Legal Compliance Challenges for High-Risk Merchants: What Business Owners Need to Know

Operating a high-risk business is difficult enough.

You don’t need pesky compliance issues adding to your plate.

If you sell tobacco, vape, cannabis (or whatever other business most processors avoid like the plague)…You get it.

Traditional payment processors are NOT your friend.

But here’s the REAL kicker.

Failure to understand the legal challenges that high-risk merchants face can result in TERMINATION.

Yup. You could be left wondering where all your money went overnight.

Fortunately, there’s a lot you can do to prevent costly compliance mistakes.

Let’s cover:

• Why High-Risk Merchants Are Treated Differently
• The Top Compliance Issues You’ll Face
• How to Avoid Legal Challenges & Stay Compliant
• How to Avoid Being Terminated

Why High-Risk Merchants Are Treated Differently

So what does “high risk” even mean?

Well first off… High-risk merchants sell goods and services that payment processors deem to be “high risk”.

Pretty informative right?!

Finding the Best Tobacco Merchant Account is critical for high-risk merchants in the tobacco merchant account services industry. That’s why it’s so important to understand these unique challenges and how to overcome them.

Let’s dig into a few reasons that tobacco (and other high-risk) businesses are treated differently.

The age verification required to sell tobacco.

Higher risk of chargebacks.

MORE regulations.

In fact, according to a recent study, failure to remain PCI DDS compliant was the number one reason merchants faced penalties in 2023. Verizon’s study found that 27.9% of organizations around the world FAILED to stay compliant for an entire year.

Yep. That’s almost 1/3 of businesses worldwide.

As you can imagine… That number is expected to rise as hackers and data thieves get more sophisticated.

The Top Compliance Issues You’ll Face

There are several different compliance issues that high-risk merchants will inevitably face.

But don’t worry too much!

With advance planning and the right information, you can prevent major slip-ups that cost your business thousands. (If not your processor account altogether).

Tobacco Compliance Issues

Age Verification Requirements

Chargebacks

PCI DDS Compliance

State and Federal Licensing

We’ll go into each of these in detail below.

Age Verification Requirements

If you sell tobacco or vape products, you know this already.

Federal law requires YOU to verify the age of ANY person purchasing tobacco products. Failure to comply will result in BIG fines and possible jail time.

The FDA takes this ‘ask’ very seriously.

As mentioned above, the FDA regularly performs secret inspections where “FDA investigators and undercover purchasers visit retail establishments to attempt to purchase tobacco products without complying with the Federal requirements.”

Basically.

They send cops and kids into your store to buy your products. If you sell, you’re screwed.

The FDA can penalize tobacco businesses who sell to underage buyers through warning letters, civil money penalties, and no-tobacco-sale orders.

Chargebacks

Chargebacks are a silent killer for high-risk merchants.

They sneak up on you and destroy your business from the inside out.

When a customer disputes a transaction, your business is on the hook to pay.

Too many chargebacks and your payment processor will increase your rates (significantly) or terminate your account.

Globally chargebacks are expected to cost businesses $33.79 billion in 2025.

And high risk industries like gambling and gaming have the highest average chargeback amount at $99. (Amount a customer disputes per transaction)

So what is a good chargeback ratio?

Visa and Mastercard both want you to keep your ratio below 1%.

The lower the better. Shoot for 0.5% or less. Go over that and you’re flagged by the networks.

PCI DSS Compliance

As a merchant that accepts credit cards, you are required to be PCI DDS compliant.

Period.

If your business is not following PCI DDS standards, your payment processor can fine you anywhere from $5,000 to $100,000 a month until you become compliant.

That’s right.

For even the smallest of businesses, a data breach could bankrupt you overnight.

Here’s what PCI DDS Compliance covers:

• Protecting cardholder data with strong encryption.
• Maintaining a secure network to process card payments
• Preventing malicious attacks by regularly testing and monitoring your networks.
• Limiting access to cardholder data.

PCI Compliance is difficult for most merchants, let alone high-risk.

And because your business is already high-risk… Your payment processor will require you to do more.

They can increase your reserve requirements. Request additional documentation. Audit you more frequently.

Anything to ensure YOU become and remain compliant.

State and Federal Licenses to Sell Tobacco

Requirements vary from state to state when it comes to licenses needed to sell tobacco products.

As of 2024, 40 states require retailers to possess a tobacco license.

34 states require specific licensure to sell E-cigarettes or other tobacco products.

Licensing fees ranged from an average of $120.

Some states cost MUCH MORE than that.

But it doesn’t stop there.

Penalties are constantly changing.

Nevada recently increased the penalty for a first-time violation from $500 to $2,500.

You’ll need to do your homework to make sure you stay up-to-date on these ever-changing requirements.

How to Avoid Legal Challenges & Stay Compliant

Alright, so you know what you need to look out for. But how can you prevent any legal mistakes?

Here are a few tips to keep your business on track.

Partner with a Payment Processor THAT GETS IT.

You wouldn’t hire a lawyer who doesn’t specialize in your industry would you? Of course not.

Same thing goes for payment processing.

Work with a team that specializes in high-risk. They’ll know how to help you navigate compliance struggles specific to your industry.

Verify, verify, verify.

We cannot stress this enough with tobacco retailers.

Documentation is your best friend.

Everything. Must. Be. Documented.

Driver’s licenses, membership cards, fake I.D’s. You name it.

You should have a process in place to verify every customers age PRIOR to completing the sale.

Monitor your metrics.

Each payment network has thresholds for chargebacks and other potentially damaging metrics.

Make sure you are monitoring your numbers so you NEVER exceed that threshold.

Many chargebacks are preventable. Have a clearly defined returns policy and communicate with your customers.

Stay on top of any changes in Federal and State law that pertain to your business. Subscribe to newsletter updates or work with a lawyer that can keep you informed.

And finally…

Document EVERYTHING.

Employee training procedures, age verification practices, website proof/screenshots.

If it relates to your business staying compliant, write it down.

How to Avoid Being Terminated

If your payment processor terminates your account… GOOD LUCK finding another payment processor that will work with you.

Your business becomes marked as high-risk (even if you weren’t that high to begin with).

Being terminated is every merchant’s worst fear.

And with the tobacco industry changing weekly with new FDA regulations, staying on top of compliance can be daunting.

But if you follow the simple steps above, you’ll give yourself every opportunity to succeed.

Keep your chargeback ratio low.

Prevent fraud whenever possible.

And react quickly if you receive any warnings from your payment processor.

Most importantly though…

Partner with payment professionals that know the ins-and-outs of high-risk before you need them.

Wrapping Things Up

Legal compliance can be tough for high-risk merchants.

But if you know what to look for, you can prevent costly compliance issues.

Remember…

Know why your business is high-risk.

Stay compliant with age verifications and fraud.

Keep your chargeback ratio low.

And work with payment professionals who understand your business.

The tobacco industry is always going to be changing.

New FDA regulations will come out weekly it seems.

If you can stay a few steps ahead of the game, you’ll ensure your business continues to process payments for years to come.