Ten Tell-Tale Signs of a Con in Merchant Underwriting

The noun ‘con’ is short for ‘confidence trick’, a swindle involving money in which the victim’s trust is won by the swindler. Con artists are arch manipulators. They use various well-honed tactics and tailor them to defraud their victims.

However, if unscrupulous merchants are conning their customers, they are also conning their acquirers and payment service providers (PSPs), who guarantee their sales at the time of transaction and into the future.

According to card scheme rules, transactions must be legal (in both the buyer’s and seller’s country) to be entered into interchange. So, if your merchants engage in deceptive sales and marketing practices, it may make sales for legal goods and services illegal, thereby increasing your risk exposure.

One of the ways to avoid falling for a con, whether as a consumer or a risk professional, is to understand and recognize the signs beforehand. Forewarned really is forearmed. In the spirit of sunlight being the best disinfectant, here are ten tell-tale signs of a con:

1. The phantom fixation

Salespeople of all stripes are good at dangling the prospect of wealth and enticing customers with the prospect of something they want but cannot have.

Consumers are seemingly hard-wired to satisfy their inner longings and get the best deal. That may be the best value for money, the best results in the shortest time or with the least amount of effort. How else can the enduring success of various get-rich-quick schemes be explained?

Beware, though, if it sounds too good to be true, it probably is. The same principle applies in merchant underwriting. Risk professionals have to question why the activity is so profitable, and why the merchant or third party is approaching their organisation over various competitors.

2. Loss aversion

People dislike losses more than they like gains of an equivalent amount. The statement ‘You stand to lose €x per year if you don’t insulate your loft has been found to have a significantly greater impact than ‘You will save €x each year if you insulate your loft.’

People put more effort into avoiding the loss of something they already have than trying to get something new. So, when reviewing your prospective merchant’s sales and marketing materials, think carefully about any offer framed in terms of potential losses rather than potential gains.

3. Social norms

Social conformity or consensus is strong in most cultures. The successful salesperson makes it seem as if everyone is donating/buying the product etc. How many times have you heard ‘we’ve had a great response so far’ in a fundraiser or sales pitch?

Pyramid schemes exploit social norms, especially those targeting specific religious, ethnic or professional groups. They recruit leaders within the group first, who in turn promote the scheme within their communities. This exploits the desire to be part of the group and to emulate the success of other savvy investors.

Offers that look to be exploiting a customer’s social network should raise a red flag to merchant underwriters.

4. Scarcity

Time waits for no man. That being said, be suspicious if salespeople create a false sense of urgency by claiming limited supply. Sometimes it’s enough to imply that stocks are limited. The scarcity principle is also exploited with the offer only good until midnight, the members-only sale, the limited edition or collector’s item.

5. Investing in something because it’s suddenly cheap

People don’t always act in their rational self-interest. They may be persuaded to invest in shares that have fallen heavily because they think they are now a bargain. However, there may be a variety of reasons why the price has fallen. It may fall even further, making investment a penny-wise, pound-foolish decision.

6. Not getting confidence levels right

People have to strike the right balance between over-confidence and under-confidence. Over-confidence can lead people to take risks and overlook signs of trouble. Under-confidence can lead to an overly cautious approach and perhaps analysis paralysis instead of action. Being too nervous to invest sensibly can be as bad as being too bold. These principles apply to merchant underwriters trying to balance risk levels across their portfolio as much as retail investors.

7. Falling for headline rates

Unscrupulous salespeople may offer attention-grabbing rates. But are they comparing a more expensive price with the offer price to close a sale? It pays to be circumspect.

Merchants should communicate all the information necessary, presenting this with sufficient clarity and prominence. Use of the words ‘guaranteed’, ‘protected’ or ‘secure’ without qualification should raise red flags to both customers and merchant underwriters.

8. Not understanding the offer

The old adage applies: never invest in something you do not understand. Unscrupulous merchants may try to disguise well-worn scams, such as advance fee frauds, pump and dump schemes and wash trades, as genuine opportunities. But caveat emptor or buyer beware applies. Never be too frightened to ask or too mean to take proper qualified advice.

Even experienced investors can be conned, precisely because they are experienced. A con artist may flatter their financial acumen. Which may in turn make them less likely to ask questions for fear of looking foolish.

Perhaps the biggest and best cons are the ones that haven’t yet come to light. Or those that you simply wrote off as bad luck. If you look at your merchant portfolio in that light, are you still comfortable that you understand your risk exposure and have judged and priced it correctly?

9. Being polite enough to engage

Literature on consumer fraud suggests fraud victims make themselves vulnerable by their willingness to engage with sales pitches. They are more likely than a non-victim to listen to a telephone sales pitch from someone they do not know. They are also more willing than non-victims to attend free investment seminars.

Engaging with a scam opens victims up to other con tactics. It can then become difficult to extricate oneself. For acquirers, this highlights the importance of monitoring throughout the relationship. Consider whether you would still on-board the merchant if you knew then what you later discovered.

10. Bandwagon jumping

This tactic exploits the fear of missing out (FOMO). It draws partly on scarcity and social norms, as described above. People instinctively follow the herd, making decisions on the basis of what those around them are doing. They do this to justify their choices, believing that they are validated by the fact that other have made the same decision. Acquirers and PSPs underwriting merchants are as likely to fall for this as consumers.

The con is an exercise in soft skills and the art of persuasion as much as the tactics described above. Cons always seem very obvious when they happen to someone else. If you are aware of the types, approaches, methods and techniques, they will also seem very obvious when they happen to you and your business.

Deceptive marketing practices will also be the subject of the fifth book in the Web Shield ‘Fundamentals of Card-Not-Present Merchant Acceptance’ series launched at the RiskConnect conference, 19-20 November 2019.