Merchant Monitoring refers to the continual, active monitoring of a merchant’s behavior as well as sales, chargeback and other patterns that may fluctuate after initial onboarding.
The level of risk each merchant in an acquirer’s portfolio represents is not static and can change, especially with merchants that are young and growing. Merchant Monitoring services help acquirers detect the changes that alter a merchant’s risk, and therefore the acquirer’s risk exposure, so actions can be implemented accordingly.
There are several different types of Merchant Monitoring which range from monitoring card association and legal compliance to monitoring for high risk merchant activity and fraud. When it comes to monitoring for fraud this is in two distinctly different ways: monitoring for merchant fraud and monitoring for merchants that are experiencing card fraud.
Monitoring for merchant fraud primarily focuses on the merchant’s total transaction volume, average order value, chargebacks and other indicators. Here the service is looking for high risk indications such as large increases in dollars processed possibly signaling a bust-out attack, spikes and early indications of an increase in chargebacks, processing all transactions even if there are AVS mismatches and CVV failures, and many other factors. Fraudulent merchants may keep volumes low to avoid detection early on, but then ratchet up the processing volume. They may also catch cases of a merchant going out of business who decides to sell lots of inventory they don’t actually have.
Merchant Monitoring may also focus on the risk of transactions merchants in a portfolio are processing. This can include velocity checks, BIN checks and many other tools and techniques that are used to detect fraud in the transactions a merchant accepts. This is especially useful with smaller merchants and those less experienced with fraud prevention as they may not be sufficiently screening transactions on their own. Detecting potential fraud patterns in the transactions a merchant processes can enable acquirers to intervene with the merchant to correct and contain the issues at hand. This can both limit the acquirers risk exposure and strengthen their relationship with the merchant client.
THE FRAUD PRACTICE
KEY NOTES
Alternative Solutions - Merchant Website Monitoring and Spiders can be used to crawl websites and identify changes in products sold, product descriptions and other content, but will not monitor transactions or sales patterns.
Building this In-House - As acquirers receive and route all transaction information from merchants as well as distribute chargeback information to merchants, they could build out a rules engine, velocity checks, transaction monitoring analytics and other metrics to monitor merchant risk directly.
Estimated Cost - Typically these services are offered on a subscription basis and prices vary based on the number of merchants in an acquirer's portfolio.
Sample Venders - Brighterion
MERCHANT MONITORING TECHNIQUE OVERVIEW
Although acquirers vet merchants before underwriting them and providing a merchant account, the risk each merchant in their portfolio represents can change. Merchant Monitoring services continually assess the risk each merchant client represents to the acquiring bank or payment service provider to ensure acquirers maintain an accurate overview of the level of risk each merchant represents as well as for their portfolio overall. This enables acquirers to recognize changes in a merchant’s level of risk and proactively make adjustments to control their risk exposure when needed.
Key considerations when implementing or buying this functionality include:
What types of risk does the service monitor or identify? This can include card association and legal compliance, compliance with the acquirer’s policies, merchant bankruptcy risk, non-delivery risk, payment fraud risk, merchant fraud risk, chargeback risk, changes in the merchants processing volume and other types of risk or signals.
Can you build custom rules to identify specific changes or types of behavior across merchants in a portfolio?
Does the service offer tools or a platform organizations can use to review and investigate changes in merchant or overall portfolio risk?
HOW DOES IT WORK?
Using analytics, business rules, risk models and/or other fraud prevention tools and techniques the service provider seeks to identify merchant behaviors and transactional risk factors that may alter the original level of risk a merchant represented when they were initially on-boarded. This can include identifying significant changes in the total transaction volume, the number of non-deliveries, the amount of chargebacks, the average order value, the total and average chargeback amount and many other potential signals of increased risk.
Changes in the level of risk merchants in an acquirer’s portfolio represent can be measured on many different levels including compliance with the card associations’ operating procedures, compliance with the acquirers terms and conditions, bankruptcy risk, monitoring the fraud risk of transactions the merchants process and monitoring the merchant’s behavior and patterns to identify potential merchant fraud. Different providers may focus on one, several or all types of potential merchant portfolio risk.
Depending on the types of risk the provider is focused on identifying, they will maintain models and/or business rules to identify significant changes with merchants’ sales volumes, behavior or other risk factors. This may include the ability for the acquirer to create specific thresholds, triggers or custom rules for detecting specific types of changes or behavior.
HOW DO YOU USE THE RESULTS?
The service will identify changes in the level of risk a merchant represents and provide some indication of the signals detected and how the merchant’s level of risk is affected. The organization using the service investigates the issue, possibly through tools or an interface provided by the vendor. Based on the signals and factors reviewed by the acquirer they can decide to intervene by contacting the merchant and/or limiting their risk exposure through the use of credit controls with the merchant. This can include increasing holding times or lengthening the disbursement cycle, increasing reserves, increasing fees or in some cases even terminating the merchant account.