Industries That Are Considered High-Risk That Shouldn't Be

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Whether as an investor or an entrepreneur, it is essential to be aware of financial risks that can lead to unexpected economic results. Banks are often reluctant to support businesses in "high-risk" industries, forcing them to look for other payment processing solutions. There are some industries subject to this type of financial judgment that seem legitimate and profitable to the outside eye. Below, we talk you through the banks' logic for labeling industries "high-risk" and name a few that perhaps shouldn't be.

What a High-Risk Label Implies

Financial risk can be understood as the probability of adverse events that trigger negative economic consequences for an entity exposed to the financial system. It refers to both profits lower than expected and no profit at all. These outcomes are the result of the instability of the sector or the financial markets and the impossibility of repaying any portion of the invested capital.

Banks are often reluctant to support or invest in industries that are considered high-risk, such as the moving and transportation merchants due to their generations of high tickets. The moving and transportation industry can generate insecurities for the banking industry due to: chargebacks and one-time sales. However, the moving and transportation industry provides stable profitability and has only increased in high demand. 

Is the Moving and Transportation Industry Truly High-Risk?

Despite the devastating impacts of coronavirus on most industries, moving and transportation businesses have seen an increase of 5% over the past five years. IBISWorld reports have predicted growth of 5.4% to the moving service industry as the economy rebounds from pandemic effects. As people and businesses begin to open up their doors, the need for shipping and transportation has skyrocketed. Now the question remains as to why such a lucrative industry has received the high-risk categorization. 

“Friendly fraud” is a real problem in the moving and transportation industry. It’s when customers request refunds after services are rendered, but actual cases of fraud. Customers may have relocated high ticket furniture and then complained about filth from how dirty the truck was. This is just one example, as the list of justifications behind a friendly fraud report goes ad-infinitum. Unfortunately, this kind of behavior goes unchecked because we like to think that no one would do such to an honest company, but it happens all too often.

Moving and transportation are, in a sense, ageless since people will always need the goods and services that come along with residency. Moving and transportation are, in a sense, ageless since people will always need the goods and services that come along with residency. A recent report conducted by the Bureau of Labor Statistics has indicated that the average truck driver makes nearly $70,000 per year. The American Trucking Association reports approximately 3.5 million professional drivers in the U.S., all of which are seeing increases in their salary as demand for their services rises. With this increase in demand for trucking services, the transportation industry has seen a notable surge in fraud. However, the high-risk industries have repetitive reports of fraud, not isolated ones like the moving and transportation industry. Rather than waiting for a bank to dismiss you due to your high-risk merchant category code, consider a third party with bank relations who could do that for you.

Other Industries That Are, Surprisingly, Considered High-Risk

To some extent, it is understandable that financial institutions don’t want to get involved in high-risk situations that could lead to loss of profits. However, far more industries than we imagine are, shockingly, considered as high-risk.

Here is a list of 4 “high-risk” industries you probably would have never imagined.

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Travel agencies

The large volumes of credit processing and significant chargebacks within the travel industry often cause banks or other entities to classify them as "high-risk" and not fund them.

Trip cancellations are not uncommon in this industry, and the banks know it. The ongoing money back-and-forth can be considered as a sign of instability.

Nevertheless, it's interesting because most of us think of traveling and travel agencies as recurring and permanent over time. Except for the pandemic, it doesn't feel as if tourism is declining any time soon.

SEO Services

Despite the undoubtedly valuable services digital marketing agencies provide, they are categorized as high-risk due to their intangibility.

This categorization may make sense from a physical, natural, tangible perspective. But the world is progressively getting more digitized, and online companies compete all the time to get the spotlight. Without SEO services, many businesses would remain deep in the abyss of the Internet.

The more relevance and visibility the company gains, the more profit it makes. It would make sense to invest in SEO and marketing now more than ever. But bank entities seem not to be so sure about that.

Ebook and Software Companies

As with the previous example, although these companies are becoming increasingly relevant in the digitized world, their intangible nature prevents some financial institutions from working with them.

Even as the world grows less reliant on paper and looks to technology for a solution, there still seems to be some fear regarding digital products and software. 

Banks probably have more to lose than gain in such circumstances, especially when the idea is yet to be properly consolidated. But where would some of today's most renowned companies stand without that small faith leap?

Jewelry

The jewelry industry may be the one example that comes across as the most understandable. Traditional financial institutions are reluctant to support jewelry merchant accounts because there is a more significant impact with high-priced transactions gone wrong. Correspondingly, returns, fraud, and high tickets have led to jewelry businesses' 'high-risk' characterization.

This problem increases with the new technologies and the appearance of eCommerce. Like previous industries, Internet transactions are not the banks' favorite assets to invest their money into. Jewelry is, for the most part, expensive. It is only natural for financial institutions to avoid the risk of this industry.

Finding Alternatives

Businesses in high-risk industries are not without options. One increasingly popular one is to opt for a third-party payment processor. These processors provide high-risk payment gateways to clients in needy industries, essentially assuming some of the financial risk associated with the industry for a cost. 

Through these payment platforms, money can be sent quickly and with greater assurance that there will be no fraud involved allowing the industries to thrive and, over time, build up proven legitimacy.