Transaction Monitoring vs. Policy Monitoring: Choosing the Right Merchant Risk Monitoring Solution for Your Business

Effective risk management in the payments ecosystem is crucial for businesses to thrive. 

A key part of this process is merchant risk monitoring, which involves tracking and mitigating risks at both the transaction level and across a merchant portfolio. However, not all risk monitoring approaches are created equal, and not all can address a business's complete risk management needs. Two standard tools, transaction monitoring and policy monitoring, serve unique purposes, and understanding their distinctions is essential for success.

This blog will explore the differences between transaction and policy monitoring, and how businesses can choose the right solution or blend the two for comprehensive risk management.

Transaction Monitoring vs Policy Monitoring

What is Transaction Monitoring?

Transaction monitoring focuses on buyer-to-merchant risks and examines transactions in real-time to prevent fraud. It assesses risk at the transaction level and can stop fraudulent activity before it happens.

Key features of transaction monitoring include:

• Real-Time Detection: Flags suspicious transactions immediately.
• Risk Scoring: Stratifies transactions based on risk levels.
• Fraud Prevention: Stops unauthorized transactions, safeguarding merchants and consumers.

Example Use Case: Identifying card-not-present fraud by flagging transactions with mismatched details.

Transaction monitoring analyzes the legitimacy of individual transactions by tracking and evaluating payment activities in real-time to detect suspicious patterns, prevent fraud, and ensure compliance with regulatory requirements. By identifying high-risk transactions, businesses can mitigate potential threats, safeguard operations, and maintain trust with customers and financial institutions.

What is Policy Monitoring?

Policy monitoring shifts the focus to merchant behavior and compliance over time. Instead of evaluating transactions, it looks at trends and patterns to identify risky behaviors within a merchant portfolio.

Key components of policy monitoring include:

• Policy Oversight: Ensures merchants adhere to policy agreements and industry regulations.
• Merchant Risk Detection: Identifies non-compliant or high-risk merchants within the portfolio.
• Early Intervention: Proactively flags risky behaviors before they escalate into significant issues.

Example Use Case: Detecting a merchant generating excessive chargebacks beyond those set within their policy agreement, and addressing their activities.

Policy monitoring enables continuous and effective oversight by regularly reviewing and assessing merchants to identify potential risks and address vulnerabilities in merchant operations. By maintaining a proactive approach to policy monitoring, businesses can reduce the likelihood of fraud, mitigate financial risks, and protect their reputation in an ever-evolving regulatory environment.

How to Choose the Right Tools

To decide which tools best suit your merchant risk monitoring needs, start by evaluating your business goals. Here are some guiding questions:

1. What type of risks are you addressing?
   
   1. If you're concerned with real-time fraud, focus on transaction monitoring.
   2. To manage and monitor merchant behavior, policy monitoring might be a better option.
2. What outcomes are you prioritizing?
   
   1. Organizations focused on fraud prevention will benefit from transaction monitoring.
   2. Those aiming for strategic oversight of their merchant relationships should consider policy monitoring.

Are you prepared for combined risks?
Many businesses face challenges with transaction- and merchant-level fraud. For example, a merchant might have an issue with excessive chargebacks, while another fails to vet transactions properly. By combining transaction monitoring, which identifies suspicious activities like unusual spending patterns or flagged transactions, with policy monitoring, which oversees whether merchants follow policies or engage in suspicious practices, businesses can achieve holistic merchant risk management. This approach helps detect fraud early, enforce policy compliance, and reduce vulnerabilities in their overall process.

The Cost of Mismanaging Merchant Risk Monitoring

Underestimating the importance of merchant risk monitoring or failing to use the right tools can lead to inefficiencies, compliance issues, and increased risk exposure.

Relying solely on transaction monitoring to ensure portfolio-wide compliance can create significant inefficiencies, leading to large volumes of false positives. This wastes time and resources as teams investigate non-issues rather than focusing on genuine risks. Without additional monitoring tools, businesses may miss critical data points that indicate emerging risks at a broader level.

Furthermore, without clear and consistent policy monitoring in place, non-compliance issues can easily go unnoticed. This oversight may not only result in regulatory fines but can also cause financial and reputational damage that impacts long-term customer trust and business outlook. Policy monitoring ensures merchants follow established guidelines and contractual obligations, reducing the likelihood of violations.

Additionally, treating all merchants the same without proper segmentation fails to identify high-risk merchants who require enhanced due diligence. A one-size-fits-all monitoring approach overlooks red flags specific to certain industries, geographies, or transaction patterns.

By implementing a tailored merchant risk monitoring system that incorporates advanced technologies and focuses on both transaction and policy monitoring, businesses can proactively identify risks, reduce false positives, and maintain operational efficiency. Such systems enable nuanced analysis across the merchant portfolio, ensuring compliance and safeguarding the organization from unnecessary penalties or reputational harm.

The Best of Both Worlds

Here are three scenarios illustrating how transaction monitoring and policy monitoring can work together effectively:

• Scenario 1: A fraudulent transaction attempt is flagged and blocked in real-time using transaction monitoring, preventing immediate financial loss.
• Scenario 2: A merchant exhibiting persistent chargeback issues is identified by policy monitoring, creating an opportunity to address their practices proactively.
• Scenario 3: An e-commerce platform combines transaction monitoring and policy monitoring, detecting fraudulent activity related to a specific merchant while addressing the long-term patterns of their compliance violations.

Combining data analytics, machine learning, and manual review strategies can significantly enhance the identification of potential fraud, assessment of transaction patterns, and compliance with regulatory standards.

Enhance Your Resilience Against Fraud and Risk

To build a robust system that addresses fraud prevention and compliance, consider the following steps:

1. Evaluate Current Risks: Identify the gaps in your fraud prevention or compliance oversight processes. Analyze trends in suspicious activity, pinpoint vulnerabilities in your existing systems, and assess whether your team has the tools and knowledge to address these risks effectively.
2. Define Objectives: Clearly outline your goals. Are you focused on eliminating transaction fraud, ensuring merchant policy compliance, or achieving a balance? Defining specific, measurable objectives will guide the design and implementation of your risk management strategy.
3. Adopt a Holistic Approach: A robust solution requires combining multiple monitoring strategies. For example, integrating transaction monitoring to track suspicious patterns with policy monitoring to ensure adherence to compliance standards can create a comprehensive merchant risk monitoring system.
4. Partner with Experts: Leverage tools and platforms designed specifically for modern risk challenges. Work with industry leaders specializing in fraud prevention, compliance, and risk management. These experts can provide cutting-edge solutions tailored to your business needs, including advanced analytics, AI-driven detection systems, and ongoing support to adapt to emerging threats.

By following these steps, you can build a system that mitigates risks and positions your organization as resilient and proactive in the face of evolving challenges.

The Right Tools for Merchant Risk Monitoring

A strong merchant risk monitoring system protects your business, supports compliance, and builds trust with your partners. Whether focused on immediate fraud detection, long-term merchant oversight, or a mix of both, having the right tools in place is critical.

Ready to take control of your fraud prevention and merchant risk efforts? Schedule a demo today to learn how merchant risk monitoring solutions can support your business goals. You can minimize risks, streamline compliance, and drive long-term growth with the right strategy.

LEARN MORE:

• Webinar: From Reactive to Proactive - Transforming Merchant Risk Management with Policy Monitoring.
• From Risk Manager to Growth Driver: How Policy Monitoring Empowers Business Expansion.
• Visa Acquirer Monitoring Program (VAMP) Compliance with Policy Monitoring