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Why Better Merchant Monitoring is Essential

Acquirers across the globe are seeking solutions to help them manage their merchant portfolio and the risks that it presents. This was a key topic at the FICO Asia Pacific Fraud Forum, held last week in the Philippines with about 30 of the top banks in the region.

To understand why this is such a challenge, one need only look at the complication involved in classifying merchants. For years, acquirers have struggled to determine the accurate merchant category code (or Standard Industry Classification) for merchants that are signed up for the purposes of accepting card payment. Decades ago, the distinctions were much clearer, as most businesses operated in vertical silos. These days merchant businesses often cover a variety of categories, sometimes very disparate ones.  Yesterday’s grocery store or supermarket today probably has an online business, may have diversified into other sectors such as electronics, perfume and clothing, and may even have decided to stake its claim in insurance or financial services. The “old” SIC codes no longer represent the whole business.

This diversification presents new risks, even as more aggressive competition across consolidated industry sectors drives margins down. Merchant inexperience in unfamiliar sectors means that they are now sometimes not prepared to deal with the regulatory landscape in the likes of insurance or financial services. Business planning and profit, loss and cash flow monitoring have become far more complex. For the acquiring banks processing merchant transactions, this means it is harder to distinguish anomalous behaviour from merchants or their staff who are acting inappropriately or collusively from normal activity; harder to spot when a merchant is falling into financial difficulty; and harder to tell when a merchant might be at higher risk of attrition from one acquirer to another. It is an acquiring headache.

Financial services delegates at the FICO Asia Pacific Fraud Form debated the need for a better way to monitor merchants. Ultimately, the best solution mirrors leading fraud solutions like FICO® Falcon® Fraud Manager: It would combine analytics, business rules and case management to detect anomalous patterns in real time and investigate them efficiently.

In the FICO® Merchant Monitoring Solution, summary profiles using past authorisation, settlement, chargeback and fraud data allow anomalies to be quickly highlighted and made available for investigation. A rules-based facility can automatically instigate settlement suppression. This new solution is part of FICO’s enterprise fraud approach, which has been named an industry leader by Chartis, CEB TowerGroup and Forrester.  It offers acquirers the “next generation” of merchant monitoring for managing not just traditional fraud and compliance risk, but also the risks associated with merchant profitability changes, attrition and financial failure.

The FICO Asia Pacific Fraud Forum was titled “A Pathway to Enterprise Fraud Management.” More efficient merchant risk monitoring is certainly a significant step along that path.

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