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Managing High-Risk Merchants

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Both banks and their regulators have been focusing on the issue of high-risk merchants with differing points of view as to how to deal with them. There is no standard definition of what is “higher risk” but some business categories which typically fall into that classification are online gambling, tobacco products, casinos, etc. There seems to be guidance from some regulatory agencies that banks should establish prohibited customer categories and thus de-risk their portfolio — exiting relationships with any business that falls in to that category. Others, such as the FDIC, have suggested that one shouldn’t make decisions based simply on a particular class of customer. Money service businesses (MSBs) have been particularly hard hit by a multitude of banks deciding to de-risk and exit all relationships with MSBs, leaving many hard pressed to get bank accounts.


The solution lies not in de-risking but rather in re-couping or re-risking; doing sufficient due diligence on each business customer, determining their risk based on business model, products and services, typical customer behavior etc. Then, finding ways to mitigate those risks and pricing customers accordingly. Maintaining compliance on certain customers will be more costly than others; thus they will have higher costs. That is as it should be.


A financial institution should develop a strategy for assessing customers’ risks and develop criteria and policies which should be reviewed annually. They need to understand the relative risks in business categories — i.e., not all cash-intensive businesses are created equally. The mom and pop grocery store that does a lot of check cashing for customers on Fridays is not the same as a money transfer business that accepts cash and remits it to many foreign locations in high risk countries.


In addition to gathering as much information as possible (you can never have too much and probably can’t ever have enough) in the onboarding stage, you need to make sure you are conducting period checks on higher risk customers to insure there have been no material adverse changes. Automation is key to this process to avoid a labor intensive process which is prone to error.


G2 Web Services provides Solutions for Commercial Banks, Third-Party Payment Processors (TPPPs) and Third-Party Senders (TPSs) to help them assess their portfolio risk using business customer intelligence. With billions of data points collected over a decade of monitoring tens of millions of businesses, our proprietary data can predict the probability of a future fraud incident with up to 99% accuracy. 



To learn more about ways to streamline the process of onboarding new customers and monitor them on an ongoing basis to determine if their risk profile has changed, attend our webinar, Business Customer Intelligence for Better KYC. Click here to view the recording.


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