Merchant Account Underwriting Tools

This will even put Underwriters to sleep

This is really dull. Stay tuned for some blood and guts of merchant fraud.

“The risk of fraud is especially serious if a merchant takes orders by mail, telephone, or over the Internet. In such card-not-present situations, the Truth in Lending Act frees cardholders from liability-they are not responsible for even the first $50 (association rules provide essentially the same protection for debit card users). This consumer protection shifts the risk to merchants and, in turn, creates a larger contingent liability for merchant acquirers. One notorious example involves a merchant that defrauded customers by taking orders with no intention to deliver. Had the merchant been a traditional storefront operation, red flags would have been more apparent. First, customers would have been interacting with the merchant face to face, making it easier to detect suspicious behavior. second, customers would have been more likely to benefit from the experiences of other customers; they might have met in the store or overheard conversations and complaints. Finally, either the merchant would have had no inventory or business history at that location (fueling suspicion), or he would have had at least some inventory and other collateral after the firm failed. Either way, the merchant acquirer would have been better off. Instead, because this was a card-not-present situation, the fraudulent merchant was able to collect a large amount over a period of several weeks. When consumers were no longer willing to wait for delivery and filed chargebacks, they were entitled to relief. Because the fraudulent merchant could not pay, the merchant acquirer was forced to make restitution.”

Merchant Acquirers and Payment Card Processors: A Look inside the Black Box
By DeGennaro, Ramon P
Publication: Economic Review – Federal Reserve Bank of Atlanta
Date: First Quarter 2006 2006

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