Identify Risky Merchant Accounts Earlier: Tips for Acquirers and Payment Service Providers

Acquirers are liable for merchant accounts. That basically means that if the merchant goes out of business the Acquirer is responsible for covering the merchant’s commitments with their consumers. Acquirers spend great deal of money acquiring merchants and making sure their risk is known before giving them a merchant account.

There are many activities that Acquirers can perform to identify when a merchant is turning risky. The most common tool Acquirers use is monitoring the chargeback rate. Credit Card brands impose a threshold of 1% in the chargeback ratio, to include those merchants in a “monitoring program” — this program receives a different name depending on the card brand, and each brand calculate the chargeback ratio a bit different from each other. But all in essence are trying to tell the merchant that they need to do something when their chargeback rate goes over 1%.

In general, Acquirers work with their merchants when they cross this threshold. In many cases merchants are able to control their chargeback rate, and their relationship with the acquirer continues. In other cases the merchants can’t keep the rates under control and the Acquirers are forced to terminate their merchant accounts. 

However, so far we are assuming that the merchants are “good citizens” of the payment world, but many merchants aren’t. Many merchants are deceitful and are not interested in recovering, and rather try to take as much money from their customers before defaulting. Leaving Acquirers with the costs associated to the forthcoming chargebacks.

One of the most common cases Acquirers fall into is when the merchants stop delivering goods to their customers, but take their orders. By the time the chargeback crosses the threshold is far too late. The fraudulent merchant has taken all the money and is running with it. One of the signs that Acquirers can follow is an upward trend in non-fraudulent chargebacks. This includes reasons like non-delivery of goods or services. This will give them much earlier indication of the likelihood of a merchant turning rogue. 

When the Acquirers note these trends it isn’t enough “just to talk” to the merchant, they need to take an active role by implementing other measures, like holding reserves, in potential preparation for an almost sure default by the merchant.

Another difficult case for Acquirers to realize is when merchant’s customer base starts diversifying. Acquirers in general don’t analyze their merchant’s customer base. Changes in trends of the merchants customer base, given by location, payment instrument, etc, can tell acquirers whether the merchant is expanding their offering into markets that are riskier, and therefore increasing the overall risk performance of the merchant. In essence when these changes occur the process should be like the initial process of underwriting. Would you as an Aquirer or PSP take the risk of this merchant knowing the “new” customer base?

While acquirers may not be able to identify every merchant that is turning risky, they can certainly be alerted much earlier about changes that indicate risky behaviors, and hopefully not wait ONLY for their chargeback rate to go over the threshold.

As part of our Risk Management Platform we’ve implemented automatic algorithms that can monitor merchant’s metrics and behaviors alerting Acquirers and PSPs in real-time so they are able to take preemptive action when required. These algorithms are configurable and can be managed throughout the merchant portfolio.