High risk transactions refer to financial exchanges that have a high possibility of being associated with financial issues and crimes. Businesses that frequently become victims of such transactions have a greater likelihood of struggling or failing financially. For such businesses and merchants, rejection from payment gateways and banks is also more likely.
For a business to survive and profit, setting up measures for effective transaction monitoring is crucial. While there are many transaction monitoring service providers, understanding high risk transactions yourself is the key to keeping your business safe.
Understanding high-risk transactions
High risk transactions carry a greater chance of financial fraud through chargeback, money laundering, and other scams. Owing to increased incidences of fraud for all digital businesses, risk based transaction monitoring for banks and businesses in crucial. While external services can help, understanding the different types of high risk transactions is the first step to curbing and controlling fraud.
Suspicious transaction monitoring: 5 risk factors to keep an eye out for
While monitoring bank transactions in their entirety is important for security purposes, a more keen eye on high-risk ones is the key to being safe and compliant.
Following are some types and risk factors for high risk transactions that all businesses need to be wary of.
Utilizing CND or Card Not Present transactions
CND or Card Not Present transactions are those which do not involve the physical presence of the cardholder or the card. This means that information on the card is being carried over to the payment gateway in some other form.
CND transactions include all transactions that take place over mail orders, phone, email, text etc. Automatically billed payments such as online subscription setups are also CND transactions.
A lack of physical presence of the card or cardholder is what makes these transactions more likely to be fraudulent and high risk transactions. This is because anyone can steal card information and use it remotely.
First-time customers and higher chance of fraud
First-time customers are more likely to commit fraud and harm a business than older clients and customers. While some scammers may conduct sleeper fraud by stealing information and maintaining long and balanced relationships with the banks, most simply go on and make the transactions they need. This makes first-time customers have a higher chance of high risk transactions than repeat clients. Despite its importance, cross-checking all first-time transactions can be a tedious task for businesses.
Large transactions or high-ticket purchases
Businesses that charge expensive rates for their products are more at risk for fraud. However, even if you have lower prices, larger orders involving more money signal high risk transactions. This is why businesses with hefty prices as well as those dealing in the wholesale marketplace need effective fraud transaction monitoring solutions. The same goes for high-volume businesses that may not be in the wholesale department but still have a large customer base.
Accepting International accounts
International transactions are some of the biggest and most common types of high risk transactions. These are not only risky for the businesses that accept them but also carry a high risk of transferring laundered money.
International transactions are risky owing to the fact that different countries have different banking, financial crime, and digital payment processing regulations. From third-world countries, the risk of high risk transactions is even higher. FATF lists certain countries that are at higher risks of money laundering, terrorism financing, and proliferation financing. For transactions from these countries, strict AML transaction monitoring systems help curb financial crime.
Working in a high-risk industry
There are three prime factors that define whether an industry is high or low risk. These are:
- Having high-risk customers
- Selling high-risk products or services
- Utilizing high-risk modes of financial transactions
On the basis of these three parameters, industries more prone to high risk transactions include but aren’t limited to:
- Financial services
- International businesses
- Businesses involved in expensive products such as boats, planes, real estate, etc.
- Adult and gambling companies and websites
- Debt collection and consolidation services
- Firearms businesses
Understanding your identity as a high-risk business
High-risk businesses are not only more likely to fail due to scams but also can have difficulty finding good financial partners. Having to deal with high-risk financial exchanges further increases the likelihood of high risk transactions. Understanding such transactions and risk factors that may affect your risk level is crucial. Banks primarily consider four factors before determining the risk level of a business. These factors include:
- Industry type
- Financial history and model
- Billing model
- Processing volume
Assessing your businesses against these factors and then addressing issues that need to be addressed are crucial for financial security.
The final word
High risk does not necessarily mean bad. It just means that such businesses require more attention, safety protocols, and regulation. For example, a bank might classify a business with a processing volume of over 1 million transactions as a level 1 risk but if handled correctly, this business will bring great profits to the bank. At the same time, however, such a large transaction volume also increases the risk of fraud. It is easier for scammers to get away with scamming businesses that have hefty financial dealings.
This is why understanding high risk transactions is crucial for businesses that want to thrive. Only after a thorough understanding of high-risk transactions can a business can set up effective transaction monitoring solutions and stay safe and compliant with regulations.
