Between the unprecedented global COVID-19 pandemic, staggering levels of unemployment, civil unrest, and particularly contentious political tensions, 2020 is truly a year like no other. Even as consumers increasingly shift to e-commerce card-not-present transactions, COVID-19-related fraud and scams run rampant. Nonetheless, it is still important—perhaps even more important—to understand the state of risk and compliance in the payments industry.
That’s why LegitScript recently released its Payments Risk & Compliance Benchmarking Report 2020-2021, which stems from a LegitScript survey of a swath of risk and compliance organizations, including acquiring or sponsor banks, payment processors, payment facilitators, software/hardware vendors, independent sales organizations (ISOs), and ACH providers.
The report identifies the size and scope of risk and compliance in payments, industry challenges, the importance of mitigating risk with merchant monitoring, and trends that risk and compliance professionals need to be aware of.
Technology & automation help risk teams scale
Larger companies tend to utilize technology to scale risk and compliance. In other words, as the merchant portfolio size increases, so does process automation. For growing organizations, technology and automation are key to remaining highly compliant.
Though the sample size amongst this group of respondents was small, the data indicated that ISOs tended to have the least automation, the least amount of staff per merchant, and the lowest overall commitment to compliance. Third party support may be a way to help ISOs scale their risk and compliance efforts.
Top challenges associated with automatic merchant declines
Above all others, transaction laundering and other forms of fraud are the greatest challenges that result in automatic merchant declines, with nearly every surveyed organization rating transaction laundering as a major challenge. Concerns over transaction laundering are highest among organizations with large merchant portfolios.
Beyond transaction laundering, violating government, card network, or Nacha regulations all rank highly among challenges that result in automatic merchant declines. Suspected fraud and excessive chargebacks rank high on the list as well.
Merchant monitoring: an important risk mitigation approach
An important risk mitigation strategy deployed by many organizations is merchant monitoring, which is when companies continuously monitor the merchants in their portfolios for activity that is illegal, deceptive, against terms and conditions, or could result in card brand fees or regulatory scrutiny.
In total, 86% of surveyed companies reported that they use a third-party merchant monitoring service provider (MMSP), with an average satisfaction rating of 7.9 out of 10. Those that don’t use a MMSP tend to be small or medium-sized portfolios, and the most common reason for not doing so is because their merchant monitoring is already performed in-house.
Important trends that will need to be addressed
Just like many other aspects of the payments industry, risk and compliance is a dynamic and constantly evolving space. Advancing technologies, changing regulations, criminal innovation, and new products all contribute to this need to continuously adapt.
Among the most important emerging trends that risk and compliance teams will need to address in upcoming years include:
- Rapidly changing technology
- Problematic products and fraud
- The shifting regulatory landscape
Learn more about payments risk and compliance
LegitScript’s report delves into much more detail on survey respondent demographics, MMSP use and satisfaction, and the challenges in detecting merchant risk. It also offers detailed sub-categories within anticipated risk and compliance trends. Organizations with merchant portfolios of all sizes can find valuable information on risk mitigation in a time of uncertainty and great change. Those interested in viewing LegitScript’s report can do so by clicking below: