High-risk Merchant Categories and Why You Need to Urgently Detect Them

High-risk Merchant Categories and Why You Need to Detect Them 

Expansion to ecommerce has opened up new avenues for fraud, especially when it comes to certain merchant categories. These merchants often engage in activities that pose a higher risk for financial losses, reputational damage or legal issues for the acquirers or payment companies processing their transactions. Understanding these risks is crucial for anyone involved in online payments, from small business owners to large corporations.  

Types of High-Risk Merchants and the Risks 

One of the primary concerns associated with high-risk merchant categories is fraud. The Global Payment Card Fraud Report by ACI Worldwide notes that losses due to payment card fraud were estimated at $26 billion in 2021, representing a 35% increase from the previous year. High-risk merchants often serve industries like gambling, adult content, and online marketplaces, making them prime targets for fraudulent activities.  

Another critical aspect is money laundering. According to the Financial Action Task Force (FATF), illicit financial flows have reached $1 trillion per year, affecting both national and international economies. Merchant categories such as cryptocurrency exchanges, gift card sellers, and high-value jewellery retailers are considered high-risk due to their ability to facilitate transactions that might be used in money laundering schemes.  

Online Casinos 

For instance, an online casino might attract players seeking to exploit systems, leading to higher transaction volumes with greater risk of unauthorized access or fraud. These clientele often involve varying levels of creditworthiness, making them prime targets for activities like money laundering or betting on illegal lotteries. In fact, according to a study by JPMorgan Chase Institute, approximately 3% of all card transactions involve casinos, but they account for around 14% of fraud cases. 

Gaming and Sports Betting 

High-risk merchants also include businesses operating in the realm of gaming and sports betting. Sports betting sites are particularly susceptible to fraud due to their nature—gamblers may attempt to manipulate outcomes or exploit loopholes for financial gain. A recent case highlighted by Reuters revealed how an organized crime group attempted to rig online sports betting markets, emphasizing the need for robust detection systems.  

Marketplaces 

Another category that falls into the high-risk bracket is online marketplaces selling goods and services such as pharmaceuticals or electronics from unknown sources. The anonymity provided by these platforms can lead to counterfeit products being sold under false pretenses. A report by Euromonitor International found that $520 billion worth of fake goods were traded in 2017 alone. 

Adult Content 

Additionally, merchants operating in adult content require adherence to strict regulations, including age verification and local laws. There is a risk of inadvertently hosting or distributing illegal content, such as non-consensual material, which can lead to serious legal and financial consequences. Many traditional payment processors are hesitant to work with adult content merchants, as it can harm a brand’s reputation, as well as being subjugated to strict guidelines. 

Tobacco and Alcohol 

Legal risks also loom large for merchants operating in sensitive areas. For example, selling tobacco or alcohol online can bring legal repercussions if proper age verification procedures are not in place. Violations of local laws and regulations can result in hefty fines, business closures, or damage to a company’s reputation. 

Importance of Detecting High-Risk Merchants 

Detecting high-risk merchants is crucial for maintaining the integrity of financial systems and protecting businesses from significant losses. High-risk merchants, often associated with industries like gambling, adult content, and online marketplaces, can pose unique challenges, including increased fraud, money laundering, and legal liabilities.  

Moreover, detecting high-risk merchants foster compliance with regulatory requirements including card scheme rules, reducing the likelihood of financial repercussions. This vigilance not only protects the business but also enhances consumer trust by ensuring a safe and reliable payment environment. Ultimately, effective detection of high-risk merchants is a proactive strategy that safeguards financial interests, promotes operational integrity, and contributes to the overall stability of the online commerce landscape. 

Strategies for Risk Mitigation  

To mitigate these risks effectively, companies should adopt comprehensive risk management strategies. This includes implementing preventative measures such as strict Know Your Customer (KYC) policies, enhanced due diligence, ensuring robust fraud detection systems are in place, and conducting regular audits of merchants and transactions. Furthermore, partnering with reputable payment processors or risk service providers that offer specialized risk assessment tools can provide valuable insights into the legitimacy of new or existing merchant accounts.  

Timely detection helps mitigate risks associated with unauthorized transactions that could lead to substantial financial losses and reputational damage. Traditional methods such as manual reviews and static data analysis are often insufficient in today’s dynamic landscape. Advanced technologies like machine learning algorithms, behavioral analytics, and real-time transaction or merchant monitoring have become essential tools in identifying suspicious activities early on.  

For instance, companies can monitor transactions using technologies like Austeme’s transaction laundering detection, enabling them to spot anomalies that indicate fraudulent or illicit activity, as well as identifying high-risk merchants operating undercover. 

Conclusion 

Staying vigilant about high-risk merchant categories is essential for safeguarding businesses and their customers from financial and legal pitfalls. By implementing robust risk management practices and leveraging advanced technological solutions, companies can navigate the complex landscape of online commerce while maintaining integrity and trust in their operations. 

Contact Austreme and discover how our solutions can help you monitor and tackle your merchant acquiring risks. 

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