A decade ago, being a responsible entrepreneur meant ensuring that money was handled safely and payments, even if delayed, eventually went through. Fast forward to today, and the landscape has dramatically shifted.
In 2024, transactions are expected to be instantaneous, and the demand for robust security measures is at an all-time high.
This evolution makes implementing updated risk management strategies not just a good practice but an essential component of running a successful business in 2024 (if you want to succeed, that is…which you most definitely do, right?).
Where to start? We asked our payment experts for their advice to build this quick guide full of actionable tips and strategies to help you navigate the challenges and set your business up for success.
The Basics of Payment Processing Risk Management
Imagine running a business where every transaction feels like a gamble. In high-risk industries, this isn’t far from reality.
The rise of cyber-fraud has turned payment processing into a high-stakes game, where the risks are as diverse as they are dangerous.
From chargebacks and friendly fraud to data breaches, the threats are what feels to be, at times, endless for most high-risk business owners. Without a solid risk management strategy, your business could be on shaky ground.
To navigate these challenges and while staying compliant with laws and regulations, you’ll need to adopt proactive measures and leverage expert strategies to protect your business from annoying yet very preventable threats.
Key Components of a Payments Risk Management Framework
Okay, so you know you need to strategize and manage the risks but what does that mean and where does one even start with that?
The first step should always be recognizing the risks. You need to know what to be on the lookout for.
While that’s just good practice as a business owner (you should know these things, after all), understanding the root causes of these problems will help you map out the next steps.
So, do some research or get in touch with an industry expert to figure out what exactly you should be taking into account regarding the specifics of your trade, business model, products, and target regions.
While our payment specialists can offer you tailored advice, the steps listed below are a more universal approach to risk management that apply to businesses of all trades.
Risk Assessment
First, take a step back and look at your business as a whole. Consider all the minute details and overall risk factors of your industry. Try to get as comprehensive of an overview as possible (and be as objective as you can be in the process).
You can do this by yourself if you have enough knowledge and experience, or you can ask a professional who’ll conduct the assessment for you and give you direct feedback on what needs to be modified.
At FastoPayments, for examples, we offer high-risk merchants a comprehensive assessment of risks post-submission to help them improve their chances of securing an acquirer.
This also helps them improve their business operations as a whole, as it often reveals key areas in which our clients are vulnerable to certain industry-specific risks or could improve in other key areas, like chargeback reduction.
Transaction Monitoring
Transaction monitoring is one of the newer ways of handling risk management (or at least the machine-learning version of it).
Screening transactions can help you catch onto well-thought-out fraud schemes and can minimize chargebacks.
The new-age version of this technique, however, involves AI, which makes it even more efficient as it surpasses human capabilities in recognizing patterns and eliminates human error.
Response Strategies
Even with a solid risk management plan in place, it’s important to have direct response strategies set for when an incident does happen. A response strategy should define the exact steps that need to be taken in the case of a security breach.
So, as a high-risk business owner, it should be one of your top priorities to develop an immediate response plan that includes the following:
- Type of threat
- How to report it
- Who needs to be notified
- How to recover compromised data
This strategy will help you adapt to evolving threats and maintain your business in good standing should an attack occur.
Common Payment Risks Faced by High-Risk Businesses
Every high-risk business is different and so are the risks. This means there isn’t a way to be fully prepared for all potential threats.
However, there are some payment processing risks that are considered ‘common’ across the high-risk board. Understanding these risks will help you stay ahead of the curve (at least to some extent).
Payment Fraud Risk
Business is almost entirely online these days, and so are the payments those businesses process. While this is helpful for several reasons, businesses in high-risk trades often face many different payment fraud risks due to the digital nature of their payment processing setup.
The most common of these tends to be the phishing, which happens when a fraudster attempts to get ahold of sensitive data by posing as a reputable establishment. Phishing attacks in 2023 grew 17% with almost 7 million detected attempts.
Other standard fraud schemes merchants trading high-value goods face are card testing and account takeover attacks. These happen when a person who’s gotten access to a credit or a debit card tries to determine the validity of the card by making a purchase, or when a scammer gains access to a user’s credentials and uses it to commit fraud.
High-Risk Transactions
High-risk transactions are payments that are deemed riskier than others. As a high-risk business owner, all of your transactions are high-risk, but some are ‘riskier’ than others and can be prevented or managed.
A payment may pose a higher threat to your business, for example, if the ticket-value is high, which makes it more attractive to fraudsters. Transactions made in suspicious patterns are also a big red flag. Continuous payments made at intervals could be an indication of a fraud-scheme.
These instances are exactly what transaction monitoring was intended for. And, luckily for you, you don’t have to monitor all of this yourself. Modern machine-driven monitoring tools can pick up on these patterns and unusual transactions almost instantly, giving you enough time to address the problem and approach it appropriately.
Chargebacks and Disputes
High-rates of chargebacks make it more difficult to manage your business as well, especially if you’re in a high-risk industry.
Chargebacks are typically the main pain point of risky trades due to the high-value goods that might not meet the customers expectations, recurring payments clients often forget about, and the BNPL (Buy Now Pay Later) method.
All of these factors make it more likely for a customer to initiate a dispute, whether they’re in the right or not. On top of that, your business may also fall victim to chargeback fraud or friendly fraud, which happens when a chargeback is filed on a legitimate transaction.
This makes it even more important to keep an eye on your chargeback rate and screen transactions. Some chargebacks here and there should not be something to fuss over, a handful of them, however, could quickly turn into a bigger issue. Keep in mind, a healthy chargeback rate should always be below 0.75%.
Your Next Step? Implementing Payment Controls and Monitoring
Worried that your business is at risk? We’re not trying to scare you—we’re just trying to ensure you’re informed. Furthermore, as we’ve mentioned, there are some pretty effective ways to prevent these challenges and reduce the risks altogether.
Transaction Monitoring Tools
Utilizing transaction monitoring tools in your daily operations as a high-risk merchant can save you from huge headaches (and a lot of money).
These tools are essential to detect and prevent fraud, as cyber schemes are easier to carry out than ever. Most come with great AI-fueled features that are designed to analyze transaction patterns and provide real-time alerts in case of suspicious activity (ours is, at least).
There are various types of these tools available on the market now, however. Look for one that come with customizable filters and can easily be integrated with your existing systems. This will allow you to customize the tool to your business’s specific needs.
At FastoPayments, we’re building our very own CMS to make our merchants’ experience with us more personalized than ever. This system will consist of a customized dashboard that displays business- and industry-specific insights in real time.
Setting Risk Thresholds
Risk thresholds are when you set fixed caps for risk-levels when processing payments. These thresholds help pick up on high-risk transactions instantly by flagging them as soon as they hit the maximum capacity.
To determine these thresholds for your business specifically, take into account the following:
- Transaction history
- Value of goods
- Trade specifics
Also, consider how big of a risk the business itself could take on without it resulting in detrimental damage.
Review and adjust these thresholds regularly depending on your industry and high-risk fraud trends.
One way to reduce risk is to offer great customer support, as that leaders to fewer issues like chargebacks or unhappy customers in general. At FastoPayments, we try to connect our clients to call centers, for example, as having 24/7 phone support is a great measure when catering to clients with frequent issues. Other than that, always respond to emails and be proactive about support and issues. Rather than give a refund or ignoring their requests, it's best to send your clients to support, especially when dealing with recurring payments.
Regular Audits and Reviews
Regular audits and reviews are key to sustaining a strong risk management strategy. These will make it easier to spot and address issues that might not be that noticeable on the surface.
To conduct these audits effectively you need to have a full overview of the following factors:
- Compliance with industry standards
- Efficacy of fraud prevention tools
- Adherence to specific regulations (related to products or services in different regions)
- Maintenance of legal documentations and certifications
- Maintenance of transaction records
Best Practices for Payment Fraud Risk Management
While having a robust payment fraud risk management strategy is important, there are some other healthy business practices you can follow that will help you reduce the risks of modern-day payment processing.
Employee Training and Awareness
Your very own employees can be a very powerful defense against fraud.
Not only that, but if you train them correctly, they can help you “monitor” your business’s daily operations in a way, as your employees are often more knowledgeable of the inner workings of your payment processing system and subsequently able to more easily catch onto any vulnerabilities.
This, however, calls for a culture of vigilance and responsibility. A work environment where your workers know what to look out for, are able to stay alert, and are clear on how to go about reporting anything they feel is important.
Customer Authentication Techniques
Nowadays, there are several different tools available to verify your customers before the finalize their purchases. All are designed to minimize the number of fraudulent transactions and prevent account takeover attacks.
Some practices to employ to enhance the security of your customers’ sensitive information and prevent fraud include 2FA, biometric verification, and secure password protocols.
Leverage Technology and AI
We’ve mentioned this a few times already, but it’s worth mentioning again.
AI, machine learning algorithms, predictive analytics, and real-time fraud detection systems have made it possible to keep up with the evolving and just as innovative cyber-threats.
This in turn has allowed businesses to focus on growth rather than fighting fraud.
Building a Strong Relationship with Your Acquirer
If you don’t know it already, you will quickly come to learn that acquirers play the biggest role in payment processing. Payment fraud management is no different from that, as they have their own strategies and terms in place that affect your business’s security levels as well.
That’s why it’s so important to establish and maintain open communication with your acquirer. This won’t only help you understand the grounds on which your funds are being guarded, but also help you learn to address and resolve issues promptly.
When choosing the right processor, it’s paramount to look for one that has a proven track record, as knowledge only comes with experience in high-risk trades. Analyze the rigorous risk management tools they use to protect your high-risk merchant account.
The bottom line? Any good acquirer should enhance your business’s operations in more ways than just processing payments. Anybody can do that.
While it's important to work with the right merchant services provider to reduce issues, you also need to be proactive about how you're managing risk in your day-to-day operations. Merchants should make sure they're not cutting corners or leading to non-compliance. Keep your policies up to date, monitor your industry's regulations, etc.
Reduce Payment Risks with FastoPayments
Don’t let your high-risk business be exposed to unnecessary risk. Instead, work with a reliable payment provider who can help ensure safety, compliance, and continuity.
Get a free, no-obligation quote for a high-risk merchant account and payment processing services here. We’ll review your business information and get back to you ASAP.
