Risk & Compliance
High-Risk Merchant
Definition
High-Risk Merchant a classification by acquirers for merchants perceived as having elevated risk of chargebacks, fraud, or regulatory issues. Common high-risk verticals: gambling, forex, adult, nutraceuticals, crypto, travel, and subscription billing. Consequences include higher rates (1-3% premium), rolling reserves, volume limits, and limited acquirer options. Classification is risk assessment, not legitimacy judgment.
Related Terms
MCC Code (Merchant Category Code)
A four-digit code assigned by acquirers to classify merchants by business type. MCCs determine interchange rates, acquirer appetite, monitoring thresholds, and rewards eligibility. Some MCCs are restricted (gambling 7995, adult 5967) and require specialized acquirers. Misclassification can result in account termination. MCC assignment happens during underwriting based on business description.
Rolling Reserve
A percentage of processing volume held by the acquirer as security against chargebacks and refunds. Typically 5-15% held for 6-12 months before release. The reserve 'rolls' as new funds are held and old funds release. Affects cash flow significantly for growing businesses. Reserve terms are negotiable and often reduce after establishing clean processing history. Alternative structures include capped reserves and upfront deposits.
Chargeback Ratio
The percentage of transactions that result in chargebacks, calculated as chargebacks divided by transactions over a period. Card networks monitor this ratio closely. Visa's threshold for monitoring is 0.9%; Mastercard's is 1.0%. Exceeding thresholds triggers monitoring programs with fines and potential termination. High-risk MCCs often face stricter benchmarks. Ratio calculated monthly, with some lag for dispute timing.
Underwriting
The risk assessment process acquirers use to evaluate merchant applications. Examines business model, financials, processing history, chargeback rates, industry risk, and compliance status. Determines whether to approve the merchant and on what terms (rates, reserves, limits). High-risk merchants face enhanced due diligence. Strong applications include clean history, audited financials, and compliance documentation.
See Also
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