What is a high-risk merchant?

Merchants may be classified as “high-risk” for various reasons. They may operate in industries that experience higher chargeback rates than most businesses, such as travel accommodations or luxury goods, or they may face tighter scrutiny due to regulatory requirements, such as pharmaceuticals and online gaming.

Different institutions may also have differing standards and methods of assessing a merchant’s risk. Payment service providers, for example, typically refer to databases called Visa Merchant Screening Services (VMSS) and MasterCard MATCH to check if a merchant has been blacklisted by credit card networks because of high-risk factors, such as violation of card scheme rules. These lists use several numeric unique codes to determine which violation a merchant has committed, including insolvency and identity theft. Merchants who match the criteria for being listed in these databases will not be onboarded by payment service providers.

Key factors in merchant risk assessments

There are five key factors that payment service providers generally consider when assessing merchants’ risk levels:

1. Fraudulent behaviour: Merchants may engage in fraudulent practices such as credit card fraud or money laundering.
2. Compliance issues: Merchants may not comply with regulatory obligations, such as Anti-money laundering/Know Your Customer (AML/KYC) regulations.
3. Poor financial standing: Merchants may suffer from poor fiscal health and, as a result, fail to meet certain business standards or quality checks. They may also be new businesses and as a result, lack sufficient financial records.
4. High-risk industries: Merchants may be operating in industries that experience frequent chargebacks or face increased scrutiny. Examples include gaming, travel and health products.
5. Business models: Merchants that use recurring billing models may log higher chargeback rates as customers may forget to cancel their subscriptions and call their banks to request a chargeback. Businesses that offer expensive goods and services may also experience costly chargebacks if customers choose to dispute a charge.

6 best practices for managing merchant risk

To mitigate merchant risks, payment service providers must implement a comprehensive and systematic strategy to assess, onboard and monitor businesses. Here are six ways payment service providers can successfully onboard merchants and manage risk.

1. Carry out customer due diligence: Conduct thorough due diligence on prospective merchants before onboarding them. This process includes verifying their identity and financial stability and comprehensive background checks.
2. Implement robust compliance measures: Ensure compliance with local regulations by implementing robust AML and KYC procedures. This process involves verifying the identity of merchants and their owners, monitoring suspicious transaction activities and keeping current with regulatory changes.
3. Take a risk-based approach (RBA): Adopt a RBA for merchant onboarding and monitoring. Assess the merchant risk level based on factors such as their business type, processing volume and location.
4. Establish clear policies and procedures: Develop clear policies and procedures for merchant onboarding and risk management, ensuring that all stakeholders involved in the process understand their roles and responsibilities.
5. Continuous monitoring: The work doesn’t end after the merchant is onboarded. Payment service providers must implement a system to continuously monitor the merchant’s activities to detect irregularities or signs of potential risk.
6. Merchant education: Payment service providers must give merchants updated training and resources on fraud prevention, dispute prevention and compliance best practices to help merchants avoid high-risk activities.

Merchant risk management goes beyond onboarding

Payment service providers must adopt a consistent, holistic and vigilant approach to mitigating merchant risks effectively in this ever-evolving business landscape.

By having a clear understanding of the potential pitfalls and implementing robust onboarding and monitoring processes throughout the merchant’s lifecycle, payment service providers can safeguard themselves against financial losses and reputational damage. Doing so also helps to foster trust and build longstanding relationships with merchants.

At 2C2P, we work closely with our merchants to educate them on the latest security protocols and best practices so that they can ensure a seamless and secure business flow. Learn more about 2C2P’s risk management practices and secure payment platform – chat with our friendly team today.