PSPs can use consumer reviews to monitor their merchants’ performance. Negative product or service reviews, order fulfillment delays, disputed transactions, and complaints about a merchant’s business practices indicate a potential problem. By keeping an eye on customer reviews, PSPs can help ensure they are not exposed to undue risk and can take the necessary steps to protect their finances.

PSPs can use adverse media signals to monitor their merchants’ performance. These signals include indicators such as financial distress, regulatory investigations, and layoffs or downsizing, all of which can be used to identify potential issues with a merchant. By being aware of these signals, PSPs can help ensure they are not exposed to undue risk and can take the necessary steps to protect themselves.

Merchant risk can take many forms:

• Merchant Bankruptcy Risk occurs when a merchant cannot repay debts due to bankruptcy. 
• Excessive Chargeback Risk is a type of risk that occurs when a credit card provider demands that the merchant cover the loss on a fraudulent or disputed transaction.
• Collusive/Fraudulent Risk occurs when a merchant commits fraud using its customers’ (cardholder) accounts and/or personal information. 
• Money Laundering/Counter-Terrorism Financing Risk occurs when a merchant processes suspect/ non-vetted transactions on behalf of another business.

PSPs face several challenges when it comes to monitoring merchants. This includes monitoring large, diverse portfolios and not always knowing where to look for signs of financial distress or fraudulent activity. Additionally, PSPs must be able to access and read all the necessary information about their merchants, including any bankruptcies or other red flags. It can be challenging when the data is written in a foreign language. Furthermore, much of this information is not easily accessible, and labor-intensive retrieval from non-standard media can be required to find it. These factors can make it difficult for PSPs to monitor their merchant portfolios effectively, but it is an essential part of their due diligence process.

There are two main reasons for PSPs to monitor their merchants. Firstly, they must comply with anti-money laundering and counter-terrorist financing (AML/CFT) regulations like PSD3 in the EU. This monitoring goes beyond just preventing fraud; it is a duty to assess, detect, and prevent any risks associated with payments and account access. This involves transaction and risk monitoring to ensure that all relevant regulations are followed and that the payment service provider is not exposed to undue risks. 

Secondly, PSPs must monitor merchants to mitigate the risk of their merchant portfolio. This is especially critical in the underwriting process, in which PSPs accept liability and guarantee payment in the event of fraud. In addition, the PSP is responsible for refunding customers with outstanding orders or payments if a merchant goes bankrupt. Therefore, PSPS must monitor merchants for any signs of financial distress or other red flags that may lead to a merchant defaulting on their payments. Owlin can also help to detect leading risk signals from alternative data sources, such as consumer reviews, to de-risk ahead of an adverse event occurring.