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Why Your Platform-Wide Fraud Prevention Should Include Portfolio Underwriting

posted on: Tue Apr 04 2017

Offering a payment processing solution that includes portfolio-wide fraud prevention as a baseline service for your merchants helps address 7 challenges that payment service providers face.

On the “business-building / reward” side:Security

  • Differentiate from your competition
  • Maintain margins by adding value vs. discounting
  • Frictionless onboarding of new merchants
  • Positive word-of-mouth

And on the “risk avoidance / compliance” side:

  • Safer onboarding and continuous underwriting
  • Easier, more effective regulatory compliance

This post will focus on risk avoidance and compliance for the approximately 8.5 million active merchant accounts in the US. 

Safer Onboarding and Continuous Underwriting. Fast, frictionless onboarding helps you win new business. However, it can increase a payment processor’s exposure to risk if you don’t have a low-cost, easy way to independently confirm that your merchant is 1) actually selling the types of goods they stated in their application and/or 2) that they’re not running a fraud scheme. One bad decision could have serious consequences for your profitability. 

This is where the concept of “Continuous Underwriting” as part of a portfolio-wide fraud prevention solution comes into play. Continuous Underwriting entails deep monitoring at the transaction level – with hundreds of data points analyzed – to make spotting merchant problems fast and easy for payment processors.

For example, the ability to look at the Device ID, Geo-Location, Velocity, IP Address, and more on every transaction lets you quickly see if a merchant is approving hundreds of orders from the same device in the Ukraine – all on different credit cards. Red flag!!!

Even more powerful than this ability to “see” into suspicious transactions is the power to take automated action and avoid problems altogether. Thus, Continuous Underwriting would allow a payment processor to have rules in place that would shut down those types of transactions automatically – even if the merchant wanted to accept the orders. This can save your merchant from taking a catastrophic loss (which may end up on your books if it drives the merchant out of business). And it can protect your profits in the event the merchant is colluding in a scheme to defraud you (the payment processor).

Of course, not all situations will be as black and white as the one just described. Nevertheless, Continuous Underwriting is still valuable. For example, if you have merchants operating in higher-risk market segments– e.g., travel services, herbal supplements, event tickets, calling cards, multi-level marketing, etc. – Continuous Underwriting provides the stream of transaction-level data you need to ensure that your pricing accurately reflects your risk at all times. Not just at some fixed point in time in the past (i.e., onboarding), but dynamically and continuously. So your risk profile and pricing are never outdated or obsolete. 

Regulatory Compliance. Monitoring on-going merchant activity can be difficult and costly. But it’s essential to avoiding legal issues (AML, OFAC, KYC, etc.). To name just one example, in the Consumer Financial Protection Bureau (CFPB) complaint against payment processor Intercept Corporation, the CFPB stated: "[a]s gatekeepers to a system in which so much money changes hands, third-party payment processors as well as the banks they work with have responsibilities to monitor their transactions for suspicious activity and not enable fraud on the ACH network". In other words, as a payment processor, you’re on the hook for the bad actions of your merchants.

The ability of Continuous Underwriting to deeply monitor at the transaction level – easily and cost-effectively – provides an instant “tripwire” that alerts you before your operations get exposed to unwanted liability and harmful regulatory actions.

Want to know more about portfolio-wide fraud prevention as a baseline service for your merchants? Download the eBook “Protect Your Merchants. Protect Your Profits.” and discover how to minimize financial and regulatory risk while winning more new business and reducing churn among existing merchants. 

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