How to Tackle Banking Exclusion of High-Risk Merchants

Risk management strategies that transform high-risk into low-risk business.
Banking Exclusion of High Risk -1 (1)

The time required to open an account with a Payment Service Provider (PSP) can vary depending on the complexity of the merchant’s business, the industry they operate in, the PSP’s internal processes, and the merchant’s tight collaboration to complete the onboarding process. 

This is a general overview of the merchant onboarding process:

  • Application Submission: The first step is for the merchant to submit their application to the PSP. This typically involves providing information about the business, its products or services, ownership structure, processing volumes, and other relevant details as part of Know Your Customer (KYC) procedures. The application may also require supporting documents such as identification documents, business licenses, bank statements, and financial statements.
  • Due Diligence and Underwriting: Once the application is submitted, the PSP will perform due diligence and underwriting to assess the merchant’s risk profile. This process involves reviewing the information provided, conducting background checks, assessing compliance with industry regulations, and evaluating the potential risk associated with the merchant’s business model and industry.
  • Risk Assessment and Underwriting Decision: Based on the information gathered during the underwriting process, the PSP will make a risk assessment and underwriting decision. This decision determines whether the merchant’s account can be approved and what specific terms and conditions will apply, such as processing limits, reserve requirements, or additional security measures.
  • Integration and Technical Setup: If the merchant’s application is approved, the next step involves integrating the PSP’s payment gateway or API into the merchant’s website or application. This process may require technical development and testing to ensure proper integration and functionality.
  • Compliance and Legal Agreements: Before the account can be fully activated, the merchant will need to complete any necessary compliance procedures and sign legal agreements with the PSP. This may involve anti-money laundering (AML) and Know Your Customer (KYC) procedures, as well as agreeing to the PSP’s terms of service and merchant agreement.

The time required to complete these steps may vary. The process can be completed within a few days, particularly for low-risk merchants with straightforward business models. However, for high-risk industries or more complex businesses, the account opening process may take more time and in some cases the merchant is rejected.

High-Risk Business and Banking Exclusion

There are industries that often face banking exclusion and PSP rejection when trying to open a merchant account. These challenges arise due to real or perceived higher risk factors associated with these industries. Here are some examples of industries that commonly face banking exclusion:

  • Travel Operators and Ticketing Agents: Due to the higher risk of chargebacks, cancellations, and potential fraud, travel agencies and tour operators, especially those selling high-ticket or international travel packages, may face challenges in securing merchant accounts. 
  • SaaS Start-Ups sell software services that require subscription models where customers must pay a recurring fee. This is considered high-risk because of high customer churn and chargeback risk. SaaS start-ups often have a limited financial track record, especially if they are in the initial stages of development. The same can be said about Magazine vendors.
  • High-Risk E-commerce: Online gaming, adult entertainment and CBD vendors often face account rejection and banking exclusion due to the high-risk label attached to their businesses. The perceived risk may be related to regulatory compliance, chargeback rates, or reputational concerns.
  • Cryptocurrency and Blockchain: The cryptocurrency industry has faced significant challenges in accessing banking services. Due to regulatory uncertainties, concerns about money laundering, and compliance requirements, many cryptocurrency exchanges and blockchain companies have struggled to secure reliable merchant accounts and traditional banking relationships.
  • Online Gambling and Gaming: Online gambling and gaming businesses, including online casinos, sports betting platforms, and fantasy sports, often face difficulties in obtaining merchant accounts. Regulatory compliance, legal restrictions, and potential chargeback risks associated with these industries can lead to banking exclusion.
  • Forex and Binary Options: Foreign exchange (forex) trading platforms and binary options brokers encounter obstacles when seeking merchant accounts due to concerns about potentially fraudulent activities, regulatory compliance, and chargeback risks associated with volatile markets.
  • Nutraceuticals and Health Supplements: Merchants selling health supplements, weight loss products, and nutraceuticals often face scrutiny and potential banking exclusion due to regulatory compliance, product claims, and chargeback risks associated with the industry. The same can be said about vendors of e-cigarettes. 

These are just some of the business types that are labeled high-risk. The challenges faced by these merchants and the level of banking exclusion or PSP rejection can vary depending on factors such as geographical location, regulatory frameworks, and individual merchant account providers’ risk tolerance.

How to Transform High-Risk into Low-Risk

Merchants should understand the specific requirements and potential challenges they may face and look for payment processors with expertise in providing value-added services to high-risk merchants. PSPs that are specialized in providing payment services to high-risk merchants implement the latest risk management in fraud prevention solutions specifically tailored for high-risk merchant business. These solutions included integrated AI-powered fraud detection systems, chargeback prevention strategies, and secure transaction protocols. Risk management solutions that protect high-risk merchants and their clients, while guaranteeing a seamless payment experience. Using the right tools, high-risk can be transformed into low risk.

A Risk Management Strategy which includes:

  • Advanced Machine Learning Models: Fraud prevention systems are leveraging advanced machine learning algorithms to analyze large volumes of data and detect patterns indicative of fraudulent activities. These models continuously learn and adapt to new fraud trends, enabling high-risk merchants to stay ahead of sophisticated fraudsters. Content is monitored to stop violations and machine learning algorithms identify all types of abnormal patterns, flag suspicious transactions, and reduce false positives, leading to more accurate and efficient fraud detection.
  • Device Fingerprinting: Device fingerprinting involves capturing and analyzing unique attributes of a user’s device, such as browser configuration, operating system, installed fonts, and plug-ins. By creating a digital fingerprint of the device, fraud prevention systems can track and identify fraudulent activities across different accounts and transactions. This technique is particularly useful for high-risk merchants as it helps detect fraudsters who attempt to use multiple accounts or devices to commit fraudulent activities.
  • Biometric Authentication: Biometric authentication methods, such as fingerprint scanning, facial recognition, age verification and voice recognition, provide an additional layer of security for high-risk merchants. These techniques validate the user’s identity based on unique physical or behavioral characteristics, making it difficult for fraudsters to impersonate legitimate customers. Biometric authentication helps prevent unauthorized access to accounts and reduces the risk of fraudulent transactions.
  • Network Analysis and Behavioral Analytics: Advanced fraud prevention systems employ network analysis and behavioral analytics to detect complex fraud patterns and suspicious behavior. By analyzing the relationships between different entities, such as accounts, devices, and IP addresses, these techniques can identify fraudulent networks and organized fraud schemes. Behavioral analytics track user behavior, such as browsing patterns and transaction history, to identify deviations and anomalies that may indicate fraudulent activities.
  • Real-time Transaction Monitoring: Real-time transaction monitoring systems allow high-risk merchants to assess the risk associated with each transaction in real-time. These systems leverage a combination of rule-based and machine learning-based approaches to analyze transaction data, including transaction values, location, IP addresses, and user behavior, to identify potentially fraudulent transactions. By flagging suspicious transactions in real-time, high-risk merchants can take immediate action to prevent fraud and minimize losses.
  • Collaborative Fraud Prevention Networks: Collaboration among payment processors, banks, and other stakeholders has become crucial in combating fraud. Collaborative fraud prevention networks enable the sharing of fraud intelligence and data among trusted partners. By leveraging collective knowledge and insights, high-risk merchants can access a broader range of fraud prevention tools, identify emerging fraud trends faster, and strengthen their defense against fraud.

Want to learn more about your recurring payment processing options?

By partnering with a dedicated payment processor with decades of experience in serving high-risk industries, high-risk merchants protect themselves and their customers from fraudulent activities, minimize chargebacks, and maintain a secure payment environment.

For more detailed information and advice on how to protect your business without missing exciting new opportunities in the US, in Europe and in Latin America please contact our Sales Team via: [email protected] 


This article was written by @SandeCopywriter on behalf of Segpay Europe

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