Merchant Service Providers Become Banks’ Front Line Against Real-Time Fraud

Watch more: Need to Know: Maverick Payments, Kyle Becker

Payments are complex enough, but the compliance burdens that accompany money movement add a further layer of difficulty.

Regulatory expectations shift, fraud patterns evolve and financial institutions are left to balance their responsibilities to regulators, card brands and customers without overwhelming their compliance operations.

Merchant service providers (MSPs), once viewed as traditional vendors, are emerging as partners to help banks navigate this shifting terrain.

A Balancing Act for Financial Institutions

“It’s an artful balancing act for sure,” Maverick Payments Vice President of Bank Strategy and Partnerships Kyle Becker said in an interview with PYMNTS. “At the end of the day, the most important thing to understand is the financial institution has the ultimate responsibility to their regulators and to the card brands, as it’s really their charter and license that’s on the line.”

Banks face overlapping oversight from regulators such as the Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., state regulators and agencies, including the Financial Crimes Enforcement Network (FinCEN) and the Federal Financial Institutions Examination Council. Add in Visa, Mastercard and other card networks’ own brand rules, and the compliance picture becomes even more complex.

“There’s a lot of [initiatives] to get right,” Becker said.

This is where MSPs such as Maverick come in. Maverick is a full-service payments provider offering merchant services.

“[We] bring a very highly specialized view of risk and compliance in this space, as it is more nuanced than certain core banking relationships that banks see on a day-to-day basis,” Becker said.

From Vendor to Partner

The perception within the banking industry of MSPs as third-party vendors is outdated, Becker said.

“The term vendor is a bit of an antiquated term, especially when it comes to money movement,” he said, pointing to the value of strategic partnerships.

That means transparency and alignment.

“Regulators expect a sponsor bank to know the who, [what, where and how] of how each merchant came to be, how they were underwritten, how they are monitored,” Becker said.

To meet those expectations, Maverick emphasizes third-party risk management governance, providing banks with full access to policies on underwriting, compliance, risk analysis and monitoring.

Flexibility is equally important.

“Each bank has a different view on their regulatory expectations, their risk appetite, and how they want to make sure that their portfolios are safe,” Becker said. “You need to have a service provider that can really be highly adaptable.”

The Technical Burden: PCI and SOC

Banks also must reckon with operational and technical burdens that come with compliance regimes like PCI and SOC. PCI focuses on cardholder data integrity, while SOC ensures robust internal information security controls.

“It’s critically important for a sponsor bank … they make sure that all of the data that lives on our side … that we are certified on a recurring basis and confident that we meet those expectations because the regulators are going to look at that,” Becker said. “It’s a non-negotiable.”

The stakes are high. Breaches or lapses create reputational, operational and credit risk not only for banks but for their partners. Proof of certification and continuity is, therefore, table stakes for MSPs.

The Onboarding Moment

For banks and merchants, the onboarding process is a defining moment. It is here that know your customer (KYC), know your business (KYB) and customer identification program (CIP) requirements take center stage.

“The CIP requirements up front during underwriting and onboarding are probably the most critical things that we can do up front to make sure that we know the beneficial owners of the merchant as well as the merchant entity itself,” Becker said. “And CIP is something financial institutions and MSPs like Maverick cannot risk getting wrong.”

Maverick’s approach is to combine certified technology solutions with manual checks where needed, ensuring all required data is verified and shared transparently with bank partners.

“We provide our partners with full transparency into the process … and we provide full KYC, KYB evidence to our banking partners to support their audit expectations, making sure that we’re walking the walk and talking the talk,” Becker said.

Plus, a dynamic onboarding procedure is crucial when supporting merchants in different verticals, which require everything from more standard KYC through enhanced due diligence.

The process does not stop at onboarding. Ongoing monitoring, supported by merchant monitoring service providers certified with card brands, ensures that merchants continue to operate in line with agreements.

Real-Time Fraud Monitoring

As payments shift further into real time, transaction monitoring becomes an indispensable part of compliance.

“Transaction monitoring is the word that keeps people up at night,” Becker said. “You’ve got to make sure that you’re monitoring the transactions that are coming through your BINs almost real time to make sure that you’re getting in front of these fraudsters.”

Maverick uses industry-leading monitoring solutions, combined with transaction flagging parameters developed alongside bank partners. These systems assess authorization patterns, chargeback trends and other indicators of fraud. A dedicated team of risk analysts tracks alerts as they arise.

Aside from transaction monitoring, other tools are used for website monitoring for potential issues such as transaction laundering, product change monitoring, negative news and other risks that can occur post onboarding. It is important to manage the layers of risk through the relationship, Becker said.

Maverick is watching a range of risks, spanning card fraud, card testing, account takeover fraud and transaction laundering, he said. Unusual activity reports, when necessary, are escalated to banks for action.

A Stronger Compliance Function Through Partnership

MSPs can complement a bank’s compliance function.

“We can never totally replace the internal responsibilities of a financial institution, but we can certainly provide a highly complementary service to ensure their regulatory and card brand compliance,” Becker said.

Kyle Becker is the vice president of bank strategy and partnerships at Maverick Payments, a payment provider with technology designed for sales organizations and enablement channels, such as ISOs, ISVs, agents and banks looking to monetize payments.