What Makes a Business High-Risk in Payments

In the world of payment processing, being labeled “high-risk” means a business presents greater financial or regulatory challenges for banks and payment providers. This classification is often associated with higher rates of fraud, chargebacks, or compliance issues. According to Mastercard, merchants exceeding a 1% chargeback-to-transaction ratio are flagged as high-risk, which can result in higher fees, stricter contract terms, or even account termination. Industries such as travel, subscription-based services, online gaming, adult entertainment, and CBD sales are more commonly categorized in this category because they frequently experience disputes or operate under stricter regulations. Understanding what is a high-risk merchant is crucial, as it affects processing costs, approval chances for a merchant account, and the long-term stability of operations. This guide will break down the key factors behind high-risk classifications and provide insights to help merchants manage and reduce their risk profile.

Understanding High-Risk in Payment Processing

When discussing merchant accounts, the term ‘high-risk’ refers to businesses that have a greater likelihood of incurring financial losses for payment processors and banks. This risk can arise from high rates of customer disputes, exposure to fraud, or heavy regulatory oversight. Payment processors evaluate merchants by considering multiple factors, not just the type of business. For instance, they assess industry classification, as some sectors have historically faced more disputes or restrictions. They also monitor chargeback ratios, which measure the number of transactions reversed by customers. Exceeding certain thresholds signals potential instability. Fraud risk is also a central concern, particularly in industries that involve anonymous or digital transactions. Finally, compliance with government regulations is reviewed to ensure the business aligns with legal frameworks. According to Visa’s rules, merchants are considered problematic if they exceed 100 monthly chargebacks or have a chargeback-to-transaction ratio of 0.9% or higher. This illustrates how carefully processors track merchant activity to minimize losses. Understanding these evaluation criteria is essential, as being labeled high-risk affects approval chances for a merchant account, fee structures, and long-term business operations. For businesses interested in payment solutions, ACH Payment Integration with 2Accept provides a straightforward approach to handling payments without the added risk of traditional card processing.

Common Factors That Make a Business High-Risk

The following sections outline the most frequent reasons payment processors classify businesses as high-risk. Each factor shapes how banks and providers determine risk exposure.

High Chargeback Ratios

A chargeback occurs when a customer disputes a transaction with their bank, often claiming fraud, product dissatisfaction, or non-delivery. While a small number of chargebacks is expected, consistently high ratios raise red flags. Payment processors and card networks enforce strict thresholds. For example, Visa considers merchants exceeding 0.9% of transactions or 100 monthly chargebacks as part of its Visa Chargeback Monitoring Program. Similarly, Mastercard reviews merchants when their chargeback ratio surpasses 1%. Industries particularly prone to chargebacks include:

• Travel services: Cancellations and delays often lead to disputes.
• Subscription-based businesses: Customers forget recurring charges or cancel without notice.
• Online ticketing: Events may be canceled, leading to refunds and disputes.

Because chargebacks cost merchants and processors money, exceeding these limits can result in higher fees, stricter terms, or account termination. To help businesses manage chargebacks, How to Avoid Chargebacks and Protect Your Business is an essential read for reducing risk.

Fraud & Security Risks

Fraud is one of the biggest reasons merchants are classified as high-risk. Payment processors closely monitor industries where fraud attempts are more common. Card-not-present transactions, such as online payments, carry significantly higher fraud risks than in-person payments. According to the Federal Trade Commission (FTC), U.S. consumers reported losing over $10 billion to fraud in 2023, representing a 14% increase from the previous year. Online payments represent a significant share of this figure. Industries that experience frequent fraud include:

• Online gaming: Fraudsters exploit stolen card details to buy credits or virtual items
• Digital goods and services: Intangible products are easy to deliver but hard to verify.
• Electronics and high-demand goods: Quick resale value makes them attractive to scammers.

High fraud levels harm consumers and expose processors to chargebacks and regulatory penalties. As a result, merchants in these sectors often pay higher processing fees or must implement stricter fraud-prevention tools. Echeck Payment Processing Explained discusses how alternative payment methods can reduce fraud risks.

Industry Type & Regulations

Due to strict legal and regulatory frameworks, certain industries are considered high-risk, regardless of their fraud or chargeback performance. Processors classify these sectors as high-risk to protect themselves from compliance violations. Examples include:

• CBD and hemp products are considered high-risk because regulatory uncertainty and frequent restrictions make approvals more difficult.
• Firearms and ammunition businesses face added challenges since strict federal and state rules increase oversight.
• Adult entertainment merchants are often labeled high-risk due to elevated chargeback ratios and the added stigma surrounding the industry.
• Gambling and online betting operations encounter barriers due to complex licensing requirements.
• Cryptocurrency exchanges are treated cautiously by processors since volatility and compliance obligations make them challenging to support.

In fact, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) requires heightened monitoring of industries linked to money laundering or fraud risks. This makes processors more cautious about onboarding businesses in such fields. Being in a regulated industry does not automatically mean a business will fail to secure processing. Still, it does mean stricter due diligence, higher reserve requirements, and often longer approval timelines.

High-Ticket Sales & Recurring Billing

Another major factor in high-risk classification is a business’s pricing model. Merchants that sell high-ticket items, such as luxury goods, electronics, or travel packages, are more vulnerable to disputes. When large amounts of money are at stake, customers are more likely to file chargebacks if their expectations are not met. Similarly, recurring billing models, such as subscription services, raise risks because customers may forget charges, cancel properly, or dispute ongoing payments. While I couldn’t locate the exact PYMNTS figure, data from the same outlet indicate that 51% of individuals with subscription-based accounts have experienced unwanted charges, often due to forgotten auto-renewals or surprise trial-to-paid conversions. A 2023 Forbes Home Survey further supports this trend, approximately 47% of people pay for services they don’t actively use. These unintended charges can directly contribute to higher dispute and chargeback rates, as consumers may perceive them as unauthorized or unwelcome payments. The combination of large transaction amounts and recurring charges creates greater exposure for processors. They often impose rolling reserves to offset this risk, where a portion of merchant revenue is held back for a set period to cover potential disputes. For businesses using recurring billing, ACH vs. Credit Cards: Which Saves More offers a comparison of the best options.

Poor Credit History or New Businesses

Finally, the merchant’s financial history plays a significant role. A poor credit record, unpaid debts, or bankruptcy filings can raise concerns for payment providers. Such merchants are viewed as less financially stable, making it riskier for banks to extend processing services. New businesses also fall into the high-risk category, not because of wrongdoing, but because they lack a proven track record. Without historical data, processors cannot accurately gauge risk. This uncertainty leads to stricter terms, higher fees, and sometimes mandatory reserves. For example, acquiring banks often require six months of stable processing history before offering more favorable terms. Until then, startups may need to partner with specialized high-risk processors willing to accept additional risk. High-risk classification in payment processing is not arbitrary; it is based on measurable indicators such as chargeback ratios, fraud levels, regulatory oversight, sales models, and financial history. Data from networks like Visa and Mastercard, as well as reports from regulators such as the FTC and FinCEN, highlight how carefully payment providers monitor these factors to protect themselves from losses. Understanding these dynamics is critical for merchants. Recognizing why a business may be deemed high-risk allows owners to prepare in advance, implement fraud-prevention tools, reduce chargebacks, and maintain compliance. While being classified as high-risk may lead to higher costs or stricter terms, it is not an insurmountable barrier. With the right strategies, businesses can still secure reliable payment processing and build trust with providers.

Examples of High-Risk Industries

Payment processors automatically flag Certain industries as high-risk due to their history of high chargebacks, fraud exposure, or regulatory complexity. While not every business within these industries engages in risky behavior, the overall patterns of consumer disputes and compliance challenges influence how processors classify them. Let’s look at the most common high-risk sectors and why they fall into this category. CBD and Hemp Products: Businesses selling CBD or hemp-derived products are frequently categorized as high-risk because of ongoing regulatory uncertainty. The U.S. Food and Drug Administration (FDA) has not yet fully approved CBD for use in dietary supplements or food, resulting in compliance challenges. Banks and processors hesitate to support merchants in this sector due to the potential for sudden legal changes and frequent product disputes. Firearms and Ammunition: Firearms are heavily regulated at the federal and state levels. Merchants selling guns, ammunition, or related accessories face stricter scrutiny under laws enforced by the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF). Due to the regulatory burden and high liability risk, payment processors categorize firearms businesses as high-risk, regardless of their operational history. Travel and Hospitality: The travel sector often experiences high chargeback ratios due to cancellations, delays, and customer dissatisfaction. In response to consumer complaints and DOT enforcement, U.S. airlines issued over $600 million in refunds to passengers in 2022. A clear indicator of both system volatility and financial exposure in the travel payments ecosystem Online Gaming and Gambling: Gaming and gambling platforms face two key challenges: fraud and regulatory restrictions. Fraudsters often exploit stolen payment details to buy credits or place bets. In addition, online betting is regulated differently across jurisdictions, creating compliance challenges for processors. Adult Entertainment: The adult industry consistently experiences high chargeback rates due to customer regret, disputes, or unauthorized use of cards. Beyond that, reputational risks and stricter content regulations add additional hurdles. Because processors fear reputational damage or compliance violations, adult merchants nearly always fall into the high-risk category, regardless of size or operations. Debt Collection Agencies: Businesses in the debt recovery sector frequently face high levels of consumer complaints and disputes. According to the Consumer Financial Protection Bureau (CFPB), debt collection generated over 115,900 complaints in 2022, making it one of the most frequently reported financial services sectors. This record of disputes makes processors cautious, leading to higher fees and stricter terms. Nutraceuticals and Supplements: Nutritional supplements and nutraceuticals are often marketed with bold health claims, some of which are difficult to verify. The FDA frequently issues warning letters to supplement companies for misleading claims, creating legal risks. Combined with recurring billing models and customer dissatisfaction with results, this industry faces frequent chargebacks and regulatory scrutiny. Each industry illustrates how chargeback rates, fraud exposure, and compliance pressures drive high-risk classification. Knowing these risks allows business owners to better prepare for stricter processing terms.

Consequences of Being Classified High-Risk

Being labeled a high-risk merchant is not a small matter. It directly affects how a business operates, the fees it pays, and the relationships it can build with payment providers. Once processors categorize a merchant as high-risk, several consequences follow.

1. Higher Processing Fees

The most immediate impact is increased transaction costs. According to the U.S. Chamber of Commerce, standard merchants typically pay 1.5% to 3% per transaction. In contrast, high-risk businesses such as CBD, adult entertainment, or travel often face rates of 4% to 6%. Some very high-risk industries pay as much as 7% to 10%. These elevated fees compensate processors for the greater fraud, chargeback, and compliance risks they assume.

2. Stricter Underwriting Procedures

High-risk businesses undergo significantly more thorough financial scrutiny when applying for a merchant account. Processors may require extensive documentation, including a detailed history of past processing, financial statements, and proof of regulatory compliance. For example, a firearms business may need to submit federal licenses, while a CBD merchant may need to provide evidence of state-level authorization. This enhanced due diligence process can delay approval and sometimes result in rejections.

3. Rolling Reserves and Holdbacks

To protect themselves from potential chargebacks, processors frequently impose rolling reserves. This means that a percentage of each transaction (commonly 5–10%) is withheld for a set period, typically 90–180 days, to cover potential disputes. While this protects the processor, it reduces a merchant’s cash flow, making it harder for small businesses to manage day-to-day expenses.

4. Limited Processor Options

Many mainstream processors, including well-known providers like PayPal or Stripe, restrict or deny services to high-risk merchants. This forces businesses to work with specialized high-risk processors that often charge higher rates.

5. Increased Likelihood of Account Termination

High-risk merchants operate under closer monitoring. If their chargeback ratios or fraud levels exceed thresholds set by Visa or Mastercard, processors can suspend or terminate their accounts. This sudden loss of payment services disrupts business operations and can damage customer trust. Merchants in industries such as travel or subscriptions face this risk more frequently due to fluctuating transaction patterns.

6. Damage to Business Reputation

Beyond financial costs, being labeled high-risk can damage credibility with customers, suppliers, and financial institutions. Consumers may be wary of providing payment details if they associate an industry with a history of fraud or disputes. Meanwhile, suppliers and banks may hesitate to extend credit or favorable terms to businesses flagged as risky.

How Businesses Can Improve Their Risk Profile?

Being labeled as high-risk is not a permanent designation. Merchants can take proactive steps to show payment providers that they are reliable, financially stable, and compliant. Businesses can gradually lower their risk classification by reducing disputes, improving cash flow, adopting fraud controls, and maintaining proper documentation.

1. Reducing Chargebacks

Chargebacks are one of the strongest indicators of risk for processors. Merchants can reduce disputes by:

• Writing clear product and service descriptions that align with customer expectations.
• Offering transparent refund policies helps prevent customers from escalating complaints.
• Using accurate billing descriptors to prevent confusion on statements.

2. Demonstrating Financial Stability

Processors review a merchant’s financial health to determine whether they can withstand disputes and refunds. Weak balance sheets or inconsistent revenue patterns make businesses appear unstable. To enhance their profile, businesses should maintain a positive cash flow, settle debts on time, and keep accurate financial records. Startups can also separate business and personal finances to show professionalism. The U.S. Small Business Administration (SBA) notes that lenders and payment providers favor businesses with strong financial documentation and stable cash management.

3. Implementing Fraud Prevention Tools

Fraud remains one of the top reasons businesses are flagged as high-risk. According to the FTC, U.S. consumers reported losing over $10 billion to fraud in 2023, a 14% increase from the prior year. Merchants can strengthen defenses by adopting:

• AVS (Address Verification Service) and CVV checks.
• 3D Secure authentication for online payments.
• AI-driven fraud monitoring tools to detect unusual patterns.

These measures protect customers and reassure processors that the merchant is actively reducing exposure.

4. Maintaining Compliance and Documentation

Regulated industries, such as CBD, gambling, or nutraceuticals, face additional scrutiny. Missing licenses or failing to comply with consumer protection laws can result in severe penalties. For example, non-compliance with the Payment Card Industry Data Security Standard (PCI DSS) can result in fines. To stay compliant, merchants should keep their licenses up to date, follow data protection rules, and maintain logs that demonstrate ongoing adherence to regulations. This evidence reassures processors during underwriting reviews.

Frequently Asked Questions

What is considered a high-risk merchant?

A high-risk merchant is a business that payment processors view as more likely to generate disputes, fraud, or compliance issues. Examples include industries such as travel, CBD, adult entertainment, gaming, debt collection, and nutraceuticals. These sectors face higher scrutiny due to their transaction patterns, regulations, or history of elevated chargebacks.

Are small businesses ever classified as high-risk?

Yes. Small businesses can be labeled as high-risk if they sell high-ticket products, utilize subscription models, or lack a proven financial history. Processors may also consider new companies with no proven track record riskier because they cannot demonstrate stability or reliability.

What chargeback rate makes a business high-risk?

Most card networks, including Visa and Mastercard, classify businesses with chargeback rates above 1% of total transactions as high-risk. Industries such as travel and subscription services often exceed this threshold due to cancellations or recurring billing issues. Staying below 1% is critical to avoid additional monitoring or fines.

Can a business move from high-risk to low-risk?

Yes, but it requires consistent effort. Businesses can enhance their profile by reducing chargebacks, demonstrating financial stability, implementing fraud-prevention tools, and maintaining up-to-date compliance documentation. Over time, these steps can convince processors to reassess the risk level and potentially reduce fees or restrictions.

Do payment processors treat all high-risk industries the same?

No. While all high-risk businesses face stricter requirements, some industries are considered riskier than others. For example, adult entertainment and online gambling often face more scrutiny than travel or nutraceuticals. This variation depends on a company’s fraud history, regulatory levels, and reputation with card networks.

What is an example of a high-risk form of payment?

Credit card payments in industries with frequent chargebacks, such as online gaming, travel, or adult services, are often considered high-risk. These payments carry greater fraud exposure and regulatory scrutiny, making them harder to process through standard merchant accounts.

What’s the safest form of payment?

Bank transfers (such as ACH in the U.S. or wire transfers internationally) are generally viewed as safer because they involve direct movement of funds between verified bank accounts, with lower fraud and chargeback risk compared to credit cards.

Partner with 2Accept to Overcome High-Risk Challenges

Businesses are classified as high-risk for several reasons, including high chargeback ratios, exposure to fraud, regulatory complexity, and financial instability. Industries like travel, CBD, gaming, adult entertainment, and nutraceuticals are particularly affected because they operate in environments where disputes, cancellations, or strict oversight are common. While this classification may result in higher processing fees, rolling reserves, and limited access to traditional banking, it does not have to limit growth. Specialized providers like 2Accept understand the unique challenges faced by high-risk merchants and offer tailored solutions that help reduce chargebacks, improve approval rates, and ensure compliance. If your business is high-risk, partnering with experts can turn obstacles into opportunities. Explore our High-Risk Merchant Account Services to secure payment processing built for your industry’s needs.