As a high-risk merchant, maintaining a secure and stable payment processing solution is vital to your business’s success. However, account closures, particularly for high-risk merchants like adult merchants and online gaming businesses, can significantly impact revenue and reputation. At TickleCharge, we meet many merchants struggling to keep their payment processing account open. So in this blog, we have compiled some common mistakes that high-risk merchants make leading to their account closures. We’ll also provide tips on how to avoid them.

Merchants such as those in the adult industry or online gaming, face unique challenges when it comes to payment processing. These businesses often have a harder time getting approved for merchant accounts and face more scrutiny from payment processors. Yet one wrong move can lead them towards an account closure, which can be devastating for a business. According to DirectPayNet, approximately 25% of high-risk merchants who have their accounts terminated do not recover from it and must close their businesses. So, what are those mistakes?

1. Misrepresenting Business

One of the most significant mistakes that high-risk merchants make is misrepresenting their business. Payment processors require merchants to accurately describe their business and the products or services they offer. Failure to do so is a one way road to account closure!

For example, if you’re selling supplements, you need to be clear about what the supplement does and any potential side effects. If you’re not upfront about this information, it would lead to chargebacks, customer disputes, which feed in to account closures.

To avoid misrepresentation, make sure to provide accurate and detailed information about your products or services. If you’re unsure about how to describe them, consult with a legal or compliance expert.

Being a part of the fintech world, we have seen payment facilitators advertising hard about their “easy 24 hours onboarding.” But auto-boarding, a common practice used by certain payment facilitators and marketplaces to quickly onboard new merchants and streamline the process, increases the risk of approving fraudulent merchant applications. 

These fraudulent merchants may attempt to obtain payment services by misrepresenting information on their merchant applications, especially if they have been previously declined or terminated. In some cases, they may even attempt to disguise their high-risk nature by using generic descriptions of their goods or services, or by omitting key details that could trigger a red flag by the acquiring bank or even credit card networks.

To mitigate this risk, payment facilitators and marketplaces need to adopt a proactive approach to screening and onboarding new merchants. This includes implementing thorough due diligence procedures, such as verifying the identity of the merchant, reviewing their business history, and performing all necessary background checks.

2. Inadequate customer service

We cannot emphasize enough about how important customer service is (Not AI bots, but humans) and yet it remains so overlooked. High-risk merchants must be able to address their customer complaints and concerns in a timely and effective manner. 

A drop in customer satisfaction is directly proportional to customer dissatisfaction and that will lead to increase in chargebacks. According to a study by Chargebacks911, up to 40% of chargebacks are the result of poor customer service or merchant error. This means that providing effective customer service can have a significant impact on reducing chargebacks and retaining customers.

One example of a high-risk business that shut down due to inadequate customer service is the online gambling platform Lock Poker. Lock Poker was accused of failing to pay out winnings to customers and providing poor customer service. The company was ultimately forced to shut down, resulting in significant financial losses for both the company and its customers.

For online gaming merchants, providing excellent customer service is essential to maintaining a healthy account. This can involve offering multiple channels for customer support, including email, live chat, and phone support, as well as promptly responding to inquiries and complaints. Additionally, igaming merchants can benefit from investing in a chargeback mitigation service that can help resolve disputes before they escalate to the point of account closure. 

Another example is the dietary supplement company Hi-Tech Pharmaceuticals. The company faced numerous complaints from customers regarding the quality of its products and its customer service. This led to a significant increase in chargebacks and ultimately resulted in the company’s account being closed by its payment processor.

3. Prohibited Products, Services

Online gaming merchants and adult merchants are particularly prone to making this mistake. Online gaming gets tagged as a high-risk industry due to the potential for fraud and chargebacks, as well as numerous regulatory issues. 

According to a report by Juniper Research, the global online gambling market is expected to reach $1 trillion by 2021. This has made it an attractive industry for fraudsters and illegal operators. To combat this, payment processors have strict rules around licensed gambling operators and may close accounts for those who violate these rules. 

In 2019, online gaming giant Valve Corporation was fined $3 million by the Washington State Gambling Commission for facilitating illegal gambling through its video game marketplace. This led to the closure of many high-risk merchant accounts associated with Valve Corporation.

Similarly, adult merchants may run afoul of regulations around content restrictions and age verification. In 2018, payment processor CCBill closed thousands of adult merchant accounts due to non-compliance with Visa and Mastercard regulations around age verification. This resulted in significant financial losses for many of the affected merchants.

That’s why it is crucial for high-risk merchants to fully understand the regulations surrounding their industry and geography, to ensure compliance with all applicable laws and regulations. Failure to do so will end up in account closures, financial losses, and legal consequences.

Typically, descriptions of prohibited products and services may vary by payment processor but it includes anything from illegal drugs to gambling services. Make sure to review the terms and conditions of your payment processor and ensure that your business complies with all regulations.

4. Excessive Chargebacks

Chargebacks occur when a customer disputes a transaction and requests a refund from their bank. Excessive chargebacks can lead to account closures as they indicate that there may be issues with the quality of the product or service being offered.

Every merchant that TickleCharge works with, we ensure that they have a system to track and manage chargebacks, and to work with customers to address any issues they may have before a chargeback is initiated.

In 2019, a high-risk CBD oil merchant called Inception Websites had their account terminated by their payment processor due to a high volume of chargebacks. This ultimately resulted in the business shutting down.

An industry report says that the chargeback rate for online gaming merchants is 2.7%, which is significantly higher than the average rate of 0.5% for all merchants and this may be due to the nature of the industry! For instance, igaming customers are prone to disputing charges when they feel the game was rigged or they did not receive the expected outcome. 

Likewise, adult merchants may face chargebacks if customers feel that the product or service they received did not meet their expectations. Not monitoring chargebacks and addressing them in a timely manner can lead to account closures for online gaming and adult merchants. For example, in 2016, the adult merchant processing company, CCBill, had to pay a $1.6 million fine to the Federal Trade Commission due to failing to properly manage chargebacks and fraud prevention, leading to numerous consumer complaints and account closures.

Excellent customer service and timely response to customer inquiries is the most obvious way to mitigate this risk. Make it easier for customers to request refunds and returns, and ensure that you have a clear refund policy.

5. Violating Terms of Service

For online gaming merchants, violating the terms of service (yes, that unremarkable page on your website) can lead to immediate account closures. According to a report by the National Indian Gaming Commission, there were 241 gaming-related enforcement actions taken in 2019, with a total of $9.6 million in fines and 101 cases resulting in the closure of gaming operations. 

Many payment processors have strict rules regarding the sale of adult content, such as restrictions on certain types of content and age verification requirements. Failure to comply and include the terms of service on your site will be a sure-shot reason for account suspension. One example of a high-profile adult merchant account closure due to violating terms of service is the case of Backpage.com, a classified ads website that was shut down in 2018 due to allegations of facilitating prostitution and human trafficking.

TickleCharge strongly recommends consulting with legal counsel to ensure that your business practices are compliant with applicable laws and regulations. Payment processors have strict rules and regulations that merchants must follow. So, make sure to read and understand the terms and conditions of your payment processor. If you’re unsure about any of the rules, contact your payment processor for clarification.

Conclusion

If you’re a high-risk merchant, it’s crucial to avoid these common mistakes to prevent account closures. Make sure to accurately represent your business and products, avoid prohibited products or services, minimize chargebacks, keep sufficient funds in your account, and follow the terms of service of your payment processor.

Industry leaders like Visa recommend using various tools and techniques to detect and decline fraudulent merchant applications during the underwriting process. Some of the recommended methods include:

1. Third-Party Validation: Use third-party data sources and verification services to validate information provided in the merchant application, such as verifying the business name, address, and phone number.
2. Negative Databases: Check negative databases, which contain information on high-risk merchants, terminated merchants, and merchants with a history of fraud or chargebacks.
3. Device Fingerprinting: Use device fingerprinting technology to detect and identify fraudulent merchants who use the same device for multiple applications or attempt to hide their identity by using virtual private networks (VPNs) or proxy servers.
4. Geolocation Checks: Perform geolocation checks to verify the IP address location used to fill out the application matches the physical address of the merchant.

By using these tools and techniques, payment facilitators and marketplaces can better protect themselves from fraudulent merchants and minimize the risk of chargebacks and other payment disputes.

Working with a reliable and experienced payment solution partner can also help you avoid these mistakes. Payment solution partners like TickleChare can provide risk mitigation, fraud prevention, dispute resolution, and chargeback management services to help you maintain a healthy merchant payment processing account.