Types of High-Risk Businesses

Fintech

31.05.2022

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High-risk business is not necessarily hazardous. On the contrary, it may be profitable, promising, and, most importantly, legal. But this does not mean that the high-risk industry is named “just like that.” Problems with a company that operates in a high-risk area are quite possible.

A high-risk business has a high probability of encountering difficulties of various kinds, including breaking legal requirements, customer dissatisfaction, or a high probability of bankruptcy.

Some determinants of high-risk industries for banks are too superficial, based on niche or clientele. But, at the same time, other indicators are directly related to the merchant’s business practices.

A business belongs to high-risk industry sectors if:

• the business relationship with the previous bank was prematurely terminated due to an excessive amount of funds returned to customers (chargeback);
• it’s a startup with tiny credit card processing history;
• it is an industry with high returns to customers;
• the company is engaged in transactions for huge amounts;
• the business model is based on subscriptions and recurring payments;
• the company has a bad credit history.

What are the main categories of high-risk businesses?

There is no generally accepted classification. In the simplest version, companies are divided into two groups – some are engaged in a high-risk business, and others are traditional. But it is also possible to single out a more extended version of the term, built based on three zones:

• Green Zone. The company conducts a “safe” business for the bank; the risks are minimal.
• Gray zone. The company’s activities are associated with potential risks. But the level of business reputation, a decent credit history, and the absence of problems with payments on loans and taxes allow us to speak of a certain “margin of safety.”
• Red zone. It is a high-risk business in its purest form, and it will not work to “compensate” this moment with a reputation or a “white” credit history.

Why does no one want to cooperate with high-risk companies?

Companies whose core business is payment processing don’t want to work with high-risk companies in the first place because of the potentially high losses. First, high-risk companies are more likely to fail. Secondly, it negatively affects their reputation. How will other firms look at a company that handles payments from a firearms dealer or a casino whose reputation isn’t perfect?

Let’s consider a company that sells electronic cigarettes. A common reason for not doing business with them is the huge chargebacks.

It is important to understand that the more risky a company’s activities are, the greater the risks that the payment processor will have to take. Accordingly, high-risk companies will have to pay a much larger commission, and it is far from the fact that any high-quality payment provider will want to cooperate with such a company.

High-risk industries

The list of areas of activity that are traditionally classified as high-risk businesses is quite wide. Does this mean that running a high-risk business is futile? Of course not. But in this case, it is better to conduct financial affairs with professionals.

Here’s a list of high-risk industries:

• Call centers and companies working on the principle of direct sales.
• Gambling on the Internet.
• Bets on the results of sports competitions.
• Advance ticket booking services and companies providing services to travelers (tourists).
• Television marketing in all its manifestations.
• Forex trading.
• Cryptocurrency mining. Here it is worth clarifying that this criterion of high-risk business may well change if the status of the CFA on the scale of the global economy is clarified and legalized.
• Everything related to cannabis-based products (in the general case, any narcotic drugs).
• The field of pharmacology.
• All kinds of XXX services for adults. A classic example is when an inherently legal activity is automatically classified as a high-risk business.
• Manufacture, processing, and sale of tobacco, cigarettes, cigars, or other similar products.
• Electronic cigarettes (vaping).
• Cryptocurrencies. High-risk business, showing sharp ups and downs. The second reason why financial institutions refuse to open accounts for companies working with DFAs is the high risk of financing/securing illegal transactions.
• Dating websites. Traditional high-risk businesses are forced to “put up” with a high risk of deception and fraud. Even in a mid-shore jurisdiction, opening an account for such a company is quite challenging.
• Charity. The reason for the high level of risk is ethical considerations related to the psychological pressure on donors. In addition, cases of outright fraud in this area are not uncommon.

The activities listed above are classified as high-risk businesses because of too many chargebacks and the associated risks of abuse and fraud.

Summary

The main problems of companies working in high-risk industries are difficulties with banking services, opening accounts, and tight control by regulators. Therefore, it is so important to do everything to ensure that the registration of a company and the opening of a bank account for it are carried out in full compliance with applicable law. As a result, a high-risk business may well be profitable and potentially successful, even considering chargebacks and a high level of risk of unfulfilled financial obligations.