In this episode of the Paycast Network, host Chase is joined by a full house of industry experts: Andrew Gill of Gill Payment Solutions, Zach Gottlieb from Tampa Bay Pay, Clay Shivers of Clay Pay, and high-risk specialist Scott Morley from Linked2Pay. The discussion provides an in-depth look at the often-misunderstood world of high-risk merchant processing, aiming to equip agents and merchants with the knowledge needed to navigate this complex landscape.
The Threshold of Risk: Understanding the 1% Rule
The conversation begins by identifying the “magic number” that often defines a high-risk merchant: a 1% chargeback ratio. If a business’s monthly transactions exceed this 1% threshold, they are typically labeled as high-risk by major card brands. However, Scott Morley clarifies that this label isn’t always a permanent scarlet letter; while high-risk accounts often have higher ratios, even low-risk accounts must work closely with their processors to bring those numbers back in line if they spike. High-risk classification can also stem from the inherent complexity or unknown nature of a business model rather than just poor performance.
The Hidden Risk of “Service Lag”
Certain global industries, such as airlines, are classified as high-risk primarily due to the “time to service lag”. Because airlines often collect payments weeks or even months before the actual flight takes place, processors face significant exposure if the company were to go bankrupt before the service is rendered. To mitigate this, processors now often hold onto funds until closer to the flight date, a major shift in how airline transactions are managed compared to a few decades ago. Similar risks apply to industries like furniture stores, where customers might pay in full upfront, but delivery is delayed for weeks, creating a long window for potential financial instability or merchant failure.
The Anatomy of a High-Risk Application
When submitting a high-risk deal, underwriters look for a specific “package” of information that demonstrates the merchant’s stability. Scott Morley emphasizes that requested processing volumes must be commensurate with the merchant’s financial standing; for example, an applicant with only $10 in their bank account seeking to process a $10,000 ticket is an immediate red flag. A complete and professional submission should include a functional URL, clear terms and conditions on the website, and at least three months of bank statements and processing history. For more complex models, underwriters may even request copies of customer agreements to fully understand the delivery timeframe and the complete risk profile.
Navigating SaaS and Reputational Hurdles
The panel also discusses why traditional MSPs and ISOs sometimes struggle with SaaS companies, which often default to platforms like Stripe. While Stripe offers an easy API and fast onboarding, they often use soft underwriting and may shut down a merchant’s account once the business scales and hits a high-volume “stride” because they didn’t fully understand the business model initially. Furthermore, industries like collection agencies are often deemed high-risk regardless of their actual performance. This is largely due to reputational risk and the actions of bad actors within the vertical, making it difficult for even the most compliant agencies to secure standard processing.
The Regulatory Minefield of the Peptide Industry
Currently, peptides represent one of the most challenging high-risk verticals. Scott Morley notes that while the industry is booming, direct-to-consumer (B2C) peptide sales are generally not considered compliant by card brand standards. Merchants often try to bypass regulations with simple login gates or “research” labels, but these are frequently uncovered by card brand secret shoppers. Violating these standards can lead to BRAM (Business Risk Assessment and Mitigation) fines that start at $25,000 and can quickly escalate to $250,000. Currently, the most tenable path in this space is a business-to-business (B2B) model supported by rigorous Know Your Business (KYB) and licensing checks.
Strategic Advice for High-Risk Agents
For agents entering the high-risk arena, the panel advises against a “race to the bottom” on pricing. High-risk deals should not be priced at the thin margins typical of standard retail, such as Interchange plus 25 basis points, because the processor is taking on significantly more risk. Agents are encouraged to focus on VAMP (Visa Account Monitoring Program) and chargeback ratios to protect their portfolios. Finally, it is recommended that newer agents work with experienced high-risk partners who can provide guidance on appropriate pricing and compliance, ensuring that one high-risk merchant doesn’t jeopardize the stability of an agent’s entire portfolio.