A Complete Guide to Ongoing Merchant Monitoring


June 8, 2022

Table of Contents

  1. Introduction
  2. How Merchant Monitoring Protects Your Business
  3. Why Merchant Portfolio Management is Crucial to the Success of Your Business
  4. How to Manage Risk During Merchant Monitoring
  5. Hands-off Automated Monitoring with MonitorX



Life is full of surprises, but some are more welcome than others. If your merchants are involved in unexpected transactions or behaviors, you need to know about it as soon as possible.

Merchant acquirers and payment facilitators (payfacs) know to expect and accommodate a certain amount of risk. It goes with the territory. But effective fraud prevention isn’t just about following the latest KYC protocols or nailing AML compliance. Ongoing monitoring has to be part of the puzzle.

So what is ongoing monitoring? It’s a process of continual evaluation to ensure your merchant account information isn’t just up to date, but that merchants operate in line with your expectations and desired risk profile.

Ongoing monitoring helps payment service providers (PSPs) spot suspicious activity as it happens, providing real-time alerts and thereby vastly improving fraud detection. Of course, not all unusual transactions are fraudulent but, as a merchant acquirer, you still need to be aware of what your clients are doing to stay ahead of risk monitoring best practices.


How merchant monitoring protects your business

1. AML compliance and KYC screening

For payfacs who fail to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations like the Bank Secrecy Act (BSA) it’s only a matter of time before they’re targeted by fraudsters.

In the current context of rising merchant fraud and ever-more sophisticated financial crimes, it’s not enough to treat KYC compliance as merely a box-ticking exercise. Stringent KYC and AML screening is needed to help merchant acquirers safeguard their portfolio, avoid sanctions, and protect their business.

This level of protection is only possible with ongoing monitoring. It’s not enough to turn new merchants over to your underwriters or automated onboarding service for initial compliance checks. Those first-point-of-contact checks are obviously crucial, but they only show you a snapshot in time. There’s no guarantee that your new merchant won’t veer into criminal activity down the road. And if they do, it’s better you find out before the US government and its regulatory bodies.

2. Avoid government fines

Falling foul of compliance regulations can lead to fines, criminal action, and significant reputational damage. You may be tempted to shrug this off as a remote possibility, but the statistics tell a different story.

Regulators are cracking down on enforcement –  hitting careless PayFacs with hefty fines to send the industry a message that sub-par risk management won’t be tolerated. AML fines against financial institutions totaled $1.9bn last year. Fines can be manageable for a large bank but can easily drive a PayFac into bankruptcy. Still tempted to take shortcuts with your fraud detection? 

3. Merchant Fraud prevention

Fraudulent activity of all kinds is increasing as more business moves online, but merchant acquirers should be on the lookout for two types in particular – transaction laundering and business remodeling.

The former occurs when criminals use legitimate merchant accounts to do illegal business, usually involving gambling, drugs, or counterfeit goods. Transaction laundering is a growing threat in the payments industry, in part because it’s tough to spot. PayFacs are typically left scrambling to catch up when this fraud is exposed, dealing with the aftermath rather than taking a proactive approach.

Business remodeling is similar to transaction laundering. In both cases, merchant accounts clear initial compliance checks only to pivot into unapproved business once onboarded. Business remodeling, however, doesn’t necessarily have to involve third-party fraudsters. With this type of fraud, merchants themselves switch their product or service to evade Merchant Category Codes.

Transaction laundering and business remodeling are some of the easiest types of frauds to commit and therefore very common. Given that these unscrupulous merchants generally sail through early due diligence checks, they’re a more insidious threat than straightforward identity fraud or other financial crimes. Without continuous monitoring of merchant accounts, PayFacs can easily fall victim to scammers taking advantage of the lack of oversight.

4. Maintain the value of your merchant portfolio

A merchant portfolio is an acquirer’s most lucrative asset so it’s just good business not to jeopardize that with ineffective and incomplete due diligence and monitoring.

Acquirers who take on merchants from high-risk industries such as precious metals, need to be particularly mindful of not relying on standalone checks and balances. And, of course, PayFacs from all sectors should be staying up to date with current risks and challenges.

Every industry evolves over time as it acclimatizes to new threats – the most successful acquirers know that they need to innovate across all processes (including risk management) to stay on top of their game.


5. Align with industry best practices

Keeping up with competitors is key to solidifying your position in the highly-competitive payments industry.  Acquirers who aren’t continuously monitoring their merchants are providing a substandard service compared to those who do.

So don’t get left behind. With so many tech tools on the market, there’s no excuse for sticking with outdated procedures. Ongoing monitoring is a cinch with automated software solutions that provide integrated oversight of everything that’s happening in your portfolio, minute to minute.

Your merchants want to know they’re in safe hands, your business wants to make a profit by staying competitive, and your industry wants to ensure you’re compliant with the law. Ongoing monitoring is a win-win-win.


6. Transparent oversight

Businesses change – moving into different industries, taking on new staff, partnering with new clients – and each change exposes their PayFacs to different risks and vulnerabilities. If your merchant is switching things up, you need to know about it.

Ongoing monitoring gives PayFacs complete visibility into their operations and ensures a high level of transparency so they can breathe easy, knowing they’ll be alerted of potential problems before they become actual threats.

Not all merchants stay low-risk. Some move into more dangerous waters and there are often early red flags when they do. Ongoing monitoring is your canary in the coalmine, giving you a warning so you can respond in good time.

Transparent monitoring is also a handy means of collecting valuable data on your portfolio activities which, in turn, allows you to glean insight on merchant trends. Continuous oversight throughout the entire merchant lifecycle doesn’t just help an acquirer manage risk over the long-term. It also illustrates their growth and areas of opportunity.


Why merchant portfolio management is crucial to the success of your business

Customer Due Diligence (CDD) is part and parcel of any payments-related business but for high-risk and/or high-value portfolios, merchant acquirers have to go the extra mile.

Enhanced Due Diligence (EDD) adds an additional layer of protection to further reduce your risk of fraud. It’s typically required in industries with a higher risk of money laundering, but often it’s up to FayFacs to assess whether a merchant needs EDD based on factors such as their location and occupation.

EDD goes hand in hand with ongoing monitoring. In fact, the Financial Action Task Force recommends enhanced monitoring as part of ‘risk-based approach’ best practices, recognizing that due diligence is only one part of the process.

After those important initial checks there needs to be real-time monitoring to confirm, validate or correct the results of those early CDD/EDD procedures. Having this kind of infrastructure in place gives acquirers the flexibility to assess merchants on a case by case basis and give high-risk merchants the extra attention they require.

Not only is this key to fraud detection and prevention, it’s also a good tactic for building well-managed portfolios.

PayFacs who tend their portfolios carefully, weeding out bad actors before they do any damage, will become known as a trustworthy choice and therefore attract more business.



How to manage risk during merchant monitoring

Managing risk is a multi-faceted process, involving not just oversight but also data collection and analytics. An effective monitoring system provides all three, integrated together and working in the background while you concentrate on the daily operations of your business.


Automated oversight

Underwriters are busy people. They don’t have time to peer over merchant’s shoulders and watch everything they do on a daily basis. Especially when many underwriting departments are over-worked and short-staffed. Thankfully technology can fill the gap with automated monitoring that offers hands-off digital oversight.

What is automated monitoring? It’s a software solution that uses pre-programmed rules and procedures to automatically flag unusual merchant activity. Removing the manual effort from monitoring reduces error, provides 24/7 visibility, and ensures consistent quality of service. It also allows PayFacs to scale up their portfolios as they don’t have to devote hours to myopically monitoring every individual merchant.


Data intelligence

Merchants offer value to acquirers in a number of ways. At the transactional level, they’re obviously your primary source of income, but go deeper and you’ll find a rich treasure trove of information at your fingertips, simply from watching what they’re up to.

Every time your merchant performs a transaction, that tells you something about them, the industry, and even your services. Gather enough of that data and you’ve a solid bedrock of data from which to make evidence-based risk assessments.


Predictive analytics

Once you’ve amassed your data, you need a tool to help you make sense of it. Predictive analytics uses data to make informed forecasts about trends and possible outcomes.

In the context of the payments industry, this can help you quickly spot and troubleshoot issues with your merchants. Knowing their patterns helps PayFacs segment their merchants according to risk and stay vigilant for transaction laundering and other fraud.


Hands-off Automated monitoring with MonitorX 

A leader in automated monitoring solutions, MonitorX is the payments industry’s preferred choice thanks to its innovative approach and multiple risk-management features.

MonitorX allows you to set customized rules for merchants and carry out continual, updated monitoring so you can be sure your merchant stays compliant for the entire lifecycle of their business. It works in tandem with the Merchant ScanXpress risk scorecard – a tool that allows you to create customized scorecards for different merchant types, selecting from over 127 risk criteria. 

Periodic reviews keep you up to date with every activity across your entire portfolio while automated alerts instantly warn of unexpected behavior. The software is fully aligned with current AML and KYC regulations and backed by decades of industry know-how and experience.

Seamlessly integrated into an acquirer’s existing architecture, MonitorX is so easy to use that you won’t miss a moment of business. Once installed, the system simply gets to work, protecting your business without any need for hands-on oversight. Our support team is also on hand 24/7 to answer any questions as you get to know your way around the toolkit.

Take the pressure off your underwriters and let MonitorX handle your risk-management needs. With an automated system, you can confidently plan for the future – knowing that staff loss, company growth, legislative changes and other disruptors, won’t derail your portfolio.

MonitorX helps acquirers and other payment service providers stay ahead of both current and future risks, assisting compliance efforts, reducing fraud, and strengthening their brand in a highly competitive market.

Concerned about merchant fraud? Download our e-book ‘Merchant Fraud: Are You Ready For The Next Big Threat?’ or watch our Finding Fraud webinar to learn about types of fraud, fraud protection best practices, and how to reduce your risk.