e.g., a cannabis shop would still be classified as higher risk), generally, stores with physical locations have more straightforward regulations than online businesses. They also mainly deal with in-person credit card transactions, where fraud is more complex to commit than online.
How to Minimize Risk
Let’s explore some proven ways to mitigate risks in merchant services portfolios.
Due Diligence
Verifying all relevant information about merchants.
- Performing thorough background checks on merchants. Verifying all information provided.
- Assessing financial stability.
- Ensuring the merchant complies with all relevant licenses, industry standards, and regulations.
Use Risk Assessment Tools
There are now many software tools to make risk assessment easier. Fraud detection software can identify suspicious transactions in real-time. Using the right tools can help improve risk assessment accuracy.
Look For Patterns in Transaction History
Every merchant has its transaction patterns, depending on its size, industry, and the products it sells. Sudden changes in these patterns can signal an issue, such as increased fraud or a decline in quality, which can cause customers to request refunds.
Re-evaluate the Portfolio Regularly
To stay atop the risk levels of a portfolio, it’s necessary to re-evaluate risks consistently. Conditions can change rapidly due to changes in the economy, stricter regulations being passed, or changes in consumer demand.
Get a Professional Evaluation
Having a specialist perform a merchant services portfolio evaluation gives you a clearer picture of your portfolio’s value. The specialist will examine factors such as KPIs, industry trends, retention rates, profit margins, and others to give a clear picture of the portfolio’s value. Companies may do this if they want to sell a portfolio or identify potential issues that help them mitigate risk.
Mitigating Risk is an Ongoing Challenge
As businesses face challenges, from economic uncertainty to an unpredictable regulatory environment, they must assess risks in their merchant services portfolio with greater diligence and sophisticated tools. Fortunately, more options are available to help with this, from AI-powered software to evaluation services.
