Payment processing in high-risk merchant industries

Risk is an unavoidable reality all businesses must navigate, and unfortunately, some industries are considered more high-risk than others. There are various types and levels of risk that merchants considered “high-risk” face, and these can impact business performance if not effectively managed. This is why it is imperative to understand if a business – and industry – are perceived as riskier than others so that you know how best to mitigate these risks for optimal business success. 

Which industries are considered high-risk in payments and why?

Some businesses are known to generate more risk exposure than others because of their business model. For example, subscription businesses that see high transaction volumes each month also see greater risk exposures as a result. Additionally, businesses operating in industries considered high-risk are more prone to risk exposures because of the industry they’re in.  

Industries like dating and gambling generally fall into the “high-risk” category, largely because of concerns and perceptions around turnover volumes and regulation, which often lead to fraud and chargeback risks. These and other factors, like international payment acceptance, low credit scores, or no prior payment processing track records, usually result in banks categorising businesses in these industries as “high-risk merchant accounts”. Compliance is another key indicator of risk that risk assessors look for, as poor compliance records also contribute to businesses inheriting the “high-risk” label. 

Other industries considered high-risk include:

• The CBD and cannabis industry
• Online gaming and casinos
• Cryptocurrencies and trading 
• Nutraceuticals 

To ensure compliance and a smooth payment experience for customers, businesses in these industries can benefit from the support of an experienced payment services provider (PSP) that is familiar with the needs of high-risk merchants.

What we talk about when we talk about compliance

Compliance is more than just a checkbox for high-risk businesses—it’s the foundation of sustainable operations. 

When we talk about compliance, we’re referring to a business’s adherence to the legal, regulatory, and industry-specific requirements that govern its operations. For high-risk industries like CBD, online gaming, or nutraceuticals, risk management strategies are crucial to avoiding penalties, maintaining customer trust, and ensuring long-term success.

Key compliance areas include:

• Regulatory Compliance: Meeting the legal standards set by authorities in different jurisdictions, such as GDPR for data protection or PSD2 for secure online payments in the EEA.
• PCI DSS Compliance: Ensuring that payment processes meet the Payment Card Industry Data Security Standard, which is vital for protecting customer card data and preventing breaches.
• KYC and AML: Implementing Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols to verify customer identities and prevent fraudulent activities.
• Tax Compliance: Accurately reporting and paying taxes according to local and international tax laws to avoid legal complications.

In high-risk industries, non-compliance can lead to severe consequences, including hefty fines, legal action, and loss of merchant accounts. And that’s exactly why it’s essential to partner with a payment provider that understands the intricacies of compliance and offers robust support to help your business navigate these challenges.

Why are CBD merchants considered high-risk?

A relatively new industry that’s gaining in popularity, the CBD market is considered high-risk mostly because of the complicated regulations that surround CBD products. CBD laws differ from country to country, and because CBD is largely associated with the intoxicating effects of its narcotic counterpart, many jurisdictions still have very stringent laws in place when it comes to CBD and its uses. This, in turn, influences payment processors’ willingness to support merchants operating within the CBD industry. 

Additionally, because the laws around CBD products vary across countries, CBD businesses with an international presence, accepting international payments for their products, run into complex compliance requirements, which further contribute to their high-risk status. Another contributing factor to note is that because the CBD industry is still in the process of establishing its credibility and has yet to be fully accepted in mainstream markets, customers are more likely to request refunds if they’re not satisfied with their product purchases. As such, high chargeback risk is a red flag that payment processors are on the lookout for when it comes to the CBD industry.

Things to think about when choosing a high-risk payment gateway

Selecting the right payment gateway for a high-risk business, such as those in the CBD, online gaming, or cryptocurrency industries, is crucial for long-term success. High-risk businesses face unique challenges that can lead to higher fees, stricter regulations, and increased scrutiny. 

Therefore, understanding what to look for in a payment gateway provider can make all the difference in managing risk and ensuring smooth payment processing.

Here are some key factors to consider:

• Industry Expertise: Choose a payment gateway provider with proven experience in handling high-risk industries. Their familiarity with industry-specific challenges will allow them to offer tailored solutions and better risk management strategies.
• Compliance Support: Ensure the provider is well-versed in the regulatory requirements of your industry, including PCI DSS compliance, PSD2, and other relevant frameworks. Compliance is critical in avoiding legal issues and maintaining trust with customers.
• Flexible Payment Options: Opt for a gateway that supports a wide range of payment methods, including credit cards, ACH, and digital wallets. This flexibility ensures you can cater to diverse customer preferences.
• Chargeback Management: High-risk businesses often face a higher incidence of chargebacks. Look for a provider that offers robust chargeback protection and dispute resolution services to minimise potential losses.
• Scalable Solutions: As your business grows, your payment needs will evolve. A scalable payment gateway can adapt to increasing transaction volumes and new market expansions without compromising performance.
• Transparent Pricing: High-risk businesses often encounter higher fees. It’s essential to choose a provider that offers clear and transparent pricing structures, helping you manage costs effectively.

Why do many banks and FinTechs refuse to work with the CBD industry?

In order to run a legitimate business, merchants need bank accounts to facilitate transactions. However, despite CBD laws becoming progressively more lax in some countries as the industry gains momentum, many banks still refuse to work with CBD businesses.

In the UK, one of the few financial institutions that supported CBD industry businesses, METRO Bank, made an industry-shaking move earlier this year by closing all accounts associated with the CBD industry. Additionally, FinTech firms like Revolut have also closed a number of accounts related to the CBD industry, with one such account abruptly closed because “the nature of the business did not comply with the firm’s policies”. Revolut in particular also refuses to work with other high-risk industries including dating services and weapon manufacturers. CBD businesses in the UK continue to struggle to establish business bank accounts, with banks, regulators and underwriters more often than not opting to steer clear of this high-risk industry. The climate is much the same in the US, with many banks fearing federal prosecution for financing CBD industry businesses. Elsewhere in Europe, FinTechs and other payment service providers, like Swedish BNPL service, Klarna, do facilitate payment support for merchants selling CBD products.

Is the situation changing?

While the banking landscape for CBD businesses has been challenging, there are signs of gradual change. 

As the global market for CBD products continues to expand and consumer demand rises, some financial institutions and payment processors are beginning to reconsider their stance. In certain regions, particularly in Europe and North America, regulatory frameworks are evolving to provide clearer guidelines on the legal status of CBD. 

This has prompted some smaller banks, credit unions, and FinTech startups to step in and offer services to CBD merchants, seeing the potential for profit in an underserved market.

In the US, for example, the introduction of the SAFE Banking Act, which aims to provide protections for financial institutions working with legal cannabis businesses, could potentially reshape the industry. The act represents potentially a significant shift in the conversation around banking and cannabis-related businesses. 

Similarly, in the UK and parts of Europe, we’re seeing the early stages of more specialised financial services emerging to support high-risk industries like CBD, though these are still limited in scope.

However – despite these positive developments – widespread acceptance and support from major banks remain distant. 

For CBD businesses, the key to success in this evolving environment lies in staying informed, being adaptable, and finding reliable partners who understand the unique challenges of the industry.

Regulatory requirements for cannabis industry payment processing

Because of the restrictive laws surrounding the CBD industry, processing payments has been a huge challenge for merchants in this space. With card providers like Visa clamping down on CBD industry transactions, and the limited banking opportunities available, many merchants have had to resort to payment methods like cash and cryptocurrency. These payment means, however, have very limited transparency, can’t easily be traced and complicate regulatory requirements like KYC and AML for merchants. Not to mention the security risks associated with these payment methods. 

However, CBD’s medically proven health benefits and recent legislation changes in certain countries have resulted in an overwhelming demand for the products – typically online. As the industry continues to grow and consumer demand for CBD products increases, legislation across the world will see further amends and payment processing requirements for the cannabis industry will become more clear-cut. This will allow merchants to more easily process payments in a transparent and compliant manner.  In terms of the payment industry, payment service providers have by and large neglected to understand the complex regulatory requirements of this high-risk, heavily regulated industry. As the regulatory tides change, however, more payment partners will start implementing the infrastructure needed to help high-risk merchants navigate their payment processing obligations, and merchants should look to partnering with payment providers who have the expertise in navigating regulatory complex industries.

How CBD merchants can process payments despite these challenges

In today’s fast-changing and ever-advancing digital landscape, having the right payments solutions in place for a CBD business is crucial to its success, especially considering the competition out there for merchants.

Consumer preference for digital payments, especially after the pandemic, has prevailed. Although their high-risk classification is a barrier to growth because of high transaction costs and other restrictions, merchants in the CBD industry would do well to adopt digital and online payment mechanisms to meet customer demands. 

Operating a CBD business comes with challenges surrounding perception, regulations and categorisation. So, when considering a payment partner, knowing how payment gateway providers perceive CBD businesses, how they categorise them, and whether they will be compatible with a business’s offering, are important factors for merchants to consider. It’s integral they do research, speak to the right people and filter out gateway providers that are likely to be a non-starter from a risk/governance perspective. Another consideration for CBD businesses is the significance of their company’s location and the location of prospective payment gateway providers, especially when serving customer bases in several different locations. It’s important from the perspective of integration, incorporation and regulation, as different countries have different factors businesses to bear in mind when looking to expand, which can affect payment processing capabilities in unexpected ways.

High risk payment gateways: Final thoughts

While still gaining ground, the CBD industry is an exciting one for businesses, with ample profit potential. However, this industry does come with the challenges of high-risk industries, and high-risk merchants need to be savvy when it comes to how they process payments for their CBD business. While legislation is catching up, there is still some way to go before we see clearly defined payment processing regulations for this industry. But by taking the steps needed to establish effective risk management and payment processing now, CBD businesses can look forward to unparalleled growth when the regulatory clouds finally lift.

As an experienced payments provider and consultancy, Fibonatix helps business owners and Payments teams to make informed decisions and offers guidance around system design, settlement account opening, KYC and risk management, especially for businesses in high-risk industries. Our payments expertise helps new businesses to navigate their market, which can be tricky in an industry that’s considered high-risk, such as the CBD market. To find out more about how we can support your business, visit our website or contact our friendly team of experts.

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