The article explains aspects of high-risk processing and answers various questions, such as do start-ups need high-risk processors? Why do they need it? If you are reading this article, either you have a start-up or are planning to launch one. You would have decided whether you want to open a physical store or e-commerce website. Further, you would have a rough idea about the product or services you wish to trade.
Whether venturing into physical stores or online stores, setting up your payment processor is a must. Today online payment processing has become the heart of any business. New start-ups are often labeled high-risk and need high risk payment processors to process their payments.
Start-ups are more prone to chargebacks, fraudulent transactions, refunds and are considered risky affairs by many. But first, let us understand more about high-risk credit card processing.
What is High-risk Credit Card Processing?
A good payment processor has smooth transaction flow, shopping cart integrations, multiple payment options, converts more sales, and saves time. You are venturing into a new start-up business, and suddenly your bank says your business is a high-risk merchant account.
High-risk credit card processing is payment processing for high-risk businesses. Businesses can either be high risk or low risk; there is no in-between. High-risk businesses usually operate on a volatile base that comes with a lot of uncertainty. Further, the industry has a history of merchant failure.
Simply put, any business which comes with high-risk volatility, history of chargebacks and frauds, probability of refunds, and uncertainty needs a high-risk merchant account to process their transaction.
Being categorized as a high-risk merchant account is a common phenomenon for many businesses. Some famous businesses that come under high risk are as follows:
- Tours and travels
- Airlines and bookings
- CBD products and vape shops
- Financial consultancy and brokerage
- E-commerce sites and SEO services
- Online gaming and betting
A high-risk merchant account is a provision made to ensure the safety of funds invested or given by banks and other financial institutes. Banks often charge rolling reserves as another protection layer against uncertainties.
Also, the bank charges higher transaction fees to process these transactions, though the security provided here is very robust and reliable.
Do start-ups Need High-risk Processors?
According to Fortune magazine, only 1 out of 10 start-ups succeed in making business. Rest 9 failed at some point. The customary composition that entrepreneur pens down after the failure states the reasons and issues associated with the shutdown of the start-up.
Start-ups do not fail due to one particular reason, but an amalgamation of various reasons contributes to the failure. In a failure postmortem, done by CB insights, experts found 12 significant reasons due to which start-ups fail.
Failure to raise adequate capital, no market demand for your product, competition, flawed business model, statutory and legal regulations are the primary reasons for failure. Some secondary causes such as unsuitable teams, pricing issues, poor product, burnout, disharmony among stakeholders and teams also contribute to the collapse.
The sheer number associated with start-up failure explains why banks and other financial institutes find any new venture risky. New start-ups are often low on budget, with fewer raw employees doing a lot of work, and have unproven products or services to offer in the market. Hence, start-ups need high-risk processors to tackle these problems.
Reasons Why Start-ups Need High-risk Processors
1. Chargeback and Refunds
Chargeback and refund are transactions that question the validity of requests made by merchants as well as customers. Refunds are requested directly to the merchants due to dissatisfactory services or products.
While in chargebacks, customers request chargebacks and payment processors involvement to confirm the validity of transactions made.
Start-ups are prone to increasing chargebacks and refunds, as they are new in the market, and people are yet to know the quality of products and services offered by them. Hence, banks deem start-ups as high-risk businesses.
2. Risk and Volatility
Any new venture or start-up comes with immense volatility and risk. As rookies in the market, start-ups don’t have the experience that established companies have. Established companies can sustain for years to come and have a spectacular finance record.
Start-ups are risky ventures that may or may not succeed. Also, the looming track record of start-up failure forces banks to flag the start-ups as high-risk accounts.
3. Credit History
While providing any financial or payment services, banks and payment processors ask for the credit history of the business or owner. They want to ensure their funds are protected and safeguarded.
Failure to make payments will make the banks wary of you. Even a low-risk account is marked high risk if your credit payments show you as a defaulter in making payments.
Start-ups don’t have any such credit history that assures the banks about the security of their payment. Also, start-ups usually work on very tight budgets. Banks are unsure whether you would make your credit payments on time and label your business as high risk.
4. Overseas Businesses and Rookies Claim
Start-ups often have headquarters elsewhere while they sell their products to overseas clients. As a rookie, you may claim benefits that your product does not provide or fulfill.
That may anger the customers, and they may demand refunds saying the product is hyped and does not live up to the expectations. It will create a negative impact on your goods as well as banks and payment processors.
Further, international regulations and legal work are of utmost importance while selling overseas. If anything goes off the way, the payment processor or bank has to recover the money from an international business making it a high-risk business.
Start-ups, being a risky affair, need solid and robust payment processing. While choosing a reliable payment processor, pay attention to a few aspects such as monthly billing cycle, easy termination, excellent customer service, transparent pricing, and transferability. The plus side here is most payment processors know that start-ups are risky and are willing to provide excellent services to high-risk start-ups.