Merchant Underwriting vs. Merchant Monitoring

Merchant Underwriting Entails Identifying Risk Before It Enters the Payments Ecosystem

Merchant underwriting is, according to underwriting provider Infinicept, “the process of assessing and verifying potential customers – including adherence to banking, brand, and governmental rules – to protect consumers from entities that are wanting to engage in fraud or other illegal activities by accepting credit card transactions.” It’s an important first step to understanding the merchant and their business.

Identifying problematic merchants requires a variety of checks before they enter the payments ecosystem. Traditionally, an underwriter reviews merchant applications to verify a merchant’s identity, creditworthiness, business model, and more. The underwriter will also run a check against third-party databases to make sure that the merchant is not problematic in some way. These usually include:

• An IRS TIN match to verify an applicant’s tax ID and legal entity name
• A check against Mastercard’s Member Alert to Control High-Risk Merchants (MATCH) list to ensure that the merchant has not been previously terminated
• An Office of Foreign Asset Control (OFAC) screening to ensure that the applicant has no links to terrorism or order federal crimes

For more information on card brand requirements during underwriting, see the Visa Global Acquirer Risk Standards (Section 5).

Thorough underwriting can take time, but innovative underwriting providers have created technology to help speed up the process, making it highly automated and nearly frictionless.

Merchant Monitoring Complements Frictionless Underwriting

Frictionless underwriting or frictionless onboarding is the process of vetting a merchant application in a way that makes use of automated tools to approve or deny an application quickly. It has become a valuable tool for payment service providers to balance risk mitigation, business growth, due diligence, and a positive customer experience.

Generally, frictionless underwriting makes use of third-party services to perform checks on the merchant’s application in a matter of minutes if not seconds. If the checks come back clear and the information provided is complete, the application is typically approved automatically. Merchants can often begin processing payments immediately.

The drawback, of course, is if automatic checks miss an important detail that an experienced underwriter might have flagged, such as problematic content on a merchant’s website or on the business’s social media. This is where merchant monitoring comes into play.

Merchant Monitoring Entails Identifying Risk After It Enters the Payments Ecosystem

If underwriting is the doorman at a building, merchant monitoring is the roaming security guard inside. Without merchant monitoring, an applicant who has passed underwriting checks and is “through the door” is free to operate in a payment service provider’s ecosystem generally unchecked and unwatched. Only suspicious activity captured by transaction monitoring might draw attention to the merchant.

Merchant monitoring is the process of persistently, regularly monitoring a merchant after onboarding has occurred and throughout the merchant’s existence. Using automated tools and sometimes human analysis and machine learning, merchant monitoring solutions look at merchant details, website content, and other data points to continually assess merchant risk. This is important because merchants who appear innocuous can change their business models or sales tactics once they have obtained their merchant accounts.

Merchant violations can sometimes be accidental. A supplement merchant may, for example, inadvertently carry a product with a banned ingredient. Other merchant violations can be deliberate. A merchant may, for instance, pretend to sell T-shirts during the application review only to use the merchant account to process illegal drugs. This tactic, called transaction laundering, can be extremely difficult to identify without a merchant monitoring service provider. When card brands catch violative merchants, payment service providers are typically on the hook for expensive card brand fines.

Because merchant monitoring does not involve vetting merchants before they enter an ecosystem, it is an insufficient solution for mitigating merchant risk. Likewise, underwriting only provides a snapshot in time of a merchant’s behavior, making it insufficient for monitoring risk over time.

Together, however, merchant underwriting and merchant monitoring make for an effective solution for payment service providers to mitigate their merchant risk.