An effective strategy to minimise excessive chargebacks and fraud while avoiding Visa and Mastercard risk programs, is to carefully evaluate the merchant underwriting and conduct due diligence on the application. It is essential that acquirers refrain from signing merchants who might violate underwriting and credit policies.
The Importance of Scrutinising Merchant Applications
Acquirers and PayFacs play a crucial role in the ecosystem of payment processing. Their responsibility extends beyond merely signing new merchants; they must ensure that they are not introducing excessive risk into their portfolios. Here are some key characteristics that acquirers should look out for in merchant applications to predict chargeback and fraud potentiality:
1. History with Offshore Acquirers
Merchants that have previously processed transactions with offshore acquirers should be examined closely. They may possess risk factors that are less prevalent among local businesses, making them more susceptible to chargebacks.
2. High Risk Products and a Short Track Record
Merchants selling high-risk products and operating for less than a year present increased risks. While new businesses may lack the necessary experience to manage customer expectations, selling high-risk products are also a major compliance concern – leading to a higher rate of disputes. Learn more about high-risk merchant categories here.
3. High Risk Merchant Categories
Merchants in high-risk categories and card absent transactions should be subject to enhanced due diligence during both the onboarding process and ongoing activity monitoring, particularly when associated with certain business and marketing practices.
4. Vague Service Descriptions
Applications that claim to offer “Internet or marketing services” can be red flags. These terms are often broad and unclear, potentially masking high-risk activities.
5. Lack of Processing History
Merchants that cannot provide six months of processing statements to demonstrate healthy chargeback and fraud ratios should raise concerns. This documentation is crucial for assessing a merchant’s track record.
6. Fulfillment Partner Concerns
Partnerships with merchant fulfillment service providers warrant careful examination. If they do not complete a merchant application, acquirers should meticulously review the payment facilitator’s application to ensure thorough oversight.
7. Multiple Merchant Accounts
Merchants requesting multiple accounts or varying billing descriptors might be attempting to disguise or spread out chargeback risks. This behavior is often indicative of merchants with something to hide.
8. Geographic Discrepancies
Applications from partnerships or sole traders where the principal owner is in a different geographic location pose additional risks. This distance can complicate transaction oversight and accountability.
9. Shell Entities
Pay attention to multiple applications from the same agent that display high-risk characteristics or present similar business information. These could be shell entities, designed to sidestep scrutiny.
10. Third-Party Agent Applications
High merchant discount rates on applications submitted by third-party agents or independent sales organizations (ISOs) may signify underlying issues. It’s crucial to investigate the motivations behind such applications.
11. Simultaneous Applications
Businesses applying with multiple acquirers or ISOs simultaneously can signal fraudulent intent. Acquirers should be vigilant about these behaviors, as they often manifest in a principal’s credit bureau report.
Additional Evaluation of Merchant Marketing and Online Reputation
Beyond basic application review, acquirers and their agents should also conduct an exhaustive review of all merchant marketing materials, websites, and online consumer complaint boards. This step is vital in validating that merchants will not generate excessive disputes. Here are some areas to examine for red flags:
1. Website Functionality
Websites that lack a “shopping cart” or similar mechanism for conducting e-commerce transactions may not provide a secure purchasing environment, raising concerns about the legitimacy of the merchant’s operations.
2. Trial Period Terms
Be cautious of trial periods that begin at the time of the transaction rather than the cardholder’s receipt of the product or service. This practice can mislead customers and lead to feelings of unfair treatment.
3. Pre-Checked Boxes for Acceptance
Any terms or conditions utilising pre-checked boxes to indicate cardholder acceptance can be problematic. This method often circumvents true consent and may result in disputes.
4. Waiving Dispute Rights
Merchants suggesting that cardholders waive their rights to disputes should raise immediate concerns. This practice undermines consumer protections and can lead to a higher incidence of chargebacks.
5. Frequent Descriptor Changes
Merchants that frequently change their billing descriptors or utilise dynamic or soft descriptors may be attempting to obscure their identity, making it harder for consumers to recognise legitimate charges.
6. Unrealistic Return Policies
Return policies that impose unrealistic time frames or create obstacles for cancellations can frustrate customers and increase the likelihood of disputes.
7. Poorly Disclosed Terms
Merchants must clearly disclose and explain their terms and conditions, ensuring compliance with government and regulatory disclosure requirements. Poorly communicated terms can lead to confusion and disputes.
8. Misleading Endorsements
The use of illegitimate news articles, false endorsements from supposed experts, or misleading materials intended to deceive consumers should be heavily evaluated. These tactics can cause distrust, false expecations and lead to disputes.
Implementing Risk Monitoring Strategies
While acquirers can’t eliminate all risks, they can implement robust merchant content monitoring and mitigation strategies. By integrating thorough assessments during the underwriting process and ongoing monitoring, acquirers can better predict chargebacks and take proactive steps to safeguard their businesses.
Contact Austreme and learn more about our SiteInspect solution for effective merchant content screening.
Additionally, you can read our How Merchant Content can Predict Chargebacks blogpost to learn more about evaluating a merchant website.
Want to learn more about merchant risk services? Visit our Youtube Channel.
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About Austreme
Austreme Technology is an industry leader specialising in ecommerce acquiring payment risk technologies and services. We provide a wide range of financial risk management services for global customers such as big data analytics, anti-transaction laundering, merchant website risk content monitoring, merchant onboarding and chargeback prevention. Austreme is a MasterCard Merchant Monitoring Service Provider (MMSP) since 2015, and a Visa Third Party Agent (TPA).