Acquiring banks – Why do they perform a risk review?

Card brands, such as Visa and MasterCard, assess risk levels before boarding a merchant. Due to an acquiring bank processing card funds on behalf of merchants, MasterCard and Visa delegate this risk review to them.

Merchant’s Risk Review

Determining merchant risk is not clear-cut. There are numerous factors to carefully consider and weigh. These factors include: 

• High dollar transactions
• Lack of prior processing history
• Excessive fraud or chargeback disputes
• Unusual shifts in processing volumes

Merchants portraying the above behaviors automatically raise a red flag for the acquiring bank and, therefore, Visa and MasterCard. Despite working with so many merchants, these two giant card brands have the resources and technology to flag risky merchants with ease. If your risk level is considered high, it will be a tedious process to locate a processor willing to board your business. And even then, you run the risk of being caught in unfavorable merchant terms or high rates.

The reason MasterCard and Visa determine merchant risk is not to terminate business from the ability to accept electronic payments but to ensure compliance. A merchant with a high-risk level is likely to make them lose more money in the form of excessive chargebacks or fraudulent transactions.

Monitoring Risky Merchants

Both Visa and Mastercard utilize complex security monitoring processes to seem out and review suspicious merchant activity.  These processes don’t just assess new merchants; the monitoring continues for approved and boarded merchants. If any unusual activity is spotted, it is reported, and the merchant must ensure all card brand rules are being followed to not risk losing their processing account. The objective is to make sure transactions are authorized, secure, and compliant.

Visa uses its Global Risk Standards to determine merchant risk level.  Mastercard has a similar Business Risk Assessment. These programs aim for all merchants to be proactive in their compliance. This allows for optimal merchant growth while minimizing the card brand’s risk.

Acquiring Banks are Liable for a Merchant’s Activity

Earlier, we set the stage on why Visa and MasterCard aren’t directly affected by a risky merchant. The risk review lies with the acquiring banks. Should a merchant go bankrupt or receive numerous chargebacks, the acquiring bank must make good on every transaction. The Visa and MasterCard systems consider the bank underwriting the merchant as the acquiring bank. To safeguard acquiring banks from high risk, MasterCard and Visa set strict standards. They also charge more for high-risk transactions. Before agreeing to partner with a merchant, acquiring banks ensure a merchant meets the minimum requirements provided by Visa and MasterCard. This is done with the acquiring banks’ underwriting process before approval. Many acquiring banks also limit the amount of high-risk merchant account they can have within their portfolio at any given time. This helps balance their risk levels and ensures they remain a healthy and productive acquiring bank moving forward.

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