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3 Reasons Recurring Billing Business Models Are Considered High Risk
Why Recurring Billing is High Risk
It’s already a given that running a business comes with a lot of risks. But when it comes to processing payments online, which are where most businesses are these days, some merchants are considered high-risk for a lot of different reasons.
One of these is recurring billing, which is basically a subscription-based model where a customer signs up for a subscription of a product or service and has it billed every month to his credit or debit card.
Although this is one of the best payment processing methods today, subscription-based merchants are also considered high-risk for three main reasons:
#1
The Negative Billing Option
Negative option billing is a common procedure among a lot of subscription-based businesses because it skips the process of continuously notifying the customer of a charge to his account.
While it’s convenient, it also poses a high risk for chargebacks because there are times when a customer would forget that they subscribed for your product or service and file a chargeback claim for unwanted charges.
#2
The High Chargeback Rates
Being a subscription-based business using a recurring business model makes you a high-risk merchant mainly because you have higher chargeback rates than other businesses.
This is because you’re relying heavily on recurring revenue, which poses a higher chargeback ratio due.
#3
The Newness Of The Industry
Sure, subscription businesses have existed for many years, but only until the last few years did most of these companies get into online payment processing.
Banks see your business as high-risk because of its newness in this type of platform.
Merchant providers don’t have a lot of evidence yet to prove that they can profit from working with your business, which is why they categorize you as high-risk.
The good thing is, there are always ways to keep your risks low. It's vital that you maintain vigilance in this regard. High risk business have to ensure they maintain a good standing with banks and ISOs. You should always keep an eye on transactions and work with your credit card processor. Most high risk merchant processor will provide chargeback mitigation programs for example.
Here are some ways you can maintain a good standing:
#1
Pay Attention To Your Chargeback Ratio
If you can keep your chargeback ratio to zero, make sure to do that. Even if subscription businesses in general have a reputation for high chargeback ratios, you can still implement strategies that will keep your chargebacks to a minimum at least because banks see high chargeback ratios as a red flag for a merchant and it could result to the closure of your account.
#2
Keep Your Credit Clean
At the end of the day, it’s your financial reputation that will be under scrutiny if you apply for a merchant account. So if you want to get easy approvals, it’s very important to keep your credit clean.
#3
Work With The Right Partner
Since a lot of merchant providers tend to shy away from high-risk merchants, applying for a merchant account can be challenging if you’re a subscription-based business.
But it’s very important to work with the right payment processing partner to make sure that all your transactions are secure, which will reduce your chargeback ratios and protect your business form huge losses.
Although being a high-risk merchant can make doing business more challenging, there are always a lot of solutions to make sure that you’re taking advantage of the huge potential profit of being online without having to worry about the risks that come with it.
