A risk-based approach is a compliance and risk management strategy where financial institutions including acquirers, PayFacs, and ISOs allocate resources and apply controls based on the level of risk presented by a customer or transaction. Instead of applying the same checks across all merchants, a risk-based approach adjusts the intensity and frequency of due diligence based on factors like industry, geography, transaction behavior, and past activity.

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For example, a low-risk merchant selling household goods may undergo basic onboarding checks, while a high-risk business  such as an online pharmacy or gambling operator  would face enhanced verification, documentation, and transaction monitoring.

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This approach is a cornerstone of AML (Anti-Money Laundering) and KYC/KYB frameworks and is encouraged by global regulators and standards bodies like the FATF (Financial Action Task Force). It helps payment providers remain compliant without overburdening low-risk merchants, balancing fraud prevention, regulatory requirements, and business efficiency.

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