It’s Tough Being the Middleman: Managing Risk in Merchant Acquisition
It’s tough being in the middle. Just ask any middle child. The other siblings are always favored and are never stuck playing intermediary. Being an intermediary poses an inherent set of risks no matter who you are. Diplomats are often caught in tense negotiations in the creation of foreign policy, product distributors risk being cut out of the supply chain through disintermediation as businesses seek to reduce costs and the middle child suffers because their parents learned valuable lessons in raising the older sibling that get applied to them while the baby, well, gets babied. Merchant acquirers are no different. They assume risk as the intermediary with each new merchant they accept payments for. In order to survive, middlemen need to be able to manage whatever kind of risk they are facing.
In the merchant acquisition space, the main risk is that of non-delivery. This presents itself in two different forms, intentional and unintentional. Intentional non-delivery happens when a merchant goes into the relationship with the intent to defraud consumers and leave the merchant acquirer holding the bag while they fly off to the Bahamas. Unintentional non-delivery happens when unforeseen circumstances cause the merchant to be unable to fulfill all of its orders. For example, a vendor making t-shirts out of his garage has a celebrity wear his shirt and suddenly everyone wants that shirt. The orders come pouring in and there is no way he can fill them all based on the scale of his operations. So he closes up shop and the acquirer is stuck with a litany of chargebacks. Unintentional non-delivery is often more difficult to manage because the merchant’s intentions are good, they just encounter circumstances beyond their control.
So how do merchant acquirers manage non-delivery risk? While risk cannot be eliminated entirely, a proactive approach to managing the inevitable will go a long way toward minimizing the amount of risk incurred. Understanding that the risk posed by merchants is going to be variable and being able to adapt as the risk level changes needs to be a key priority. What does this look like?
Merchant acquirers need to comprehensively evaluate a broad range of merchants during underwriting and effectively monitor those accounts based on both known and suspicious loss indicators. Utilizing a wide variety of business and consumer credit data, in addition to alternative credit and fraud data allows a more comprehensive evaluation based on what is most appropriate for a particular merchant. For established businesses pulling a business credit file is appropriate. For a small start-up, looking at the consumer credit history of the business principal(s) is a better option.
Having access to the right data is critical throughout the entire merchant relationship lifecycle. Monitoring dramatic changes in sales volume, ticket prices (switching from selling low end to high end goods) or changes in the type of product being sold (i.e. apparel to furniture) all require immediate and proactive attention. Automated risk triggers will help acquirers stay ahead of the curve when managing all types of merchant risk. Early identification of risk gives acquirers opportunities to protect against losses and chargebacks.
Just like diplomats put their powers of persuasion to work for the global good and middle children like Bill Gates, Donald Trump, Nelson Mandela and the Dalai Lama overcome their seemingly unfair positions in life; merchant acquirers have opportunities to position themselves for great success and profitability with the least amount of risk.