Acquiring an e-commerce merchant account is similar to having an unsecured line of credit, in that it has the potential to carry significant risks of merchant-based fraud, as well as risks of non-delivery and non-payment of chargebacks. Online merchant acquisition has become an increasingly volatile business with a focus on speed and volume, pressuring acquirers to seek ways to mitigate their risk while continuing to maintain growth rates. The current market puts high demand on approving merchants in real time; when only a few years ago, the signup process used to take days, possibly weeks.
Delineating the Risks
Acquirers face numerous risks when onboarding merchants. Some of the most common and damaging setbacks include:
High Chargeback Rates – Dishonest merchants may decide not to deliver goods that have been processed and paid for, resulting in consumer claims and cardholder disputes. Credit card companies generally favor the consumer and make acquirers liable to pay the fees associated with these cases.
Credit Risk – If the merchant becomes fiscally unstable or insolvent, they can shut down their business with little to no advance notice, increasing the chance of chargebacks.
Reputational Risk – Merchant acquirers must closely monitor the quality and appropriateness of their merchant’s products and services, as association with illegal or illicit content can cause severe reputational damage.
Non-Delivery Risk – Once an acquirer has processed and cleared a transaction, the acquirer is exposed to financial risk in the case of non-delivery of goods or services to the end customer.
Merchant Fraud – Fraudulent activity comes in many forms:
a.Transaction Laundering – Unknown e-commerce transactions are processed through legitimate merchant accounts in your portfolio. Acquirers need to identify when undisclosed merchants, including those are running illegal e-commerce businesses are funneling transactions through legitimate merchant accounts.
b.First-Party Fraud – A merchant applies for and opens an account with no intention of operating a legitimate business. The losses end up on your bottom line, as those fraudulent merchants abandon the account before you realize it is happening.
Compliance Risks – Potential legal action and large fines by regulatory bodies and credit card brands are a reality for merchant acquirers, unless they can credibly demonstrate that all the necessary steps were taken to detect and prevent illegal activity.
Credit Card Fraud Trends
According to U.S. Payment Forum Report, CNP fraud in the U.S. will reach $6.4 billion in 2018. Given that CNP transactions are expected to grow to in value to more than $19 billion by 2018, the threat of online fraud is very real.
Transaction Laundering – The principle is simple, detection is difficult.
When it comes to online merchant fraud, Transaction Laundering is especially worrisome for acquirers, as it is one of the most difficult to detect and monitor.
Transaction Laundering occurs when an unknown business uses an approved merchant’s payment credentials to process payments for unknown products and services.
In a recent study, EverCompliant discovered that Transaction Laundering for online sales of products and services tops $200 billion a year in the U.S. alone. Of the $200 billion, approximately $6 billion involves illegal goods such as drugs, pornography, weapons, etc. It is also an illegal practice that has been used to finance previous terrorist attacks, like the one on the Paris offices of Charlie Hebdo in 2015.
The risks to acquirers affected by Transaction Laundering can lead to serious reputational and regulatory consequences.
Mitigating the Risks
Based on our reported statistics, current merchant due diligence efforts have proven to fall behind the pace of online criminals and untrustworthy merchants. Now is the time for acquirers to revise procedures, update technology and evolve faster than the cyber criminals
Specifically, acquirers should ensure that they:
- Have a dedicated digital KYC regime
Acquirers have exhausted their efforts to create KYC procedures that have now become inadequate in our digital era. Adding a comprehensive digital element to physical vetting procedures is the first step to building a solid plan. An example includes analyzing a merchant’s digital fingerprints as well as their brick-and-mortar equivalents. Advanced cyber intelligence solutions, like the products offered by EverCompliant, can uncover the true identity of each merchant and their business activities to support your KYC efforts.
- Establish comprehensive merchant monitoring
Continuous monitoring of each merchant is an important step to mitigate risk. For example, merchants often hold numerous inactive domains that can be activated any time and used for illicit activity with no knowledge to the payment processor.
Actual line of business versus claimed line of business needs to be monitored. For example, an online florist, having successfully gone through the KYC and due diligence process, is considered by the MSP as low-risk. Using this legitimate online business, a drug dealer can set up hidden transactions and create a gateway into the payments system through the florist. Advanced cyber intelligence-based technologies, like EverCompliant’s merchant monitoring systems, scan hosted websites for illegal content and continuously monitor sites for changes and risk levels.
- Maintain a solid compliance program, including Transaction Laundering Detection
Acquirers maintain strict compliance programs, yet may not investigate suspected Transaction Laundering until it is too late, facing sanctions or fines. Even when investigations are proactively initiated they rely on traditional forensic tools, which can be lengthy and inefficient. In these cases, the focus is typically dedicated to the high-risk, high-volume merchants, while Transaction Laundering can happen through many smaller-scale, seemingly low-risk players.
The Bottom Line
Merchant acquisition and onboarding needs to be re-evaluated and updated for the digital realm. Current KYC procedures may be inadequate to detect sophisticated online fraud like transaction laundering.
Acquirers need dedicated solutions to understand, remediate and reduce the risks of working with online merchants. Automatic solutions look closely at multiple risk factors, monitoring the entire portfolio of merchants at scale on a continuous basis, and scanning a depth and breadth of information that is impossible to do manually.
Today, machine-based learning technology, like EverCompliant’s MerchantView software, can uncover hidden e-commerce networks, merchants, and activity – and stop transaction launderers in their tracks. By leveraging advanced solutions that add a comprehensive digital element to physical vetting procedures, acquirers can lower risk, exposure and liability.