Mastering The High-Risk Transaction: A Comprehensive Guide for Businesses

When you first start a business, you have dreams of it growing into something huge. In many cases, that happens. However, some business owners find themselves plagued with challenges simply because of the nature of what they provide and/or sell. In many cases, these aren’t particularly controversial items as such; it’s usually a high risk of fraud or large value transactions that place them in this category. 

As a high-risk business owner, you’re probably wondering how you can navigate the challenges of high-risk payment processing. After all, getting paid is vitally important if you want to create revenue and grow. 

In this guide, we’ll cover everything you need to know about high-risk transactions. We’ll talk about why they’re high-risk, how to help them move as smoothly as possible, and how PayCompass can help you overcome the challenges that plague your working days.

The Anatomy of High-Risk Transactions

Before we can talk about how to manage high-risk transactions, we need to understand what they are. Let’s dive in.

Defining High-Risk Transactions

First things first, what is a high-risk transaction? This is an exchange of funds, in most cases from a customer to a merchant to pay for goods and services. However, what makes it high-risk is the type of business the merchant has, e.g., it is subject to strict regulations, it has a higher risk of fraud, legal complications, or a threat of chargebacks. Travel agencies, certain ecommerce businesses, and tobacco and vape businesses are just a few examples of high-risk industries. 

Additionally, high risk transactions can simply be because they’re for a very high amount or there is suspicious activity during the transaction. It’s vital to understand high risk transactions because they affect businesses significantly. For instance, fees are often higher, there is a risk of restrictions, and in some cases, accounts can be blocked due to suspicious activity. Payment platforms and processors use risk assessment algorithms to identify whether a payment is high-risk, and they typically cover more than 200 data points to do this. 

The table below gives some information on the characteristics of a high-risk transaction versus a standard one.

Characteristic	Standard Transaction	High-Risk Transaction
Chargeback Probability	1-2%	15-20%
Average Transaction Value	$100	$130
Processing Fee	2-3%	4-6%
Risk Assessment Data Points	50-100	200+

Card-Not-Present Transactions

A card-not-present transaction basically means that at the time of initiating the payment, the merchant did not see the card details. For instance, when a customer pays over the phone or online. These are extremely common transaction types in ecommerce in particular, but they are more vulnerable to fraud, especially when using mobile devices. Using 3D Secure authentication is a vital piece of the puzzle in this case and goes a long way to helping to prevent fraudulent or suspicious activity. 

We can take this further by talking about PayCompass’ Ecommerce merchant services. These are designed to help mitigate these risks, by providing real-time transaction monitoring. That way, you can make proactive moves before the impact hits.

High-Value Purchases

If a payment is for a large amount of money, it will likely be flagged by payment processors as a high-risk transaction. This is because there is a much larger risk of fraud or potential money laundering. For instance, if a transaction is over $1,000, it is much more likely to be flagged and checked. Businesses that regularly have high value payments, such as travel agencies or property businesses, must implement robust verification methods to ensure legitimacy of payments.

High-Risk Industries

As we mentioned earlier, there are certain industries that are automatically deemed to be high-risk because of the nature of what they do. These industries face payment processing problems from the get-go because many regular platforms don’t work with high-risk payment processing. For instance, PayPal, Stripe, and Square, to name just a few. However, at PayCompass, we’re more than happy to help these businesses with our high-risk merchants accounts. 

Let’s take a look at some common high-risk industry examples. 

Travel and Tourism

Travel agencies, cruise lines, and other related companies are deemed high-risk businesses by payment processors.

The travel industry as a whole faces significant payment processing challenges due to several reasons. The first is the high chargeback rate many businesses face, often due to cancellations or dissatisfaction, e.g., itinerary changes on cruise ships. The second is the regular number of high-value payments they receive, which increases the chance of fraud. 

We can also mention multi-currency payments here too, which complicates payment processing and adds extra complexity. Finally, the travel agency is also highly regulated, which is another reason for its high-risk label.

Adult Entertainment

The very nature of the adult entertainment industry places it in the high-risk bracket from the start, but there are other reasons too. Again, this industry is vulnerable to chargebacks and regulatory issues mean there is a significant need to verify age when providing goods and services. Many payment processors find these risks too high and may simply not want to associate with the type of services these businesses provide.

Online Gaming and Gambling

The online gambling and betting industry has grown significantly over the last few years, but despite its success, it is labelled as a high-risk industry and faces many challenges. There are strict regulations in place within this industry, mainly due to age verification, and there is also a high risk for fraud. All of this makes payment processing complicated for many businesses, including those offering sports betting. 

In these industries, AI-powered fraud detection is widely used and very efficient at spotting any suspicious patterns in high-risk transactions. This can lead to a significant reduction in fraud attempts.

Factors Contributing to Transaction Risk

To fully understand high-risk transactions, their impact, and how to mitigate risk, we need to consider the factors that define them. There are certain elements that can increase risk in any transaction; let’s explore them now.

Geographical Considerations

A transaction that originates in certain regions or countries could be deemed as high-risk from the start. This is due to regulatory issues or high fraud in those areas. Cross-border transactions in general are considered risky and are highly likely to be flagged due to the multiple currencies involved, regulatory concerns, and again, high risk of fraud. 

When a transaction is flagged in this way, it is reviewed carefully and this can take a considerable amount of time. Obviously, this isn’t ideal for businesses that need to access the money they’ve been sent.

Customer History

It’s not only the business and its dealings that can cause a transaction to be flagged as high-risk, but the customer themselves. New customers with no transaction history or those who regularly file chargeback disputes can increase transaction risk. 

In this situation, using behavioral analytics can help you to spot any potential risks before they come to fruition.

The Impact of High-Risk Transactions on Businesses

Now it’s clear that a high-risk transaction is, what impact do they have on businesses? In general, high risk business owners endure many challenges that significantly impact on their day-to-day operations. Let’s explore these in more detail.

Financial Consequences

High-risk transactions can significantly impact the financial operations of a business.

Of course, the first thing to consider is the financial impact of high-risk transactions. These effects can be significant and complex. First, high-risk businesses often face higher processing fees than those deemed low-risk. In fact, some payment processors simply won’t accept high-risk businesses from the get-go. That leaves many owners looking for a PayPal alternative because their account has been restricted or blocked unexpectedly. 

The table below gives you an idea of the difference between high and low-risk industries and their processing costs.

Merchant Type	Average Processing Fee	Potential Cost Reduction
Low-Risk	2.2%	N/A
High-Risk	3.5%	Up to 30% with volume-based pricing
High-Risk (Specialized Processor)	2.0% – 3.0%	Up to 1.5% lower than traditional banks

Chargebacks are another issue, and we’ve already mentioned that high-risk businesses tend to have a higher instance of these. On top of the uncertainty and upheaval that a chargeback causes, fees can cost a business quite considerably, while the time and physical item is also lost. At PayCompass, we offer built-in chargeback prevention on all our merchant accounts to help mitigate this very significant risk.

Reserve Requirements

Some payment processors may ask businesses to commit to reserves. In this case, the processor holds a portion of each high-risk transaction amount to cover any potential chargebacks. This can be anything up to 20%, which is a significant amount for industries dealing with high-value transactions. Rolling reserves are usually held for around 180 days on average, adding to cash flow issues in general.

Operational Challenges

It’s not just financial challenges that high-risk businesses face, but operational ones too. Many of the aspects of dealing with high-risk transactions means more resources and extra steps in standard processes.

Enhanced Due Diligence

It’s vital for businesses to have robust verification processes to help reduce the risk of fraud. However, these processes often mean utilizing technology, which takes time to learn and use. Multi-layered verification systems can drastically reduce fraud attempts in high-risk industries, whale KYC (Know Your Customer) systems powered by AI can speed up processes with automation.

Compliance Burdens

Many high-risk businesses are regulated heavily, and compliance is vital. However, this adds extra steps to operations, taking time and resources. Of course, regulations often change over time, and staying up-to-date is another critical element to add to the overall picture. 

Automating compliance is one answer to this problem, and such technological tools can drastically cut down on workload and time associated with this problem. Regular compliance audits are another valuable tool, helping to spot any potential violations before they happen.

Mitigating Risks in High-Risk Transactions

While all of this sounds quite negative, there is some light at the end of the tunnel. Risks can be reduced with the right measures, and can help to smooth processes and make business life much easier when dealing with a high-risk transaction.

Advanced Fraud Detection Systems

An increased risk of fraud is why mobile banking is considered riskier than online banking.

Proactive is always better than reactive, and advanced fraud detection systems are your metaphorical crystal ball. Using indepth technology can help you spot fraud and work to prevent it before the worst case scenario happens. 

This is where AI comes in very useful, as AI-powered fraud detection technology can quickly spot any suspicious patterns in customer behavior and transactions themselves. Real-time fraud scoring is also very accurate and can help to reduce the chance of false positives, while behavioral analytics can predict fraud before it even happens.

Machine Learning Algorithms

Machine learning is growing in sophistication and it’s becoming a serious advantage in fraud detection and prevention. This is an AI-powered system and it analyzes patterns at lightning fast speeds. From there, it can flag any suspicious activities with a high level of accuracy. In fact, machine learning algorithms process more than 1 million data points every single second. They also learn over time, so they become even more accurate as time goes on.

Biometric Authentication

The days of passwords are slowly leaving and many businesses are choosing biometric authentication for high-risk transactions. In this case, we’re talking about fingerprint or face scanning, or voice recognition. These methods are a lot more accurate and secure for card-not-present transactions, cutting down on the risk of fraud due to a stolen credit card or authorized use in general. 

Chargeback Prevention Strategies

Earlier, we mentioned that chargebacks are a huge problem for high-risk businesses and it’s important to try to prevent them as much as possible. Again, proactive measures are the way forward. Alongside PayCompass’ chargeback prevention tools, what else can you do to cut down on troublesome chargebacks?

Clear Communication

Many chargebacks are due to customer dissatisfaction or confusion, so clear communication is vital. Ensure that your product descriptions are detailed and clear, leaving no space for confusion. You should also have transparent policies in terms of returns and refunds that are clearly displayed on your website. This helps to reduce misunderstandings that commonly lead to chargebacks.

Rapid Response to Disputes

If a high-risk transaction leads to a dispute, it’s crucial to address the issue quickly. This can help to prevent the problem escalating to a formal chargeback and its associated fees. 

Ensure you respond to customers within 24 hours at the latest, but you could also consider automated dispute resolution platforms. These can handle disputes without the need for human intervention, responding much faster, and solving small issues. It’s also worth considering pre-emptive refunds to help reduce chargeback rates.

Regulatory Compliance and Best Practices

Alongside looking at different payment methods, high-risk businesses also need to ensure they comply with regulations and legal practices. This can be done through compliance management software, which automates many of the smaller tasks and frees up time for other things. However, regulatory compliance training is a must for all businesses, ensuring that staff are up-to-date with changes and compliance methods.

Know Your Customer (KYC) Procedures

Many regulatory issues for high-risk businesses are around age and identity verification. Advanced KYC (Know Your Customer) procedures are useful in helping to reduce fraudulent access attempts, while also being much faster for the customer going through the authentication process.

PCI DSS Compliance

PCI DSS (Payment Card Industry Data Security Standards) compliance is crucial to help protect financial information. This compliance helps to reduce data breaches and stops information falling into the wrong hands. Again, this task can be automated to a large degree through PCI DSS scanning tools. These can quickly identify a large number of potential vulnerabilities, giving you time to solve them before they turn into compliance issues.

The Role of Payment Providers in High-Risk Transactions

With all these complications added to high-risk transactions, what role do payment providers play in helping businesses navigate everything successfully?

We mentioned earlier that many standard payment processors, such as PayPAl and Stripe, don’t accept high-risk transactions. That leaves businesses wondering which way to turn. PayCompass is a specialized payment provider with fast acceptance and high approval rates. Our customized risk management and fraud protection solutions can help reduce many of the challenges you face. Let’s dig deeper into this and learn how tailored solutions work.

Tailored Solutions for High-Risk Merchants

When choosing a high-risk merchant service provider, understanding their specialized services is key to making the right decision. Let’s look at some of the services these payment providers offer and why going down the specialized route is a better option.

Specialized Underwriting

Providers offer underwriting processes that are specifically adapted to high-risk merchants and their unique needs. This can help to improve approval rates by a significant amount. The use of risk-based pricing models can also help to reduce processing costs for merchants.

Industry-Specific Fraud Prevention

We’ve talked at length about the fact that fraud risk is a major issue for high-risk industries, and specialized payment processors recognize this. We’ve already mentioned that at PayCompass we offer specific tools to help reduce fraud, and this is something which should be high up on your priority list when making a choice. Additionally, fraud prevention tools should be industry-specific, giving you the highest level of protection possible.

Ongoing Support and Risk Management

A high-risk business’ journey is never linear or easy, yet having ongoing support can help to smooth the waters somewhat. One part of this is real-time monitoring. This can give you instant information about any transaction patterns that may cause concern, helping you identify risk and take action. Incidentally, PayCompass’ high-risk accounts all feature real-time monitoring as standard. 

Within this, automated alerts are valuable in giving you a ‘head’s up’ as quickly as possible, extending the amount of time you have to deal with the threat.

Dedicated Support Teams

Having a dedicated support team can offer specialized help to address the challenges that you face as a high-risk merchant. Dispute resolution support can go a long way to reducing the time it takes to solve problems, while specialized teams can also help you to improve your chargeback win rates.

Global Perspectives on High-Risk Transactions

Working across borders raises many challenges, and there are many regional variations when it comes to high-risk transaction management. Understanding these differences will help you create a solid action plan moving forward.

Cross-Border Payment Challenges

International transactions bring their own unique complexities to payment processing, especially in high-risk situations. When payments cross borders, they have a far higher chance of being fraudulent, while there are certainly added costs to consider in terms of forex-related issues. 

It’s important to manage currency exchange risks in markets that are particularly volatile to help avoid revenue losses and to prevent a higher risk of fraud.

Sanctions Compliance

It’s also important to ensure that transactions don’t violate any sanctions, something which global businesses need to be aware of. If you trade across many borders, this can be hard to stay up-to-date with, so automated sanctions screening is a useful tool in this case. You could also look toward real-time updates to sanctions lists to ensure you don’t accidentally step over any red lines.

Regulatory Divergence

The legal landscape across jurisdictions is wide and ever-changing. It’s vital to ensure that you comply with regulations not only in your area but also in any areas where you trade. Again, staying up-to-date with changes can be very challenging, and as your company continues to grow, this becomes even more crucial. 

Again, you can look to automate much of this, helping you to comply with multi-jurisdictional regulations. AI can also be used to track updates to regulations and ensure compliance.

The Psychology of High-Risk Transactions

We’ve talked at length about high risk transactions examples and how they work, but how does all of this affect the psychology of both the business and customers?

Consumer Trust in Digital Payments

In customer-business relations, trust is everything. It’s vital that your customers trust your business and believe that you’re open, honest, and aligned with providing the very best service possible. Security risks can affect all of this, and how you handle them has a large impact upon whether your customers stick around or move toward one of your competitors. 

To show that you’re taking security seriously, visible security measures are key. This is an “actions speak louder than words” situation which shows your customers in a tangible way that you’re taking action to protect them and their money. It’s also important to communicate transparently about security and what you’re doing about it. 

Of course, it’s also important to ensure that the entire check-out process is smooth and not overly cumbersome for customers. It’s about finding that balance between security and ease of use. Identifying user-friendly authentication methods is one step toward achieving this.

Merchant Risk Perception

High-risk transactions can also affect the business itself, especially in terms of perceived risk levels and how it correlates with decision-making. With the very real challenges associated with high-risk industries, it’s normal to be cautious about account restrictions and blocks due to increased chargebacks and fraud risk. However, having a strong risk management strategy in place goes a long way to mitigating a lot of these problems. 

Risk perception training can help to reduce merchant-induced fraud by raising awareness, while behavioral analytics can help to predict these situations too. In the end, it’s about finding a balance between understanding the risks and doing what you can to reduce them without causing undue stress. 

Decision-Making Under Uncertainty

In high-risk situations, second guessing yourself can lead to poor decision-making. It can be quite overwhelming when you’re aware of increased risks and you’re trying to avoid anything happening, yet there are many routes you can take to reduce this. 

Scenario-based training is a good tool for improving decision-making under pressure, while you can also use AI in this case too. AI-assisted decision support can give important pointers to help inform decisions. A final option is real-time risk visualization tools, which give you something tangible to look at and base your choice on. All of these options can help reduce overthinking and allow you to focus and turn your attention to growth strategies for high-risk merchants.

Learnings Recap

Throughout this guide, we’ve talked at length about the high risk transaction meaning and the challenges they cause for businesses. It’s clear that to overcome these issues, it’s vital to utilize the latest technology and tools that are designed specifically to handle these problems. AI, blockchain, and biometrics are all highly promising in helping handle risk management in high-risk transactions, yet it’s equally as important to understand the psychological effects too. 

With the evolution of technology and regulatory changes, it’s more important than ever before to stay up-to-date with new developments and remain ahead of the curve. Regulatory compliance is a complex picture, especially when you add borders into the equation. Yet, with a clear risk management strategy, it’s possible to overcome high-risk transaction issues with greater ease. 

At PayCompass, we’re experts in the world of high-risk transactions, and we understand the challenges you face very well. For that reason, we’ve developed our services with you in mind. We can give you advice on how to manage high-risk transactions in specific industries, while helping you develop a balance between risk management and business growth. So, if you’re ready to move ahead and side-step the challenges that have plagued you so far, reach out to us today. After all, high risk doesn’t have to be a barrier to business success.