Financial technology has dramatically changed the nature of business. It’s impacted customer engagement, helped create new products, produced new payment options, etc.
In most cases, such an impact played a positive role. By using technology as a solution and tool, many companies have increased their efficiency and customer experience.
But some merchants saw the new technology as a way of illicit enrichment. So, they started exploiting it in all possible ways.
In an attempt to protect against new risks, financial institutions started dividing their business clients into low, medium, and high-risk categories.
Any business from a high-risk category found it hard to exist. Banks often closed their bank accounts, froze payments, and blocked onboarding.
The times have changed, and now it’s possible to serve customers from all industries and risk levels. And fintechs are right here to help.
So, do you want to survive in the financial space if you run a high-risk business? Read on to get more insights on why fintechs make the best partnerships.
What are high-risk businesses?
High-risk businesses imply merchants who have a greater risk of financial failure. The level of risk usually depends on two main criteria: certain industry/vertical and specific situations.
The first criterion refers to the type of business a merchant has. Some of the high-risk companies typically come from the following industries:
- Online casinos
- Pharma and online drug suppliers
- Adult content and dating services
- Tobacco and cannabis products
- Sports betting
- Auctions, credit collections, pawn shops
- Companies assisting in offshore business activities
- Membership or subscription-based services
These verticals often offer big payoffs. At the same time, they are more exposed to money laundering, chargebacks, and fraud.
But despite their dubious nature, high-risk verticals aren’t always bad. Merchants who operate in the high-risk categories agree to neutralize the extra expenses associated with a high-risk account.
Therefore, for many banking services providers, such clients make the greatest part of their earnings.
Thus, financial institutions can’t entirely ignore high-risk clients. But they must treat such clients carefully to never be banned by the central banks.
The second criterion is related to credit history and business background. Excessive chargebacks or outstanding obligations can cause trouble between businesses and financial institutions.
As a result, a high-risk business often comes across challenges that standard enterprises never face. For example, it can be obliged to use a specific high-risk merchant account or pay extra operating fees.
What makes high-risk customers?
So what is the difference between a high-risk business and a standard one? As we noted above, there are several reasons for a business to be considered risky.
Here are some factors that distinguish the two types of risk categories:
|Low-risk business||High-risk business|
|Average monthly sales||<$20,000||>$20,000|
|Number of currencies accepted||1||Several|
|Product range||Books, apparel, home goods||Software, online services, tickets|
|Based in a high-risk country/region||No||Yes|
Each banking institution has their own conditions and policies. Once a processor assesses your business, they’ll decide whether to qualify you as high risk or not.
What factors to control to avoid high-risk lists
What if your company isn’t considered high-risk? Does that mean you are out of the risk zone?
Unfortunately, no. You can still get onto a high-risk list. Usually, financial institutions look at both the vertical you are in and your business performance. They want to know that you are a genuinely reliable entity.
Various factors can impact your business being considered high risk:
- Your business was put on the block list by other providers
- You are a newcomer and have no previous business background
- You have a bad credit history (overdue payments, bankruptcy)
- You often process high-amount transactions
- You have a high amount of returns/refunds
- Your chargeback ratio is too high
The last point is of greater importance. If merchants have a high volume of chargebacks, they can lose their current processing agreement.
And when this processing agreement terminates, your business is automatically placed in the “high-risk business” category.
How can fintechs help high-risk companies grow and develop?
Partnering with the fintech industry may become a perfect solution for risky businesses. Even if you’ve got under a high-risk umbrella, fintechs can help with the following aspects.
Anti-money laundering (AML)
Fintechs constantly invest enormous resources in AML practices. Due to this, they are among the most advanced providers of comprehensive risk assessment.
This lies in Know Your Customer (KYC), Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD) procedures.
Customer details are analyzed and screened against multiple online databases, such as politically exposed persons (PEPs), government records, watchlists, and sanctions screening.
If taken by traditional banks, such checks may take weeks and months to complete. Also, if you take such procedures independently, they may cost a fortune.
But if becoming a fintech partner, you may forget about complex monitoring and verification. They take on all the obligations.
Strict regulations are another hot topic in the financial industry. All businesses today (not necessarily risky) face complex limitations.
Given the significant fines caused by compliance violations, high-risk businesses need to always stay aware of new regulations. However, the rules are often inflexible. Varying at the national and international levels, they are pretty hard to follow.
Luckily, recognizing the potential of serving high-risk businesses, fintechs have solid risk management controls in place.
As the regulatory environment evolves, so does the fintech market. And the fintechs do their best to keep pace with the regulators’ latest updates.
Also, fintechs consider differing regulations in multiple territories since they often deal with those operating internationally.
So, they can navigate, sort out, and consult on how to run a business to accelerate performance without regulatory and operational risks.
Thanks to enormous money flow, formerly niche segments have become mainstream: crypto, online casinos, CBD, etc.
But running a business in such sectors has always been challenging due to compliance issues.
The times have changed, and now it’s possible to onboard customers from all industries and risk levels. The key issue here is to find a reliable fintech that will help with all laws and regulations.
Due to numerous fintechs, it has become possible to:
- Open and manage accounts
- Withdraw funds
- Complete payments
- Make purchases
- Make transfers
Also, now there are lots of providers who launch special accounts for those who deal with risky assets and who are fed up with trouble withdrawing funds.
Pricing plans and fees
Finding a reliable payment gateway to manage transactions can be challenging if you’re a high-risk merchant. Banks and other payment processors are often reluctant to work with such companies.
But the increased demand causes supply. So numerous fintech companies offer specialized solutions for high-risk merchants.
Typically, the onboarding process is not tiresome. The average approval duration may last a few days.
Another issue is the price of services. Payment providers charge more for processing high-risk businesses’ transactions. That’s because they want to offset the risks.
Most commonly, companies charge 3-4%. But the good news is that there’s always a chance to negotiate better terms.
The bottom line
Any business assumes certain risks, and it’s absolutely normal. But if a payment processor assesses you as a high-risk entity, there is still much you can do about it.
If you have a bad business background, there are a few steps you can take to decrease the risk level of your business. The keys are to follow business best practices and provide excellent customer service.
If you fall under risky verticals, fintechs make the best solution for managing funds and complying with regulations.
Payment solutions from Verifo suit any merchant, regardless of the risk level and industry. If you have any other questions related to regulatory compliance, crypto, or high-risk sectors, feel free to get in touch with us to see what’s more in it for you!