A Guide to Strategic High-Risk Merchant Management: By Jonathan Hancock

Finextra

14-05-2025

With a powerful growth engine, today's digital marketplace presents acquirers with the critical challenge of managing high-risk merchants. Success in this arena hinges on a dynamic and adaptable strategy, balancing opportunity with security. The definition of "high-risk" is fluid, constantly reshaped by technological advancements and shifting consumer behaviours. Therefore, acquirers must maintain a vigilant watch, identifying emerging high-risk segments such as cryptocurrency exchanges, online gambling platforms (where legal), telemedicine services, and businesses specialising in vaping or CBD products—these sectors each demand tailored risk mitigation strategies, reflecting their unique challenges and evolving regulatory landscapes.
To effectively navigate this terrain, acquirers must leverage advanced data analytics. Implementing sophisticated tools enables deep insights into transaction patterns and the identification of anomalies. Employing behavioural neural network models facilitates the analysis of transaction data to detect potentially fraudulent activities. This data-driven approach, coupled with rigorous monitoring of chargeback rates and strict adherence to regulatory requirements, provides a robust foundation for informed decision-making.
The support ecosystem surrounding high-risk merchants plays a crucial role in mitigating risk. Acquirers should actively foster collaboration with Independent Sales Organisations (ISOs), Independent Software Vendors (ISVs), and agents. These partnerships facilitate more substantial relationships with merchants, enabling assistance in refining refund and return policies, implementing robust fraud prevention measures, and ensuring compliance with industry standards.
Payment facilitators (PayFacs) offer a strategic advantage in managing high-risk merchants. Utilising PayFacs to onboard these businesses as sub-merchants mitigates risk through tiered underwriting and automated processes. PayFacs' digital infrastructure streamlines operations, facilitating transparent pricing, accessible merchant services, and targeted value-added services. Their specialised expertise in specific high-risk verticals further enhances risk management capabilities.
However, not all high-risk segments are created equal. Acquirers must exercise caution and, in some cases, outright avoidance. Illegal gambling operations, unauthorised prescription drug sales, and websites featuring prohibited adult content present significant legal and regulatory risks that far outweigh potential rewards. Prioritising legal and regulatory compliance is paramount when evaluating these segments.
Rigorous due diligence is essential for mitigating risks associated with high-risk merchants. Acquirers must thoroughly evaluate business models, transaction histories, chargeback rates, regulatory compliance, and overall reputation. Implementing regular audits, even post-onboarding, ensures ongoing compliance and risk mitigation. Employing stricter financial safeguards, such as reserves or holdbacks, and potentially requiring personal guarantees from business owners provides an additional layer of security.
Effective management extends beyond initial vetting. Implementing robust fraud prevention measures is crucial. Advanced fraud detection systems powered by machine learning and AI enable identifying and preventing fraudulent activities. Real-time transaction monitoring allows for prompt detection and response to suspicious activities. Maintaining clear communication with merchants and ensuring consistent adherence to industry and payment scheme standards are equally vital. Maximising transaction processing efficiency minimises downtime and ensures continuous operation.
The regulatory landscape is constantly changing, requiring acquirers to remain vigilant. Staying informed of new rules and compliance requirements introduced by card networks and regulatory bodies is essential. Implementing additional authentication measures, such as those mandated by initiatives like VIRP and PSD2/PSD3, for high-value remote transactions is necessary. Compliance with card scheme monitoring programs and prompt address of excessive fraud and chargebacks is also critical.
Acquirers must continuously evaluate risk management strategies and adapt to threats and regulatory changes. Fostering a culture of compliance within any organisation, emphasising ethical and responsible business practices, is essential. By adhering to these strategic principles, acquirers can effectively manage high-risk merchants, fostering growth while safeguarding their interests and maintaining the integrity of the payment ecosystem.