The Green Sheet Online Edition
January 1, 2023 • 23:01:01
Reduce merchant fraud while scaling up
A critical challenge for growing payment providers is onboarding new merchants while mitigating risk. Mounting online fraud, expanding numbers of merchants, and uneven risk distribution are significant hurdles. But automation can overcome these hurdles.
Fraud exploded during the pandemic
The pandemic brought an explosion of new ecommerce businesses as in-person interactions plummeted. As of March 2022, Americans had increased their online spending by 55 percent compared to the two years before COVID-19 (see Forbes, bit.ly/3GoyebL).More merchants than ever opened digital storefronts—legitimate and illegitimate. This meant a dramatic increase in the number of ecommerce URLs and opportunities for fraudulent activity: fraudulent sales reached $155 billion last year alone.
Common types of ecommerce merchant-initiated fraud
The online fraud landscape is ever-changing as bad actors constantly adapt. Here are some common types of merchant fraud:
- Look-alike URLs: Creating imitation domains for other websites to trick users into thinking they are on a different site
- Counterfeit products: Selling imitations of branded products
- Transaction laundering: Processing transactions for illegal goods through an online merchant that falsely represents itself as a legitimate business, product or service
- Collusion fraud: Buyer and seller collusion where ecommerce stores are used to launder funds.
- Stealing payment with no intention to sell a product: Taking customers’ credit card details without sending the product they purchased
Providers must stay informed about fraud trends to protect their users, merchants and brand.
The challenge of addressing fraud while scaling up
When payment providers launch, they often start with a small pool of merchants and have the bandwidth to manually review each merchant’s profile during onboarding. As they grow and scale, it becomes impossible to manually evaluate thousands of new merchants daily. This presents significant challenges, such as:
- Avoiding an entire industry: Unable to evaluate every merchant manually, providers may deem entire industries too high-risk in order to “de-risk” an entire vertical. For example, a provider may decide not to pursue historically risky industries like online dating, digital media or gambling. Thus, they lose out on business and growth opportunities in popular segments of the online marketplace.
- Not understanding industry risks: Providers who cannot sufficiently review each merchant at onboarding may take on risk without realizing it. For example, CBD transactions have different regulations between states. A legal transaction in Colorado may be illegal in Georgia. Providers need a thorough understanding of the industries in their portfolio and a strategy for addressing issues like government compliance that differ from region to region.
- Uneven risk distribution: When onboarding high volumes of merchants, your portfolio may skew toward high-risk industries. This can threaten your brand's sustainability. Providers must be able to strategically plan their growth across sectors to evenly distribute risk in the long-term.
Automation empowers providers
Automation can help address these challenges. Providers can use automated tools that analyze merchant information at onboarding to uncover risks and remove risky merchants from a portfolio. In many cases, automation can provide insights to remediate a merchant, rather than reject them. For example, if a merchant sells only a few products outside of a payment provider’s risk tolerance parameters, the merchant can remove those products to retain the merchant account. In this case, automation can also provide ongoing monitoring to ensure a merchant remains compliant.
Automation allows providers to capitalize on business opportunities, while ensuring that each merchant is properly assessed. Automated tools also provide critical data to help providers grow sustainably by:
- Understanding merchants: Gather data on the merchants’ websites, products, customers, sales locations and more. Use the data to learn who is using your platform.
- Empowering staff: Provide specific, tailored merchant data to internal analysts and risk managers to improve the manual review process for unique cases.
- Maintaining compliance: Meet the evolving requirements of regulators and avoid fines.
Ultimately, there is no one-size-fits-all solution to determining the risk for every new merchant on a growing platform. Providers should harness the adaptability of automated tools to ensure their risk management is tailored and thorough, while making the onboarding process as efficient as possible. 
Robert Ellenhorn is payment risk specialist at EverC, the world’s first fully automated, AI-driven cross-channel risk management platform that is transforming the internet into a safe and trusted place for ecommerce. Contact him via email at roberte@everc.com>/a> or LinkedIn at www.linkedin.com/in/robertellenhorn.
Whether you want to upgrade your POS offerings, find a payment gateway partner, bone up on fintech regs or PCI requirements, find an upcoming trade show, read about faster payments, or discover the latest innovations in merchant acquiring, The Green Sheet is the resource for you. Since 1983, we've helped empower and connect payments professionals, starting with the merchant level salespeople who bring tailored payment acceptance and digital commerce tools, along with a host of other business services to merchants across the globe. The Green Sheet Inc. is also a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals.
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