45% of merchants stated in a recent survey that reducing fraud and chargebacks was top of mind. Another 45% said they were most concerned with improving the customer experience while 10% said minimizing fraud-related operational costs is a top priority.
In this article, we delve into the defining characteristics of the parties responsible for the various types of fraud and/or merchant risk. And, we clarify how third-party merchant risk solutions like LegitScript’s Merchant Onboarding and Merchant Monitoring address the challenges banks, payfacs, and ISOs face.
Defining Differences Between Acquiring or Sponsor Banks, PayFacs, and ISOs
Banks, payfacs, and ISOs all share different levels of responsibility for merchant risk within the overarching payments ecosystem. Each entity ultimately holds some responsibility for their merchants, but the specific shape of their risk is determined by where they are positioned in the payments value chain, and it can change based on how their upstream and downstream relationships are structured.
While acquiring or sponsor banks may pass down card network fines, they often hold the bulk of the responsibility for regulatory scrutiny, brand damage, and increased operational costs in the event of a merchant violation.
- Acquiring or sponsor banks maintain the merchant accounts that payfacs and ISOs help service, and are responsible for transaction authorization and settlement. As members of the card networks, they must ensure their downstream is compliant. Although acquirers and sponsoring banks are directly responsible, they commonly pass down card network fines for violations to ISOs or payfacs or the merchants themselves.
- Payment facilitators (also known as payfacs) own the risk within their merchant portfolios by providing processing, merchant account services, risk management, and fraud detection. As intermediaries, they must navigate both regulatory demands and the evolving threat of fraud, making effective risk management solutions indispensable.
- Independent sales organizations or ISOs rely on their relationships with acquiring or sponsor banks, payment processors, and other financial institutions to provide merchant services. Depending on how those relationships are set up, an ISO may play more of a purely account-sales role and pass the merchant accounts to their acquirer, or they may be more involved in managing merchant risk directly, ensuring the merchants adhere to all applicable legal, card network, and other regulatory requirements.
- Retail ISOs rely heavily on partnerships with acquiring banks, payment processors, and other financial institutions. They have limited ownership over merchant risk due to the smaller size of the organization. They rely heavily on partnerships with acquiring banks, payment processors, and financial institutions, having limited ownership over merchant risk.
- Wholesale ISOs tend to be larger organizations that take on more responsibility over merchant risk. With their own underwriting systems, onboarding platforms, and in-house credit, risk, and compliance teams, they are more involved in managing merchant risk directly.
Acquiring or Sponsor Banks, Payfacs, and ISOs All Face Similar Challenges
Minimizing friction points during the merchant onboarding process can support a smoother merchant experience and more rapid business growth. However, it commonly means that internal teams collect less merchant information up front and have reduced visibility into the true risk profile of the merchants entering their ecosystem.
Internal teams often lack the bandwidth to effectively monitor merchant activity on their own, particularly when relying on manual approaches or outdated monitoring solutions that create noise with false positives and fail to detect important violations. Ongoing merchant monitoring is critical for ensuring merchants are adhering to regulatory and card network requirements. Violating these requirements can result in hefty fines, penalties, or fees for violations.
Unidentified Risk Impacts Your Merchant Portfolio and Brand Reputation
Unidentified and violative risk, such as transaction laundering networks, can have serious consequences such as hefty card network fines, increased operational costs, and litigation and penalties.
Let’s explore the various types of unidentified risk that may be lurking in your downstream and/or portfolio of merchants.
- Unexpected card network fines. Card networks issue violation notifications and associated fines to acquiring and sponsor banks when they identify a merchant that is operating in violation of their network policies. If the merchant account in question is under a payment facilitator or ISO with which the bank shares the merchant risk, the bank may pass the violation fine down to that entity.
- Brand and reputational damage. Reputational risk or harm refers to the damage a company’s brand could experience as a result of negative publicity from customers, employees, stakeholders, or the public.
- Regulatory scrutiny and resulting litigation and penalties. Major cases of fraud, such as transaction laundering, can attract regulatory scrutiny and result in litigation and/or penalties.
- Increased operating costs. Responding to a card network violation notice and communicating with upstream/downstream acquirers increases operating costs.
- Stressed relationships with acquirers. When your business depends on relationships, ensuring your partners are happy with your brand's reputation and risk management is critical.
A combined merchant onboarding and monitoring solution can help prevent unidentified risks from impacting your brand reputation and help you avoid card network fines.
LegitScript Merchant Risk Solutions Address the Unique Challenges Faced by Banks, Payfacs, and ISOs
LegitScript Merchant Onboarding and Merchant Monitoring combine into one powerful Merchant Risk Solution. Banks, payfacs, and ISOs may be responsible for different levels of merchant risk, but they all share similar challenges when navigating complex jurisdictional issues and regulatory requirements. Third-party merchant risk solutions like LegitScript’s can reduce the stressors from those challenges by helping you rapidly and confidently action existing merchants with accurate and detailed analysis of website content and transaction laundering risk.
LegitScript's blend of big data, advanced technology, and human expertise makes our Merchant Monitoring solution one of the most accurate on the market.
Talk to an expert and discover how LegitScript can help you.
