Payment risk cannot be completely eliminated, but there are ways to lessen it. In order to ensure that you make well-informed decisions, this handbook discusses methods for determining your degree of risk and managing it.
No internet firm can avoid the responsibility of risk management. This reality encompasses a wide range of risks, from operational risk (such as interruptions) to reputational risk.
The three categories of payment risk that we have decided to emphasize in this guidance are credit risk, fraud risk, and account takeover risk. Payment risk cannot be completely eliminated, but there are ways to lessen it.
In order to ensure that you make well-informed decisions, this handbook discusses methods for determining your degree of risk and managing it.
Credit risk and fraud risk overview
Due to their three-party business model (consisting of the platform, merchants or service providers who charge through the platform in question, and cardholders who make their payments for the benefit of merchants or service providers), software platforms are faced with three distinct and complex types of risk when adding payment facilitation to their service offerings:
Credit risk: Credit risk often develops when trustworthy high risk merchant account provider for accumulate more refunds and chargebacks than they are able to pay for, up to the point where they are occasionally compelled to cease their operations because they lack the finances to fulfil their customers’ purchases.
In this case, cardholders have the right to file a payment dispute if their requests for products or services were not fulfilled. Because the platforms that process payments typically take liability for the actions of their merchants, you owe these consumers money in this situation.
Platforms must also control the dangers brought on by dishonest merchants. For instance, you may be dealing with a fraudster who takes information from a stolen card to register for an account on your platform and use it to make payments to himself. You can also come across a dishonest retailer who steals money from a cardholder (by selling them goods that they have no intention of sending, for example).
Account Takeover: The presence of a legitimate cardholder and merchant alone is insufficient to completely remove payment risk. In order to steal money from a merchant, a malevolent third party must gain their account credentials. This is known as an account takeover.
Strategies for credit risk management
Even while chargebacks and refunds that they must pay expose most merchants to credit risk often, they typically have the cash flow to handle it. They run the danger of being unable to pay their clients back when they record fewer sales and more refund requests, which complicates the issue.
Consider the following scenario: You are in charge of a website where event organisers may sell tickets, and you pay them before the events happen. A live event’s organiser is obligated to compensate its patrons in the case of cancellation.
However, it will be on to you as the platform for accepting payments to make up for this loss if this organiser has the financial flow required to pay these reimbursements. Then, you’ll have to take on a substantial credit risk on behalf of your merchant, which might put you at danger for damages.
We’ve divided the various credit risk management tactics into three separate categories: user enrollment, monitoring, and prevention.
User registration
Since new merchants have no previous interactions with your platform, they always pose a risk. The more data you get on these new users, the better you’ll be able to evaluate the risk you’re taking on and maintain the balance of your platform.
For instance, you may identify the accounts most likely to encounter cash flow issues and have a negative balance by looking at their financial behaviour.
Risk evaluation: Prior to letting any new merchants into your platform, evaluate the degree of risk that comes with them. Make sure to get sufficient details regarding their service to establish whether or not they come within the high-risk group.
Check up their past performance on platforms like yours and inquire about their refund policy or anticipated gross payment volume. Consider a manual appraisal for larger companies that involves a financial analysis and a director or owner’s credit check.
Temporary transaction controls: Spend some time getting to know the behaviour of high-risk or new merchants on your platform by putting some temporary constraints on them. You may, for instance, think about restricting the overall sum of their daily or monthly transactions. You might halt their transfers if this threshold is reached so you can examine their transactions.
Creating a Reserve Fund: Set up cash in a reserve to offset any possible losses from hazardous traders. As soon as these merchants establish a positive balance on your platform, you will be able to lower the amount.
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