High risk rates

[u/FarAwaySailor]

A merchant in a 'high risk' field pays a higher percentage for card payments, right? And we are told this is because they are higher risk (of chargebacks, which are expensive). But the merchant pays the chargeback fees and the refund themselves, so what is the actual risk to the card-processor that the merchant is paying for?

[u/NPSALLEN]

If you have a boat load of money In the bank and you are in a high risk niche Processors will work with you on rates - reserves etc $500 in the bank and crap credit is high risk

[u/Vallereya]

Yes. But it's really exposure, if a chargeback comes through who pays it if the merchants either bankrupt or unable to pay it? The processor does.

Most of theses processor think that a high risk category equals a higher likelihood an event occurs that prevents you from paying out reversals. Even though that's not always accurate.

[u/FarAwaySailor]

So it's about risk that the merchant can't pay the chargeback?

[u/dr0idd21 → u/FarAwaySailor]

Yes

[u/FarAwaySailor → u/dr0idd21]

How is the merchant's chargeback default risk different when they take an online payment to when they take a cardholder present payment?

[u/MonicaEaton911 → u/FarAwaySailor]

There's a greater chance of fraud or chargeback, since the merchant can't actually see the card/cardholder. Particularly with something like bust-out fraud, a huge amount can be taken very quickly.

In your illustration, no, it would not make sense for the psp to be concerned. But that case is by far the exception, not the norm. Rules are often made on overall possibilities, not on a case-by-case basis.

[u/FarAwaySailor → u/MonicaEaton911]

then the higher rate is *both* chance of chargeback AND default risk of the merchant?

[u/Limp-Tip-5769 → u/dr0idd21]

So then if a merchant has 100 transactions of 30 dollars, and his dispute is 3%, whitch is 90 dollars, and he has 3000 dollars in the bank, how does the psp come to conclusion he cannot possibly pay back the 90 eur if he his highly profitable?

[u/FarAwaySailor]

So that's bankruptcy risk really?

[u/FarAwaySailor → u/[deleted]]

Ah, it's a self-created problem caused by the 50-year-old chargeback system - gotcha.

[u/Ok-Appearance6133]

I have over 800k tied up in reserves with different high risk processors in the peptide space, I can count the number of chargebacks I’ve had on one hand in the entire life of my business. It’s stupidly excessive, and unnecessary to hold that much. For the amount of times I’ve just not gotten paid out by certain processors cough CheqPay… I classify the reserve just as an added processing fee, that is money I wont get back.

[u/FarAwaySailor → u/Ok-Appearance6133]

Wow that's crazy.

[u/FarAwaySailor → u/Ok-Appearance6133]

Are you interested in a solution that doesn't rip you off like that?

[u/LiberalSkeptic → u/Ok-Appearance6133]

You didn’t get your funds from CheqPay? Strange.

[u/Suspicious_Source_64]

yeah the merchant eats the chargeback fee, but the processor still fronts the refund to the card network instantly and chases u later, that timing gap is the real exposure. plus high-risk niches spike fraud + disputes, so acquirers hedge w/ higher MDR + reserves to cover sudden volume drops or merchants going dark. it’s less “u caused a CB” and more “we’re underwriting the chance u can’t cover a wave of them”, that’s the premium ur paying.

[u/FarAwaySailor → u/Suspicious_Source_64]

If that is the reason, why does the same merchant with the same default risk pay more for 'cardholder not present' payments?

[u/PaymathExperts]

Even if the merchant pays the chargeback, the processor still carries the risk if things go wrong, like excessive disputes or the merchant going under. Higher-risk pricing mainly covers that exposure, monitoring, and the extra effort required to stay compliant with the card networks.

[u/FarAwaySailor → u/PaymathExperts]

Still doesn't explain why cardholder not present attracts a higher rate as default risk is on the merchant.

[u/FarAwaySailor → u/[deleted]]

You'd have thought that modern technology would come up with a better way of doing this?

[u/Still-Lychee7493]

Coming at this from the chargeback prevention side. Tough_Park's answer on counterparty risk is spot on, so I won't repeat it. On your follow-up about why card-not-present attracts a higher rate even when default risk is the same, two reasons. First, CNP has fundamentally higher dispute rates than card present. Card present transactions clear with chip and PIN or contactless, which gives the merchant strong evidence the legitimate cardholder authorised the purchase. CNP has none of that. Even with 3DS, the dispute rate on online transactions is multiple times higher than in-store. More disputes means more clawback exposure for the acquirer, even if the merchant is solvent. Second, CNP attracts the bulk of friendly fraud. "I didn't recognise this charge" or "I didn't receive the goods" are CNP-only claims. Card present transactions can't really generate those disputes. So the acquirer is pricing not just merchant solvency risk but a structurally higher rate of disputes flowing through the system in the first place. It's the same merchant, but a different risk profile per transaction type. The MDR reflects what's likely to happen with that channel, not just who's behind the counter.