Take an exclusive inside look into the world of payment processing fees in high-risk industries. Discover the truth about the costs that can make or break your financial success.
In the dynamic world of payment processing, high-risk businesses face a unique challenge when it comes to managing their financial operations.
One significant aspect that demands their attention is the variation in payment processing fees compared to businesses in low-risk industries.
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The Financial Implications of Being Labeled High-Risk
Payment processing fees play a pivotal role in determining the overall costs and profitability of their operations. Understanding how payment processing fees differ for high-risk businesses is essential for making informed financial decisions and optimizing revenue streams.
Due to the increased risks associated with high-risk industries, payment processors employ strategic measures to mitigate potential financial liabilities. As a result, they often charge higher fees to account for the elevated risk levels.
In this blog post, we will delve into the details of payment processing fees in high-risk industries, highlighting specific examples to shed light on this crucial aspect.
We will explore different types of fees that high-risk businesses encounter, including percentage-based fees, flat transaction fees, chargeback fees, and risk management and underwriting fees.
By understanding these fees and their implications, businesses operating in high-risk industries can proactively strategize and take steps to prevent revenue loss.
Overview: Payment Processing Fees in High-Risk Industries
Let’s take a closer look at the various fees you can expect and how they impact high-risk industries, such as cannabis and CBD, to a larger degree than non high-risk businesses.
The Percentage-Based Fee
Payment processors typically charge a percentage-based fee on each transaction, known as the discount rate. This fee varies based on the risk level associated with the industry and the specific business within it.
High-risk industries generally attract higher discount rates compared to low-risk industries.
Example: In the nutraceutical industry, where chargeback rates tend to be higher, a payment processor might charge a discount rate of 3.5% per transaction. In contrast, a low-risk retail business might be charged a discount rate of 2.5%.
The higher discount rate for the nutraceutical business reflects the increased risk and potential for chargebacks.
Flat Transaction Fees: Covering Operational Costs
In addition to the percentage-based fees, payment processors often apply a flat transaction fee for each processed transaction. These fees contribute to covering the operational costs of payment processing services.
Similar to discount rates, flat transaction fees can be higher for high-risk industries compared to low-risk ones.
Example: Let’s consider the online gambling industry, which is categorized as high risk due to its regulatory complexities and potential for fraudulent activities.
A payment processor might charge a flat transaction fee of $0.50 per transaction for an online gambling business. On the other hand, a low-risk e-commerce store might have a flat transaction fee of $0.30.
Chargeback Fees: Mitigating Risk and Administrative Costs
Chargebacks can significantly impact high-risk industries, leading to additional fees imposed by payment processors. Chargeback fees are incurred when a customer disputes a transaction and initiates a chargeback, resulting in a refund.
Payment processors may charge a fee per chargeback to cover administrative costs and potential losses.
Example: An adult entertainment business, facing a higher likelihood of chargebacks, might incur a chargeback fee of $25 per disputed transaction. Conversely, a low-risk subscription-based service may have a chargeback fee of $15.
The higher fee for the adult entertainment business reflects the greater risk and potential financial burden associated with chargebacks in the industry.
Risk Management and Underwriting Fees: Mitigating Liabilities
High-risk industries often require more extensive risk management and underwriting procedures from payment processors.
To evaluate the risks associated with a business and mitigate potential liabilities, payment processors may charge additional risk management and underwriting fees.
Example: A cryptocurrency exchange, operating in a high-risk industry with volatile markets and regulatory scrutiny, may incur a risk management and underwriting fee of $500 upon onboarding with a payment processor.
In contrast, a low-risk brick-and-mortar retail store might face a lower fee of $200 for similar services.
It’s important to note that the specific fees charged by payment processors can vary significantly based on individual business characteristics, industry regulations, and the payment processor’s policies.
High-risk businesses should carefully evaluate different payment processor options, comparing the fees and services offered, to find the most suitable solution for their specific needs.
Want more answers? Here’s what to do about the financial implications related to running a business in the high risk industry.
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