Mitigate Risk

Risk mitigation is the process of implementing controls to reduce the likelihood or impact of identified threats, such as fraud, financial loss, regulatory violations, or operational disruption. For payment facilitators (PayFacs), acquirers, and marketplaces, risk mitigation involves continuous decision-making on how to manage merchants, transactions, and partners based on observed behavior and external intelligence.

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Why Risk Mitigation Is a Persistent Challenge

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Risk mitigation is not a one-time activity. It requires ongoing decisions about which merchants to accept, which to monitor, and which to offboard. Several factors make this challenging:

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• Evolving fraud patterns: Fraudsters continuously adapt tactics. What worked to detect a fraud scheme last quarter may fail next quarter.
• False positives and revenue loss: Overly restrictive controls can block legitimate merchants or transactions, leading to revenue loss and customer dissatisfaction.
• Regulatory expectations: Regulators and card schemes (Visa, Mastercard) expect payment providers to operate a risk-based approach, meaning mitigation actions must be proportionate to the level of threat.
• Data silos: Risk decisions often require combining data from merchant onboarding, transaction monitoring, and external sources, which are not always integrated.
• Speed vs. thoroughness: Onboarding delays frustrate merchants, but insufficient due diligence increases exposure.

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How to Mitigate Risk: A Practical Framework

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We recommend a structured approach that addresses risk at multiple stages of the merchant lifecycle:

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1. Risk-Based Onboarding

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Segment applicants by risk level using Know Your Business (KYB) checks, UBO verification, and business model analysis. High-risk categories (e.g., crypto, adult, travel) should trigger enhanced due diligence.

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Practical steps:

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• Define clear risk categories based on MCC (Merchant Category Code), jurisdiction, transaction volume projections, and ownership structure.
• Automate data collection from company registries, sanctions lists, and adverse media sources to reduce manual review time.
• Require additional documentation (bank statements, business licenses, proof of operations) for applicants flagged as elevated risk.

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2. Continuous Monitoring

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Mitigation does not end at approval. Merchant monitoring should track behavioral shifts that indicate increased risk, such as chargebacks spikes, transaction pattern changes, or negative press.

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We look for:

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• Chargeback rate trends (especially increases that approach scheme thresholds).
• Volume surges that exceed initial projections without explanation.
• Changes to business operations (new domains, new product categories, ownership changes).
• Adverse media mentions (lawsuits, regulatory action, consumer complaints).

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3. Threshold-Based Actions

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Establish triggers for intervention. For example, if a merchant's chargeback rate exceeds 0.9%, move them to a watch list or impose a rolling reserve. If it exceeds 1.5%, escalate to manual review or suspend processing.

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We usually advise teams to define escalation paths in advance so frontline operators know when to act and when to escalate to senior risk analysts.

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4. Partner and Ecosystem Oversight

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For platforms facilitating sub-merchants (e.g., marketplaces, PayFacs), risk mitigation extends to partner oversight. This includes monitoring the risk profile of downstream partners, enforcing contractual compliance, and ensuring sub-merchants meet the same standards as directly acquired merchants.

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5. Policy Refinement

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Use data from declined applicants, offboarded merchants, and fraud incidents to refine underwriting policies. Regular reviews (quarterly or biannually) help ensure policies reflect current threats rather than outdated assumptions.

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Example: Detecting and Mitigating an Evolving Fraud Scheme

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A payment facilitator onboards a merchant selling electronics. Initial KYB checks show a registered company, verified UBO, and a legitimate-looking website. The merchant is approved.

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Three months later, monitoring systems flag the following:

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• Chargeback rate has climbed from 0.2% to 1.8% in two weeks.
• Customer complaints reference non-delivery or counterfeit goods.
• The merchant's website domain recently changed, and traffic analysis shows a shift to a different geographic region.

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The risk team triggers a mitigation workflow:

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• Transaction processing is suspended pending review.
• A manual investigation confirms that the merchant is now selling counterfeit goods.
• The merchant is offboarded, and a rolling reserve is applied to cover outstanding chargebacks.
• The case is flagged in the internal system to block future applications from the same UBO or associated entities.

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This scenario illustrates why mitigation must combine automated alerts with investigative capacity. The merchant passed onboarding, but behavioral changes required intervention.

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Strategic Context: The Cost of Insufficient Mitigation

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Failure to mitigate risk effectively has measurable consequences:

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• Regulatory penalties: Card schemes can impose fines on acquirers with excessive chargeback rates or fraud levels. In severe cases, sponsorship relationships can be terminated.
• Reputational damage: High-profile fraud incidents or data breaches erode trust with partners and end customers.
• Financial loss: Direct losses from fraud, chargebacks, and regulatory fines can be significant. Additionally, excessive false positives push away legitimate merchants, reducing revenue.
• Operational strain: Without systematic risk controls, teams spend disproportionate time on firefighting rather than strategic improvements.

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For acquirers and PayFacs, mitigation is not optional. It is a foundational requirement for maintaining scheme compliance and protecting margins.

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How Ballerine Supports Risk Mitigation

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Ballerine provides a risk decisioning platform that integrates onboarding, monitoring, and investigation workflows. Our merchant underwriting solution automates data collection from dozens of sources (company registries, sanctions lists, adverse media), scoring applicants based on configurable risk models.

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For ongoing mitigation, our monitoring engine tracks transaction patterns, chargeback trends, and external signals, alerting teams to behavioral shifts that warrant intervention. Investigations are centralized in a case management system that consolidates merchant history, supporting documents, and audit trails for regulatory reporting.

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Teams using Ballerine report reduced manual review time, faster investigation resolution, and improved fraud detection accuracy.

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