What Is A High-Risk Payment Gateway?

Over the years, payment gateways have become a quintessential part of the online payments industry. For the uninitiated, a payment gateway facilitates the online transfer of money from one bank account to another.

It acts like a middleman between a merchant and a payment processor. Essentially, it is responsible for safely sending users’ encrypted data from e-commerce sites to payment processors.

With an abundant number of payment gateways available, it’s quite easy for a business to integrate a payment gateway on their website.

However, many payment gateways don’t work with high-risk merchants. Typically, high-risk merchants work with high-risk payment gateways only.

What are high-risk payment gateways?

Payment gateways that onboard merchants that are considered high-risk are called high-risk payment gateways.

Before onboarding them, these high-risk payment gateways assess different types of risks involved in working with such companies, which includes processing credit card payments.

Such businesses are also known as high-risk merchants. The risk assessment of such businesses involves checking the company’s line of business, its credit card processing history, chargeback history, etc.

What are high-risk merchants?

Businesses that inevitably attract dodgy users due to the nature of their business are considered high-risk by payment gateways. For example, a cryptocurrency company or an adult entertainment company is more exposed to potential threats from third parties than other companies.

The definition of “high-risk” is that there might be loss of money, chances of money laundering, users’ data theft, etc. Such businesses are more likely to face financial issues due to unforeseen circumstances.

Here are a few examples of high-risk businesses:

Online gaming
Debt collection
Adult entertainment
Online auction
Cryptocurrency
Online dating
Sexual wellness
Offshore businesses

Businesses that are considered high-risk by banks and payment gateways have to pay a higher processing fee.

Difference between high-risk and low-risk merchants

Every payment gateway will have its own measurement criteria to determine whether a merchant falls in the category of high-risk or low-risk. Despite having their own set of rules to determine a high-risk merchant, there are a few common differences between the two.

Here are a few of them:

High-risk merchant	Low-risk merchant
High chargeback ratio	Low chargeback ratio
A high number of cancellations	Minimal cancellation of orders
The business has a poor credit score	The business has a strong credit score
Operates in a high-risk industry	Operates in a low-risk industry
Has to deal with fraudulent customers	Low to nil fraudulent customers

Challenges of high-risk merchants

Merchants that operate in high-risk industries face a lot of payment challenges while partnering with a payment gateway, some of which are:

Higher processing fees: Payment gateways have traditionally been charging high-risk merchants a steeper processing fee than low-risk merchants. Since high-risk companies are considered vulnerable payment gateways charge them high fees to compensate for the risk of working with them.
Rolling reserve: high-risk merchants have to keep a certain percentage of their transaction volume with payment gateways on hold as a rolling reserve. This is to ensure that if something goes wrong with the business, banks have a way to secure their losses.
Difficult onboarding: Merchants that are considered high-risk by payment gateways or banks often find it difficult to work with them. Payment gateways as well as banks do a thorough check of such businesses before they onboard them. Even after getting onboarded, high-risk businesses have to go through certain restrictions that might affect their revenue and liquidity.

How payment gateways asses high-risk merchants

Since every payment gateway has its own set of rules for risk assessment of a merchant, it’s difficult to pinpoint specific parameters they look at to come to a decision.

There are a few common due diligence exercises that every payment gateway will conduct to assess such merchants. Here are a few of them:

Checking line of business: The industry in which a business operates is often a good marker to tell whether a business can be considered high-risk or not. Businesses that sell sexual wellness products, conduct offshore businesses, or gambling and casino companies are often seen as high-risk merchants.
Scrutiny of business promoters: The background of a company’s founders or promoters can also throw light on the business’ risk factors. Banks and payment gateways usually don’t onboard businesses whose founders have been accused or convicted of financial fraud.
Limiting credit payment: As a precautionary step, many payment gateways initially don’t activate credit card payments on a high-risk merchant’s website, until they are sure of the business’ legitimacy.

Frequently Asked Questions

What is a chargeback?

Chargeback refers to the refund of a customer’s money from his or her bank, usually after a credit card payment is done. It often happens when the customer’s credit card is charged unauthorised.

In the case of fraudulent payment, are merchants directly responsible?

Not necessarily. Let’s understand this with two examples:

A customer visits an e-commerce site that is selling shoes worth Rs. 300. He pays the money online but doesn’t receive the shoes. While the payment was authorised by the customer, he was duped by the merchant. In this case, the merchant is directly involved in the fraud. Promotional pages on social media would come under this category.
Another kind of fraud happens when the customer didn’t authorise the transaction. Typically, the fraudster would contact the customer on the behest of updating their KYC and ask for OTP, which in reality is to transfer money. The customer thinks he is giving the OTP to update his KYC and is tricked into giving his details. In this case, neither the merchant nor the payment gateway is responsible.