Why did my payment provider label me a "high-risk merchant"?

The increase in the number of e-merchants leads to an increase in the number of incidents, which can impact merchants, in particular by being categorized as “high-risk merchant” by their payment service provider.

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High risk merchant

Why did my payment service provider qualify me as a "high-risk merchant"?

Le 3 May 2020

If your business offers online payment, you should already know about payment service providers such as PayPal, Square, or Stripe. Highly represented on the national and international market, they are often the choice of VSEs and SMEs. To better understand, Stripe is a world-renowned PSP (Payment Service Providers) offering online payment services to merchants.

Today, the number of traders in all sectors is constantly increasing, which also leads to an increase in the number of incidents. This growth has a direct impact on merchants, who can be categorized as “high risk merchants,” upon receiving emails informing them of overnight closures or freezes of their Stripe accounts. Merchants should consider the hidden costs and risks if they choose to use a PSP instead of an independent merchant account.

How is a merchant's risk level defined by PSP?

The risk level of a merchant account is a key issue for financial institutions and payment service providers. So, the chargeback percentage is one of the major criteria in defining a high-risk merchant.

The lower the number of chargebacks, the better it’s for PSPs. In order to do their activities, it is essential for PSPs to maintain a relationship of trust with financial institutions (banks, credit card companies). This is why PSPs are quite strict about the level of chargebacks, even if it means losing customers.

Chargebacks are also a source of financial hardship for PSP. If a merchant with a high chargebacks level decides to close his Stripe account, it will be up to the PSP to cover the damages. To reduce the risks, PayPal (for example) requires a bank account to ensure his security in this type of situation. Also, the more merchants of a PSP have a high chargeback level, the more this PSP will have a bad reputation.

In addition to the level of chargebacks, other criteria are considered by PSPs in order to define if you are a high-risk merchant: the domiciliation of your business premises, the history of your merchant accounts, the seniority of your activity, the reputation of your sector.

If you are placed in the merchant at risk category when you were not previously, your PSP may freeze or close your account without your consent. This has happened with some merchants who have Stripe as their payment provider, for example.

How does Stripe manage the closing or freezing of its merchant accounts?

There are mainly 3 types of categories used by PSPs (such as Stripe) to register a merchant :

  • Low-risk merchant : sale of goods and services that are traceable and verifiable (low or zero chargebacks)
  • Medium-risk merchant : clairvoyance, gambling (depending on the level of chargebacks), etc.
  • High-risk merchant : sale of goods and services not traceable and not verifiable or difficult to verify, high level of chargebacks

However, this last category remains very vague, so a merchant considered as low risk can be classified overnight “high risk merchant”.

When a Stripe account freezes or is closed, the merchant receives an automatic email notifying him of the situation. Merchants are concerned about the lack of customization and details about the reasons to their freezing or closure account. Without any specific reasons it’s difficult for them to adjust their behaviour. Although often the chargeback level is the main reason, there have been cases where merchants with zero chargebacks have had their accounts closed.

Merchants whose Stripe accounts have been frozen or closed have shown their dissatisfaction with their negative rating on Stripe’s BBB (Better Business Bureau). However, despite some feedback from the BBB, most of their opinions were not taken into consideration, and no additional information on the reasons for the closures was given to them by Stripe.

Another issue raised by former Stripe merchants is the lack of fraud protection.Despite the use of all available fraud filters, merchants are not 100% protected. And unfortunately, when a merchant is a victim of chargeback fraud, they have no way to challenge it.

Former merchants therefore blame Stripe, first for not providing sufficient protection against fraud and on the other hand for its policy of Freezing Funds for 90 days. A 90 days rolling reserve is a protection against settling chargeback disputes, but merchants who are already victims of fraud and cannot process any payments (old and new) are economically impacted.

How do I open a new merchant account, after being categorized as a high-risk merchant?

While Stripe and PayPal are well established in the market, they do not specialize in high-risk merchant accounts. However, some payment service providers are. You can also find PSPs offering powerful and customizable anti-fraud filters, anti-chargebacks alerting you in real time or PSPs offering dedicated account managers, allowing you to have a personalized follow-up and a strong reactivity in case of emergency.

PSPs such as Stripe and PayPal are therefore easy to access and quick to set up, but the risk implications for merchants can ultimately be significant. So take the time to choose your PSP carefully and check its reliability.

Do you want to know your company’s risk level? Or, would you like to find out how CentralPay can help you open a high-risk merchant account? Contact our teams

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