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The importance of merchant verification before partnering with other companies

Nov 01, 2018 Philip Burgess

The importance of merchant verification before partnering with other companies

The relationships that businesses develop with other companies as various forms of corporate partnership are, ultimately, essential to the proper flow and function of the entire U.S. economy. On a more practical, everyday level, these matters are just as important but often become less cut and dried. For example, an advertising agency can start out on the right foot with a particular client, establishing a routine vendor-customer relationship, but in just a few months the account might stop submitting payments for its invoices and go dark - not answering emails or phone calls - when agency representatives attempt to reach the organization. 

"All businesses must make good use of comprehensive merchant verification services."

Fortunately, these kinds of situations aren't common, as there is usually prior indication of something being off with the client, which signals to the vendor that there exists a mistake in need of some rectification. But the possibility that it can happen at all illustrates the importance of merchant verification for companies' B2B transactions.

A broad spectrum of factors must be considered in terms of how they relate to this process, ranging from proper identification of a merchant's issuing bank to various screening procedures that search for possibilities of fraud and other irregular activity. 

The basics of merchant verification 
The primary purpose of analyzing any transaction, be it B2B or between a business and consumer, is to determine its veracity - identifying the location of its initiation, the financial institution from which it originated and the existence of sufficient funds in the account to cover the purchase, whatever it may be. Ultimately, the biggest difference between verification of B2C and B2B transactions is one of scale, but there are additional factors making the latter more complex. When push comes to shove, though, a fruitful business relationship depends greatly on trust, and because the financial stakes are much higher in B2B transactions, establishing trust by putting orders through a verification process is even more important than doing so for consumer purchases.

Major fraud risks 
According to Worldpay, the biggest fraud threat for which merchants should vigilantly search is card-not-present fraud, which has become much more popular in recent years - specifically since the broad deployment of EMV chips in American credit and debit cards, which began in October 2015. (EMV had already become par for the course in Europe and Asia several years earlier.) Card-not-present fraud refers to spurious transactions made online, in which the merchant obviously can't scan an EMV chip or even a magnetic stripe to determine a card's authenticity. While requesting additional information such as the credit or debit card's three- or four-digit CVV number and expiration date helps, these bits of data don't make for enough to definitively ensure that a purchase is above board.

The importance of merchant verification (before working with other companies)The considerable risk of certain fraud types stresses the importance of merchant verification in B2B transactions.

On the B2B side of this issue, merchants could presumably ask for payments to be remitted via other means, such as a certified check or a wire transfer, but the latter, in particular, is arguably an even bigger fraud risk than card-not-present transactions. Also, as BluePay pointed out, many clients prefer doing business with their company credit cards, so telling them that this isn't an option can end up losing clients who would otherwise be happy to work with you, thus damaging your bottom line. 

"AVS and CVV can be reliable systems for vetting the legitimacy of credit card charges."

Finding ideal fraud prevention methods 
Elavon recommended that all businesses undergo a full-scale implementation of address verification systems for vetting all transactions between their consumers, as well as those conducted with other companies. The specific workings of AVS platforms vary, but their general purpose is ensuring that the billing address submitted as part of a credit or debit card purchase matches the location originally filed by the genuine cardholder of the account in question.

If any aspect of the submitted address doesn't match what is stored within your records, the AVS generates a code to flag the specific mismatch with the transaction recipient's billing department. This freezes the entire process until some resolution to the issue occurs - mistaken information is corrected by the purchaser, or the transaction is canceled by a fraudster whose efforts have just been foiled.

CW2 and CVC2 verification systems - for cards issued by Visa and MasterCard, respectively - work in similar fashion but alert merchants of CVV code discrepancies, and work as an ideal complement to AVS.

Important considerations for merchant verification
Some creditors offer additional services, such as Visa's Account Number Verification, to provide further means of vetting transactions. However, these typically come with fees that standard AVS, CW2 and CVC2 do not, such as the zero dollar verification fee: Visa, for one, levies this every time a merchant queries the credit issuer for confirmation of a card's legitimacy without actually charging a purchase to the associated account, according to CardFellow. While this is minuscule - $0.025 for each verification request - it certainly adds up over time, especially considering merchants who process thousands or hundreds of thousands of transactions on a daily basis. 

In the long run, it may be more beneficial for businesses to employ other methods of merchant verification, such as screening techniques that verify the existence of a prospective payer's bank account and an examination of the funds within it. These can be used in tandem with AVS, CWS and CVC2, or as separate vetting processes. Either way, bank verification provides a concrete picture of another business's financial status, allowing merchants to protect themselves from the possibility of dealing with problematic companies or those vulnerable to fraud.