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Understanding Risk Types

Merchant Risk

In partnership with Payrix, Partners have a unique opportunity to work closely with a group of experts in Merchant Risk to keep their SaaS Platform safe and secure. Without controls in place, a Partner could be in a position to experience reputational and/or regulatory scrutiny and could experience financial loss associated with Fraud or Credit risk.

Below are the most prevalent merchant risk types:

Bust Out Fraud

A merchant account is set up with no intention of being legitimate, and many false transactions are processed before being closed down.

Identity Swap

Individuals on watch lists or from a sanctioned country use another identity to set up merchant accounts to bypass Anti-Money Laundering (AML) rules.

Transaction Laundering (Factoring)

Merchants process unknown transactions for another business.

Business Format Change

Merchants lie about, or change, the nature of the products or services they sell to conceal high-risk activities.

Friendly Fraud

When the legitimate card holder makes a purchase, but then later claims the purchase was fraudulent and gets their bank to cancel payment. This is done by filing a chargeback with the bank when the purchase appears on their credit card statement.

Triangulation Fraud

When a fraudster opens a fake online store, and then uses it to sell merchandise purchased with stolen credit cards.

Account Takeover Fraud

When a fraudster uses the stolen personal information of a bank or online store account holder to fraudulently gain access to the account. The fraudster then uses the account to make purchases the actual account holder did not authorize.

Transaction Risk

Payrix uses several strategies to detect, monitor, and to reduce uncertainty associated with payment processing. These strategies allow Payrix to provide comfort to Partners and Merchants when they are conducting daily business. Our technology and architecture uses many different data sources to manage risk at the portfolio level, referrer level and account level and to drive real-time decisions for transaction monitoring.

Below are the most prevalent transaction risk types:

Transaction Fraud

Unexpected loss due to deceptive activity perpetrated against the merchant, most often a result of consumer card testing, consumer account takeover, or erroneous disputes. Transaction fraud can be any type of purchase which was not authorized by a legitimate user. Transaction fraud usually involves unauthorized use of a victim’s credit card or bank account to make purchases. This would include purchases on lost or stolen cards, or on cards that were illegally obtained.

Trends in Transaction Fraud

  • Synthetic Identities

  • Identity Fraud

  • Stolen Financials

  • Card Testing

  • Collusion/Rewards Abuse/Cash Advancing

Credit Risk

Risk of Chargebacks, Disputes, or Returns and the merchant’s ability to offset funds lost when associated with Disputes. During the COVID pandemic, supply chain issues resulted in a number of business disruptions that impacted the credit worthiness of many businesses. The inability of merchants to manage operational risk (including chargebacks and refunds) often resulted in significant loss and occasional defaults across a wide range of businesses.

Trends in Credit Risk

  • Bust Out Fraud

  • “Services not yet rendered”

  • Delayed Delivery

  • Refund Fraud

Merchant Fraud

Illegitimate merchants who open bogus merchant accounts that allow them to accept credit card payments from victims. A fraudulent connected account might begin charging customers for goods that they don’t intend to fulfill. As customers submit chargebacks, negative balances might accumulate on the fraudulent connected account that the owner has no intention to remedy (particularly if the owner was able to transfer funds initially processed from their customers).

Trends in Merchant Fraud

  • Collusion/Rewards Abuse/Cash Advancing

  • Suspicious Merchant Identity

  • Suspicious Owner Identity

Money Laundering

Money laundering, which is the process of concealing the proceeds of crime and integrating them into the legal financial system, is also a method used to hide the nature, source, location, situation, and movement of a crime or to give a legal image to the proceeds of crime. Electronic money provides an easy way to transfer value without revealing its identity. It can also be streamed through online auctions, sales, and gambling websites and converted into real, usable, and untraceable “clean” money.

Cash can be made to look legitimate through reselling. Criminals may purchase big-ticket items with cash, and then quickly resell those items to have money they are able to use in their bank account. Real estate, luxury items, and other such items are popular placements for money laundering.

Trends in Money Laundering

  • Terrorist Financing

  • Cybercrimes

  • Importation and Exportation

  • Luxury Items

Additional Resources

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