Merchant On-site Inspections may also be called On-Site Surveys, Merchant Inspections or Merchant On-Site Investigations.
A Merchant On-site Inspection provides an objective visual and operational analysis of a business and is usually requested by credit card processing companies. The onsite inspection assists in determining the legitimacy of a business and helps recognize and prevent fraudsters from opening shell merchant accounts or committing merchant fraud.
When an acquirer signs a client up for a merchant account, that merchant represents significant risk. If the merchant owes money to customers or their issuing banks or is not compliant with required rules and regulations, the merchant acquirer may be left to cover these fines and debts.
Fraudsters will attempt to setup shell merchant accounts for the purpose of processing transactions on stolen or compromised payment card accounts. Fraudsters may also setup a business that is meant to seem legitimate, but they could be selling counterfeit goods or simply taking payment but never sending shipment. These are precisely the kinds of "merchants" an acquirer wants to avoid, and by using an on-site inspection service acquirers should be able to recognize such schemes and know not to underwrite the merchant.
An acquirer can also use Merchant On-site Inspections to ensure a merchant has provided accurate information on their merchant account application. For example, a merchant will say what types of products/services they sell, and the inspection may see if they are selling any items they neglected to tell the merchant services business about. Also, if the merchant exaggerated their sales volume, number of employees or other information, this can be recognized as well.
There are also services that offer On-site Merchant inspections and PCI compliance investigations. These providers offer the general on-site inspections but also have the technical knowledge to investigate the merchant's compliance with the PCI Data Security Standards.
THE FRAUD PRACTICE
KEY NOTES
Alternative Solutions - Merchant services businesses can use Spiders and Merchant Website Monitoring to inspect merchant website data and characteristics, but there are no alternatives for physical site inspections.
Building this In-House - It is possible to train internal staff to conduct such on-site inspections, but this likely won't provide the geographical coverage a third party provider can offer.
Estimated Cost - Vendors may offer services on a per merchant/inspection basis as well as on a subscription service for ongoing monitoring.
Sample Venders - N/A
ON-SITE MERCHANT INSPECTIONS
Merchant On-Site Inspections are used by merchant acquirers as a preliminary assessment and investigation before underwriting a merchant account. The inspection provides information to mitigate risk and fraud and to determine the legitimacy of a business when establishing a new account, or if following up on suspicious activity with an existing merchant.
Key considerations when implementing or buying this functionality include:
Is the vendor able to perform on-site inspections across the entire country or region? What about foreign countries?
Do they conduct both exterior and interior inspections?
What is the typically turnover time from when an inspection is requested and when the report is received?
Is the provider setup to accept site inspection requests online? Are they able to deliver site photographs and reports electronically and online as well?
Can the provider customize their inspections to handle special requests or needs? (Such as insuring products sold and other details are consistent with information provided on merchant account application.)
HOW DOES IT WORK?
An On-Site Merchant Inspection requires manual inspection and gathering of evidence from a third party occurring physically on the merchant’s site or premises. This is not limited to brick-and-mortar companies as a merchant services business may also need to inspect e-Commerce businesses, in which case it would inspect their offices or buildings where day-to-day operations take place. Most vendors are able to perform an on-site inspection within 3 to 5 days of the inspection being requested.
The merchant inspection is intended to verify the physical location of a business and document information pertaining to the merchant accepting payment card transactions. Merchant On-Site inspections range from quick, drive-by surveys to more in-depth inspections of the business and their internal procedures.
Exterior Inspections
Exterior on-site inspections, also called drive-by inspections, are less involved and may be announced or unannounced to the merchant. The exterior inspection generally includes: exterior photos of the business, business signage and address verification photos, and other observations of the merchant’s physical facility. These inspections do not provide extensive information about the merchant or their business, but it does confirm their business address is legitimate.
Interior Inspections
Interior on-site inspections are more detailed and can be used to verify a merchant’s business, inventories and operations. Interior inspections may include: exterior photos of the business, interior photos of the business to include equipment and inventory, business signage and address verification photos, details of building layout and square footage, tallying the number of phones, computers and employees, details of business hours, licenses and card association decals that are displayed, as well as a description of the business’ operations. Interior inspections provide a much more comprehensive view of a merchant’s operations.
It provides evidence that a business has an establishment at the provided address, but by looking at inventory, equipment and other capital investment the merchant services business has stronger evidence that a merchant is legitimate, and the inspection can also corroborate or contradict information the merchant already provided the acquirer in their application for a merchant account.
HOW DO YOU USE THE RESULTS?
The vendor will provide the merchant services business with photographs and a summary report of their findings from the inspection. All details, such as inventory in stock and the number of employees, will be listed as well. The report will also identify any indicators of fraud or risk. The acquirer who requested the inspection can use the information from the on-site inspection report to make a decision on whether or not to underwrite the potential client. For example, a business with hand written signs and low to non-existent inventories may be a fraudulent or shell merchant and not someone an acquirer would want to underwrite. Or maybe a fraudster applied for a merchant account and gave a vacant address. These are strong signals of potentially fraudulent merchants, but the inspections may also uncover softer signals of risk, or information that contradicts what the merchant stated on their application for a merchant account. For example, if a merchant over- or understated their sales volume, wasn’t completely honest about the types of goods they are selling, or if they claimed to have more employees than they actually have.