ISOs should recognize, control and mitigate the risks associated with credit card processing; this demands the knowledge of rules, regulations, and guidelines of card companies and regulatory bodies.
Understanding the ISO Processing Risk
The knowledge of in-house risk as well as the importance of accountability allows ISOs to provide merchant accounts to companies of all varieties and sizes, even in high-risk environments.
Online companies are typically exposed to higher degrees of risk, which is why the importance of laying out risk-limiting guidelines and monitoring performance is paramount.
Those responsible for risk management should identify and mitigate merchant risk by researching and assessing the quality of a merchant’s products and services. Based on the evaluated risk, the merchant may be required to retain a reserve with the processing financial institution. The risk division strictly monitors activity on a daily, weekly, and monthly basis, being keenly aware of merchants’ sales numbers and critiquing the monetary status of high-selling merchants. All risk evaluations are for the purpose of preventing loss.
When merchants sign up for online transaction processing, they are accepted based on the trustworthiness of the company and its practices, an assessment of the services and products sold by the merchant, and an analysis of the merchant’s fulfillment activity. High-risk accounts are assessed based on an analysis of the site, relevant records, reserve status, personal assurance by principals, and promises made by relevant bodies.
Every online merchant is placed into one of 3 liability categories: low, moderate, or high risk.
High Risk Merchants
Merchants classified as “high-risk” supply services and products in real-time or before the card payment is processed and certified.
Alternatively, services and products are supplied inside a range of time from when the card payment is processed and certified.
Some merchants, classified as high-risk, frequently conduct transactions without the presence of a card. Instances include direct advertising, mail or telephone order, and online merchants. Others require up-front payment or pre-authorized sales before products or services are delivered.
High-risk clients are liable to produce a large amount of chargebacks. They are accepted depending on their financial robustness and product quality.
Due to the fact that high-risk clients may create charge-backs, those responsible for underwriting at the online processing company may ask for alternatives to lessen their risk. The alternatives are relevant elements that affect the overall risk assessment, like fraud risk, future delivery risk, chargeback risk, credit risk, and monthly discount rate. The underwriters also assess the anticipated exposure of each client.
Medium Risk Merchants
“Medium-risk” clients are similar to high-risk clients in that they finish the transaction by supplying products and services before or in real-time with the authorization and processing of the card sale or, alternatively, when the transaction is completed for upcoming deliveries.
Nonetheless, medium-risk clients typically have a moderate proportion of charge-back rates and sales credits. They hold less risk than the previous classification, and the underwriters may ask for alternatives to lessen their risk, such as additional guarantors, a security deposit, or rolling reserve.
Low Risk Merchants
Merchants classified as “low-risk” finish sales by supplying the products and services before or in real-time with the sale’s authorization and processing. Low-risk clients typically have a low proportion of sales credits and lower rates of charge-back. Elements associated with low-risk clients are typically favorable and receive positive consideration in the approval process.
Risk is assessed based on how long the client has been in business, credit trustworthiness, and the length of processing history provided. The underwriting team at the online payment company also looks at business owners’ places of residence and credit ratings. They weigh-out business owners’ personal insolvency and also perform criminal background checks.
Underwriters assess a client’s product or service quality. Reviews on the client’s business dealings are another part of the assessment, and they include the anticipated monthly processing volumes or the refund and chargeback history. That data helps underwriters become familiar with the client’s business model. It’s how the online payment company can identify the suitable payment method to boost a client’s volume.
Now comes the analysis of the client’s maximum exposure, which underwriting teams calculate depending upon the anticipated monthly processing amount and the product or service variety. It’s crucial to study how services and products are delivered; additionally, seasonality should also be taken into account.
Creating alliances with e-commerce companies is vital. This is why the risk assessment includes analyzing the possible exposure to the online payment company and the mutual benefit of the two businesses. The anticipated exposure is found based upon the evaluated risks and maximum exposure. Depending on the results of this sample risk assessment, a decision is made as to whether or not to offer payment processing services to the applying company.