Frictionless Underwriting: Worth the Risk?
Perhaps one of the most disruptive ideas to hit the payments industry over the last few years is the notion that not all merchants are the same.
While controlling access to the payments system is critical, the legacy system in place to do so was overkill for many players. To accept electronic payments, even the smallest merchant had to complete the same applications and undergo the same scrutiny as the big guys.
Enter frictionless underwriting. Technology has enabled automated database checks that perform required KYC checks nearly instantaneously. And for many businesses processing small payments volume, those automated checks may be enough to get them started.
The ability to tailor underwriting processes to the merchant involved – asking only the questions that need to be asked to fit a particular situation – has enabled many more merchants to enter the system.
But if you let in more merchants, don’t you risk letting in more bad actors as well?
The answer is yes, according to Deana Rich, CEO of Rich Consulting. That’s why frictionless underwriting must be balanced with increased transaction monitoring and additional controls after the merchant is up and running.
“With frictionless, you run the risk of more bad actors getting a merchant account,” Rich told PaymentFacilitator. “So, when you use frictionless underwriting, you do need to be more diligent in your transaction monitoring. As they begin to process, you need to make sure that what they told you they’re doing is what they’re really doing.”
In many cases, that can mean adding a human element – additional checks from a person, who is more likely to notice abnormalities that could get past an automated system.
“If I said I’m selling widgets for $75 a widget, and I sell something illegal for $75, and no other research is done, it will look as though it’s consistent with what I applied for,” Rich said. “So, at some point there has to be testing, as you otherwise would have done if you didn’t use the frictionless approach.”
It’s also important to note that frictionless underwriting is appropriate only for certain merchants. Those in low-risk categories or who are applying for low processing limits, for example.
“If the merchant is applying for $200,000 a month worth of processing, automated checks will not be enough to approve them in the first place,” Rich said.
Ultimately, PFs are accountable for their merchants’ activity. That may mean shutting down merchants who are conducting illegal activity.
The penalties for failing to keep criminal elements out of the network can be steep. Visa and Mastercard can assess hefty fines. And if the violation is serious enough, governmental agencies such as the Consumer Financial Protection Bureau of Federal Trade Commission could get involved, Rich said.
So perhaps the most important thing for payment facilitators to remember is, whether they are conducting frictionless underwriting or more in-depth processes, their responsibility to the payment system is the same.