Credit Card Processing for High-Risk Merchants

Accepting credit cards for traditional products and services is straightforward: choose your site builder and your shopping cart, and then spend a few minutes choosing which payment gateway you would like to use. But what if your product is considered high-risk?

What determines whether a product or service requires high-risk processing?

Products and services are categorized as high-risk by payment processors because they carry a higher-than-average risk of processor losses, or a higher compliance burden, either from a regulatory perspective or a compliance-monitoring one.

The risk of chargebacks and refunds

Merchant account providers carry a shared liability for refunds and chargebacks generated by the businesses they work with. This means that if a website owner were unable or unwilling to cover the cost of chargebacks, disputes, or refunds, their payment processor would be on the hook for those reversed transactions. (This is also why a merchant account provider cares about a business owner’s credit history, and may want to retain a “rolling reserve”.)

The risk of fines or legal fees

Beyond the shared liability for customer disputes, processors also have liabilities associated with fines and legal fees. Merchant account providers facilitate payments, and in the eyes of federal and state regulators, they bear responsibility for the transactions they process.

Payment processors must ensure that the businesses they process credit cards for are marketing in a clear and ethical manner and that their products and services do not violate any of the rules that surround the sale of regulated items.

The added work and staffing required to monitor and manage online businesses that operate in a high-risk industry means two things:

1. Most traditional payment processors choose not to offer their services to high-risk companies.

2. Those processors that do work with high-risk businesses often have slower approval times and somewhat higher fees.

What types of online businesses require high-risk payment processing?

A good rule of thumb is that any product or service that is not customarily supported by the major payment processing companies, such as Stripe and PayPal, is considered high-risk. Additionally, most high-risk products are age-restricted and require the use of age-verification software before the customer can enter the e-commerce website.

Below are some of the most common examples of high-risk businesses, including examples of some of the regulations and potential hurdles involved in marketing these products.

Online smoke shops

It can be challenging to get your bearings when it comes to high-risk e-commerce due to the number of regulations and the speed at which they can change. However, over the last few years, there have been monumental positive shifts in various laws and regulations that apply to the sale of smoke-shop items like CBD, cigars, vape, and pipes and glass.

CBD and hemp products

With the passage of the 2018 Farm Bill, CBD products began to flood the internet. Unfortunately, thousands of merchants launched their business only to quickly have their ability to accept payments for CBD shut down. Processors rushed into the market, and many did not put the checks and balances in place to mitigate their risks.

Accepting credit cards for CBD can be straightforward, but there is some up-front work and due diligence involved. Payment processors will want to fully understand each product you will be selling before you list it for sale. Additionally, you must link directly to an independent lab’s Certificate of Analysis (CoA) for each product. Your CoA must show that your products do not carry harmful levels of contaminants and that your THC levels are below the “three percent THC by dry weight” threshold established by the 2018 Farm Bill.

Vaporizers and e-liquids

Since electronic cigarettes were introduced to the US market in 2006, they have been lightning rods for controversy. Like CBD, vape merchants must ensure the purity and content of the products they sell, but additionally, vape merchants that sell electronic nicotine delivery devices must also take additional steps to show that they are operating within the rules that govern electronic nicotine delivery systems (ENDS).

Some vape-related items, like coils, batteries, and tank systems, are less scrutinized, while products containing nicotine, like e-juice and disposable electronic cigarettes, have a higher burden.

Merchants must take extra care to avoid marketing any vape product in any way that could be attractive to children. The sale of flavored nicotine liquids, beyond tobacco and menthol, is limited to bulk e-liquid refills and disposable all-in-one electronic cigarettes.

Beyond some additional work related to compliance, vape websites that sell nicotine must generally register with the card associations annually. Although this registration process is seamless, as it is done for the business owner by their high-risk processor, it does come with added costs.

Premium cigars

Selling cigarettes online is not supported by any payment processor due to the FDA’s rules surrounding tobacco. This prohibition does not apply to premium cigars, though.

To be considered a “premium” cigar, any product sold online must check all of the following boxes:

• Hand-rolled in whole tobacco leaf with a tobacco binder

• Contains at least 50 percent (of the filler by weight) long-filler tobacco (i.e., whole tobacco leaves that run the length of the cigar)

• No filter or tip

• No flavor other than tobacco

• Contains only tobacco, water, and vegetable gum

• Falls in line with “premium” weight classifications (at least 6 pounds per 1,000 units)

To accept credit cards online for premium cigars, you must also pay an annual registration fee, again facilitated by your high-risk processor, and follow several other tobacco-specific e-commerce rules.

Pipes, bongs, and glassware

Traditional head-shop items are quickly becoming mainstream – but not mainstream enough for most payment gateway providers. Surprisingly, standard smoke-shop accessories like water pipes, grinders, and even simple glass pipes are excluded by most payment processors’ restricted use policies.

There are no overly onerous registration fees or overly complicated payment regulations that affect smoking accessories more so than other high-risk items. Still, some caution does need to be taken when setting up a payment gateway for pipes and glass.

When deciding whether to approve a payment processing application for smoking accessories, payment processors will review your site for illicit images, and even review your business’s social media accounts for references to illegal activities.

When selling smoking accessories, the images you choose for your site and your online reputation matter.

Online beer, wine, and spirits

As you may imagine, selling alcohol online requires a lot of up-front due diligence. In addition to typical terms and conditions on your site stating your refund, privacy, and shipping policies, your website must include age verification.

Beyond your website, in terms of selling alcohol online, there are three major areas to consider:

1. You will need an alcohol-friendly merchant account and payment gateway.

2. Your business must adhere to all federal and state regulations. These include state regulations both in your state and in the state you are shipping to. Please seek an attorney if you have not already. An online alcohol sales business will likely require all of the following:

   • Form TTB F 5630.5d “Alcohol Dealer Registration” submitted and approved by the Alcohol and Tobacco Tax and Trade Bureau (TTB)

   • A winery, brewery, or distillery license from your state of residence

   • A retailer’s license from your state of residence

3. Different shipping carriers have various restrictions on the type of alcohol they will allow you to ship, and all shipments must be marked with a “restricted product” shipping label. As you can imagine, an adult signature is always required upon delivery, and you should have a shipper’s license for each state to which you want to ship.

Selling alcohol online can be complicated, but for wineries, breweries, and distilleries looking to expand their tasting room sales beyond their four walls, e-commerce can be a spectacular growth opportunity. Our friends at Tasker Payment Gateways have put together a helpful Selling Alcohol Online 101 guide that is worth checking out.

Beyond smoke shops and alcohol

There are dozens of common high-risk product types, and each has its restrictions and requirements. Some items, such as legal FFL-to-FFL transfers, are understandably regulated. Surprisingly, once set up, these accounts are often priced no differently than the standard “2.9 percent plus 30 cents” transaction fee commonly associated with online sales.

Other products, like nutritional supplements, recurring billing models, or high-dollar items, are much easier to obtain processing for but generally demand processing fees beyond what most low-risk processors charge.

One notable exception to the “high-risk equals higher rates” standard applies to large, established high-volume websites. Generally speaking, merchants with a solid history and significant processing volume can work with a provider that is willing to negotiate lower rates.

High-risk payment processing can be confusing

When setting up high-risk payment processing, there are many “dos and don’ts,” and often, the advice of a high-risk-payments professional – with experience in your exact industry – can save you a lot of time and money.

Suppose you have questions about high-risk payments or integrations. In that case, payment gateway consultants like TaskerPaymentGateways.com are generally willing to spend time, at no cost to you, to fully understand the products you are offering and discuss the best high-risk payment options for your Foxy store.

And, of course, we at Foxy are happy to help connect you with the best options we’re aware of for your specific requirements. Feel free to reach out anytime 🙂