Weighing the Profitability of High-Risk Merchants in a Risk-Wary Climate

High-risk merchants can offer generous profit margins, but those returns must be weighed against the risks they bring. That balancing act starts before onboarding and continues afterward, panelists at the Western States Acquirers Association conference said Wednesday.

One of the many considerations with high-risk merchants is to avoid misunderstanding the circumstances and particulars of these sellers when considering them as new merchants.

“Everybody always thinks because you’re at high-risk that the margin will always be covered, regardless,” said  Michael Snow, a risk and compliance-solutions executive at LegitScript, a merchant and product certification and onboarding services firm.

One hidden cost is monitoring.

“And that [risk margin] can be the case sometimes,” Snow said. “But, there’s a lot more operational costs in different areas that folks can be aware of.”  Continuous merchant monitoring is one of these costs because a merchant may change the products it sells, and that could generate scrutiny. “A lot of people aren’t aware that merchants are going to change,” he said, while some may develop bad behavior and add prohibited products.

“If you’re not aware of what all goes into it, you’re not going to cover the margin,” Snow said. Still, that’s not reason enough not to court high-risk merchants. “You should continue going after it,” he said. “You just have to have the correct tools in place to make sure that’s the case.”

Banks, such as those sponsoring merchants for access to the card networks, have multiple layers of responsibility and risk to evaluate, said Paul Tomasofsky, senior vice president and general manager for merchant payments at North American Banking Co.

“Our purpose in life is to make sure we manage the risk,” Tomasofsky said, because banks are, everyone hopes, good at managing risk, and not just payments risk, but all the other associated risks in banking.

An acquirer bringing a high-risk merchant to a bank has to ensure the merchant knows its business and has some track record to give it credibility and a level of trust. “We have to mitigate the risk associated with it,” Tomasofsky said, “and we have to understand it and for policies and procedures to be in place.” The prospective merchant needs to demonstrate it can be compliant and has expertise, he said.

Balance also is critical in evaluating high-risk merchants, he said, asking, is the risk worth the reward? Is the reward worth the risk?

Risk alone isn’t a reason to avoid this merchant segment,  said Jason Noto, an attorney with Polsinelli, a Kansas City, Mo.-based law firm. There can be a sort of ebb and flow to regulations. Certain ones may be put in place to correct some current behavior, but then could expose an over-correction in a related aspect.

“It comes and goes,” Noto said, “and nothing’s ever really linear. I would never write off high risk no matter what comes. It’s more just balancing and finding that way.”