You need to be smart when acquiring merchants. Many acquirers do conduct extensive KYC checks, but merchant risk levels in the eCommerce space can fluctuate significantly after onboarding.
Fraudsters are known to develop websites that appear legitimate in order to pass through the initial KYC checks. Upon approval, these sites are replaced with high-risk product and service offerings.
Sometimes even with low risk goods bad merchant behaviour, such as bust out attacks (where heavily discounted deals amass huge sales before disappearing without delivering), can leave acquirers with significant chargeback losses.
Particular attention should be paid to the following three types of risks, which are most commonly associated with onboarding small eCommerce merchants.
1. Merchant Laundering
Transactions for illicit products and services being processed through approved merchant accounts. This enables the movement of funds from illegal activities, such as child pornography, gambling and unlicensed pharmaceuticals, into the financial system.
These activities can often go undetected, as merchants either obtain accounts under the pretense of a business or by working with a separate entity altogether. To avoid detection this entity may process legitimate transactions, as well and illegal ones.
2. Credit and Fraud Risk
Bad merchant behaviour can expose acquirers to credit risk in the form chargebacks by dissatisfied customers.
Examples of this behaviour include, bust out attacks, the misrepresentation of goods, non-delivery of goods and the use of deceptive marketing practices.
3. Reputational Risk
The constant churn of products, especially within online marketplaces, makes it hard to monitor for the sale of illicit items and transactions that could have a damaging impact on the reputation of an acquirer.
These products include unlicensed pharmaceuticals that fail to comply with basic pharmacy license, drug safety as well as patient safety laws and regulations.
It’s key for acquirers to engage in the continuous monitoring of their merchant base, this will ensure you are constantly aware of any potential fraudulent activity and allow for mitigating actions to be taken.