Are you an aspiring entrepreneur considering venturing into the adult industry? Or are you looking to launch your very own tobacco eCommerce brand but don’t know where to start?
Don’t worry. Most first-time high-risk merchants wouldn’t, and honestly, even the experienced often overlook crucial parts of this process.
That’s why we’ve dug into some of the most important points to consider when starting a high-risk business (including helpful insight into what being a high-risk business actually means) and gathered some tips for beginner high-risk merchants to follow.
1. Understand What Makes High-Risk Industries High-Risk
The first step is to understand what makes a business inherently high-risk. After all, you’ve likely heard of these industries, which often include adult, tobacco, CBD, gambling, cryptocurrency, and travel trades.
Why are they categorized as high-risk, though? It’s (mostly) due to the delicate nature of each industry — typically related to regulations or stigma.
Whether it’s the reputation the adult industry carries around, the high volumes of the tobacco trade, the transaction patterns of gambling companies, the increased chance of chargebacks, the likelihood of fraud, or simply the dynamic regulations of a sector, these industries do come with higher risks most merchant services providers aren’t willing to take on.
Most financial institutions view high-risk businesses as less profitable than lower-risk establishments because of the risk of increased fraud, chargebacks, or other issues. In essence, the likelihood of default and financial losses is simply higher.
The result? Business owners in high-risk industries generally face higher processing fees, more stringent regulations, and consequently only a handful of payment providers who are willing to partner with them.
2. Create an In-Depth High-Risk Business Plan
To increase your chances of successfully partnering with a reliable high-risk payment service provider, it’s wise to actually be prepared and have proof of the measures you’ve taken to face the challenges being in a high-risk industry comes with (something that is especially important if you’re applying as a start-up business).
The key components that should be showcased to make the provider more confident in working with you include:
A comprehensive risk assessment
Your strategies for managing potential regulatory changes and unforeseen problems common in high-risk industries
However, a business plan alone usually won’t cut it. Payment processors typically look for a detailed financial forecast as well. This forecast should, of course, cover the basics, like estimated expenses.
Additionally, we recommend you showcase how you, as a high-risk business owner, would manage the various financial and operational aspects of your business in different scenarios.
Show them how you would navigate theoretical regulatory changes that might result in significant losses if not handled properly.
This might sound like a lot. And it can be. That’s exactly why we advise any high-risk merchant to seek an expert opinion when building a business plan to ensure that even the tiniest details are covered.
3. Stay Ahead of Issues with Compliance and Regulatory Reviews
Staying compliant in such a complex legal framework (which is the case in any high-risk industry) is difficult yet so critical to success.
It’s important to have a clear understanding of the current regulations and ongoing changes occurring in your specific industry to ensure you’re operating legally and within whatever compliance regulations you should be.
Being confident in your business’s compliance will not only give you peace of mind but help you avoid hefty fines, guard from legal issues, and improve customer trust.
We’ve listed a few extra steps to take to guarantee compliance with regulatory terms:
Seek expert help on risk assessment: Having an expert opinion on your business type, your specific strengths and weaknesses, as well as the risk level you should be accommodating, will help you get a head start.
Regular regulatory reviews: It is important to keep your team up to date with the ever-changing requirements to avoid legal issues or security breaches (it might not seem like that big of a deal, but regulations in high-risk industries tend to change unexpectedly).
Compliance service: These days, you can acquire services that will do the work for you. Providers of such services help merchants comply with applicable laws and regulations and manage the technical side of compliance.
Good customer support: Ensuring your customers understand that you’re doing everything in your power to handle their funds and data safely will increase customer trust and likely widen your reach.
4. Choose a Payment Solutions Provider That Understands Your Needs
Choosing the right payment service provider is another challenge merchants in high-risk industries often face. Even though there are more high-risk solutions on the market today, they’re not all great services.
And remember, traditional processors avoid working with high-risk businesses (and wouldn’t be able to cater to the needs of high-risk merchants even if they wanted to or legally could).
Therefore, most high-risk businesses often need to choose a specialized provider to avoid costly fee structures, payment issues, and other headaches.
Unsure what to look for as you choose the right high-risk payment provider?
Here’s a breakdown of the benefits a high-quality processor should offer and what to look for:
Robust fraud prevention: As high-risk businesses are more prone to fraud, prevention tools are non-negotiable.
Chargeback mitigation: Most high-risk businesses are more likely to experience a higher level of chargebacks, which requires quick thinking and dispute resolutions.
Industry-specific knowledge: Regulations vary depending on a business’s industry, so knowledge of those specifics can make or break your experience with most providers.
Region-specific knowledge: Requirements and standards also differ across borders, which makes staying compliant even more difficult. Find someone who understands those small differences.
5. Get a High-Risk Merchant Account (And Understand Your Financing Options)
Let’s take one small step back first to ensure you understand what a high-risk merchant account is. High-risk merchant accounts are bank accounts dedicated to enabling high-risk transactions.
Typically, the high-risk payment service fees get deducted from the merchant’s account before the funds get settled to the merchant’s primary account.
An account as such is a necessity for businesses in high-risk industries to ensure efficient and secure transactions despite the potential risks.
While high-risk specific merchant accounts exist, obtaining one is still a challenge for high-risk businesses today.
Not only that but accessing financing is still pretty difficult for high-risk businesses. The loan terms for high-risk businesses are different from lower-risk establishments, and lenders require more documentation.
That’s why we always suggest you be able to demonstrate a detailed plan of action, marketing strategy, cash flow forecast, and profit predictions.
Additionally, well-maintained credit and an established reputation can make your business a more attractive partner for a lender.
Some acquirers or PSPs offer financing for high-risk businesses, so there are options out there for you to access that kind of financing, but you should be prepared with a great business plan, cash flow forecast, collateral, etc. The loan terms are also unique and different from a regular business loan, so ensure you've done your due diligence and are looking for funding in the right places with the right terms.
6. Be Strategic About Your Business Name and Branding
As mentioned, a business’s reputation plays a significant role in the success of high-risk establishments. So, it is important to be strategic about the image you build for your brand.
The name of a company is the very first impression of your business, which will ultimately dictate how you’re viewed. While you can often change your business name and branding down the line, first impressions stick around for a while. Plus, rebranding a business is a lot of work.
For instance, if you’re a CBD carrier, opting for a safer name that alludes to ‘hemp’ instead of ‘cannabis’ will make you look less controversial in the big picture. Including anything related to cannabis or marijuana is often a red flag, as it’s still heavily scrutinized despite its increasing legality.
However, this doesn’t mean you should hide behind a false name, as that’d be illegal. Choose a name that still represents your products or services, just keep in mind that the human perception is easily influenced by titles and logos.
7. Finally…Navigate Banking and Payment Platforms with Confidence
Unfortunately, being categorized as a high-risk business affects your ability to access even the most basic banking or payment platforms.
And honestly, there’s not much that can be done to change that, as it applies to every high-risk industry and business within it.
However, putting your best foot forward to establish good relationships with processors will help you along the way.
The more transparent and honest you are from the get-go, the more trust you gain, which can lead to better terms and maybe even lower fees if you can prove your proficiency.
💡 Our top tip? Confidence in your abilities, compliance, and risk management will always keep you one step ahead.
Get High-Risk Merchant Services from FastoPayments
When starting up a high-risk business, ensuring efficient transactions and data security should be at the top of your priority list. We cannot stress how important it is to do your due diligence and actually understand the logic behind your high-risk classification.
That’s why we at FastoPayments have tried our best to make this process easier for our merchants. With our years of experience in different high-risk industries and our drive to help combined with the comprehensive package of modern tools and a team of industry experts, we can assure you:
Smooth transactions
Seamless integrations
Quick problem solving
Tailored solutions for every high-risk merchant
If you’re a business looking for clear guidance and a helping hand in payments, we’ve put together a list of requirements for merchants that includes access to a comprehensive business plan and a cashflow forecast template, which have never been denied (at least for our clients).
Or, if you’re ready to start working with the right merchant services provider, get a free, no-obligation quote for a high-risk merchant account here. We’ll review your business information and get back to you as soon as possible.
