In the current climate, financial crime is more rampant than ever. As regulations and compliance are ramped up across the globe, money launderers and financial criminals are also upping their efforts to defraud the systems in place. Unfortunately, some businesses are more at risk than others, and the only way to combat this is to mitigate that risk and insulate yourself as much as possible, Here we will take a look at what constitutes a high-risk business, what determines their risk level, how to mitigate that risk and how RegTech can help.
What is a High-Risk Business?
High-Risk Business is a term applied by payment card processors to describe businesses that they feel are more open to financial issues. It is usually based on two different factors; your industry (because some verticals are less stable than others), and your specific situation (this takes into account things like credit history, past profitability etc.).
While the first category is more of a general criterion based on the type of business you have and the industry you are a part of, the second is more directly linked to you and your particular business.
A high-risk business faces challenges in accepting credit or debit cards that standard businesses usually don’t deal with. For instance, a high-risk business will be forced to use a high-risk merchant account. This usually means more restrictions and significantly higher processing fees.
Some of the high-risk products and industries usually highlighted by processors can include (but are not limited to):
- Casinos or online gaming
- Prepaid debit cards
- CaLLING CARDS/VoIP PROVIDERS
- Pharmaceuticals and online drug providers
- Tobacco/E-cigarette products
- Adult entertainment
- Dating services
- Subscription services
The reason these are flagged as high-risk is that they tend to be prone to returns, chargebacks and fraud. Despite this, operating a high-risk business isn’t an inherently negative thing, it just means you need to be more vigilant in how you run the business.
Some industries present a higher financial risk but bigger risks can sometimes equal bigger payoffs. Those who operate in a high-risk industry do so with the confidence that the reward will offset the extra hassle and expense that comes with it.
What Determines a High-Risk Business?
Banks, credit card processors and insurance companies look at a few factors to determine whether a business is high-risk. They may consider how heavily an industry is regulated at all levels, the likelihood of defaulting on loans or incurring chargebacks, and the extent to which a business’ market sector is saturated by similar business types.
However, a high-risk designation is not only predicated on your business type but also the policies of the processing providers; while one payment processor may say your business is high-risk, another may use different categories or factors that may not.
Typically payment processors use the following factors to determine the levels of risk:
Chargeback and Fraud Rates
A high chargeback or fraud rate is one of the most common factors for determining whether a business is high-risk or not. Merchant accounts, business insurance and loan providers review customer behaviour patterns to govern if a business has a high chargeback rate.
If a business is headquartered in a different country to the country it primarily sells to, the banking regulations where your business is based may be reason enough for you to be flagged as high-risk.
Products of Questionable Legality
Products and services over which there is a questionable legal status, such as adult services and drug paraphernalia, may be an indicator of unstable revenue streams and are often associated with questionable sales and marketing practices.
Low Personal Credit Score
This factor focuses on the business owner rather than the business itself. If you have a low personal credit score, banks and payment processors are more likely to place you in a high-risk category.
For those customers deemed to be particularly high-risk banks and payment processors may consider implementing practices to protect themselves from the risk which could include close reviews of transactional activity, frequent contact with business management and increased scrutiny on a more frequent basis.
As a business, it is your job to protect yourself from risk and give processors and banks peace of mind, creating a more conducive environment for you to operate in and protecting your business from issues like money laundering, fraud and terrorism financing.
That’s where we come in. Sekuuritance is dedicated to protecting merchants and their businesses, by providing a full compliance-as-a-solution for any and all businesses to identify, verify and mitigate against risk in all forms.
This includes our Sekur.Transact module of our Sekur.Suite. Sekur.Transact provides a solution to full screen your customers and determine whether they are safe to do business with, protecting you and your revenue interests and mitigating your risk.
KYC, KYB, KYT, AML and sanction screening form just one part of the module, as well as gathering the components of a transaction risk score. When you understand the reasons behind a transaction you can better assess its legitimacy, which will help you, as a high-risk business, to protect yourself and prove to banks and payment processors that you do not represent a financial risk in your operation.
Protect yourself with a full comprehensive RegTech solution where, with a single integration, you may handle all regulatory and monitoring tools to identify, verify and secure companies and individuals alike.
Visit www.sekuritance.com today and see exactly what we can offer you, and then get in contact and allow us to help protect your business from unnecessary risk.
The Sekuritance RegTech platform provides a single platform for every eGRC need, including end-to-end AML/CTF, CECL, FCPA, vendor management, beneficiary onboarding, investor check, card processing MFA checks, blockchain wallet checks, cyber-risk assessments, and other RegTech or Business Process Management requirements.
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