Owners of businesses that have been deemed high risk by banks or financial institutions have to deal with the extreme high risk merchant processing rates and applicable fees. These high risk merchant processing rates can be as high as twenty percent on the profits of the merchant which is taken by the financial institution to cover their risks in allowing a merchant to process credit cards through them. The typical high risk merchants include those who sell any product or service with a high likelihood of chargebacks, such as online stores that sell large volumes of non-FDA-approved products and businesses that sell questionable services or goods. The high risk merchant processing fees for a chargeback can be very expensive for both a merchant and the financial institution that must absorb the high risk merchant processing fee if the merchant cannot pay the fee.
For businesses that are struggling to deal with the high risk merchant processing rates for their products and services when they are bought with credit cards, it is typical to reduce the quality while increasing the price for their services and products. This will cause the high risk merchant processing rates to take some of their new profits but will also allow the merchant to maintain an acceptable profit level for their business to operate. The main loss of welfare is therefore burdened upon the consumers who are forced to buy the inferior goods at higher prices, which significantly decreases legitimate demand while increasing illegal or fraudulent demand. This fraudulent demand increases the rates of chargebacks to the merchant who has to pay the high risk merchant processing fee for chargebacks or to apply for chargeback insurance with their financial institution. Whether the merchant decides to buy expensive insurance or deal with the high risk merchant processing fee for chargebacks, it will lead to even higher fixed and variable costs for the merchant causing a continual slope of lower quality goods and higher prices until the business is no longer sustainable. For many businesses that are labeled as high risk, it is imperative to find a financial institution or credit card service provider that offers merchant rates that allow a business to stay competitive in their market. With more reasonable high risk merchant processing rates and fees, a business can maintain a level of quality and competitive prices to reduce the risk of chargebacks and fraudulent sales preventing a business from being forced into to a downward spiral.