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  • Writer's pictureNavvir Pasricha

Fighting Fraud Pt:1

Updated: Nov 27, 2020

Over the past few weeks, we have been focusing heavily on how to identify fraud and how fraud has changed over the years. Those topics, while forming the cornerstone of all risk mitigation efforts only deal with the first half of the equation - identifying the problem. There is a second, equally important part ie: what to do once a problem has been identified. The methods that will be discussed and presented today might not be a cookie-cutter approach but is skewed towards enabling payment facilitators and marketplaces. Next week, we will take a look at mitigation strategies for merchants.

Regardless of the strategy, there are 4 vital considerations one must take into account. When reviewing each strategy, we will cover these four considerations to provide the basis of the thought process that should be adopted when deciding a risk mitigation strategy. The 4 considerations are:

1) Effectiveness - How much of the identified risk will be mitigated as a result of the strategy?

2) Cost - How many good customers will be affected by the strategy?

3) Impact - What will the impact of the strategy be to your customers?

4) Reversibility - If something did go wrong, how easy would it be to reverse the decision?

With those considerations in mind, let us explore the 5 methods that can be used to mitigate risk.


Reserves is an amount of a merchant’s money that a payment facilitator or marketplace holds to cover customer claims/chargebacks. This can be thought of as a form of collateral, collected by the payment facilitator or marketplace. Reserves can come in forms of a fixed dollar amount that does not change ex: $5,000 or in terms of a certain percentage of the total amount a merchant could receive in a month or even a minimum amount of money that must be maintained in an account. The duration of reserves can range from 30 days ago to over a year depending on factors such as how long it takes for an item ordered to reach the customer, chargeback and refund timeframes. This mitigation strategy is a proactive risk mitigation measure and provides payment facilitators and marketplaces with a safety net to protect against claims. Reserves are common practice as marketplaces like AliExpress and Shopee tend to hold 100% of the merchant’s funds until the customer has received the items. Meanwhile, payment processors like Paypal and Adyen keep reserves on merchant accounts until they are satisfied that the merchant risk level is acceptable.

One could think of reserves as the police service, a blunt instrument that often uses an undiscerning, one size fits all approach to mitigating risks. Also, similarly to the police service, reserves can serve as a deterrent against those with bad intentions.


  1. Effectiveness - Reserves can be very effective to mitigate risk provided the method used to calculate how much money a payment facilitator or marketplace can stand to lose if a merchant does not honour any purchases moving forward. This figure is commonly called ‘exposure’ and will be the subject of an article all to itself. Once a merchant’s exposure is calculated, the payment facilitator can ensure to capture that same amount of funds as a reserve thus mitigating the risk entirely. However, should there be any change in any of the parameters used to calculate exposure, the reserves could be ineffective as the amount held is too low when compared to the exposure. There are a few safeguards that can be put in place such as periodic reviews but this is a resource-heavy exercise and would require running a team of analysts to ensure exposure calculations are accurate.

  2. Cost - Payment facilitators tend to use reserves as a proactive measure and as such, these reserves are placed on accounts before negative events occur not after. As a result, a number of good customers tend to have reserves placed on their account just as a layer of protection for the payment facilitator. Naturally, this causes a fair amount of friction between merchants and payment facilitators and unless the payment facilitator can be convinced that the merchant poses no threat, reserves are unlikely to be removed from an account.

  3. Impact - The impact of reserves can be far-reaching. A merchant could experience a cash crunch since a portion of their revenue or their entire profit margin is being held by the payment facilitator. This could result in shipment delays or the merchant not honouring sales altogether. Unless the merchant is cash-rich or the merchant is the producer of the goods, reserves would make the merchant’s ability to honour all sales significantly more difficult.

  4. Reversibility - The one saving grace of reserves is that, provided the payment facilitator has a well-designed system, reserves can easily be reversed. This would free up all of the merchant's funds in a question of a few hours, giving the merchant incentive and means to honour all sales.

Payment Holds

Payment holds are similar to reserves in that the payment facilitator holds a percentage of the merchant’s sales for a pre-set amount of time. The difference between payment holds and reserves is that holds are valid for a pre-determined set of time and that they tend to be blanketly applied to certain segments of the user base. For example, PayPal holds 100% of all funds received for 21 days for any merchant deemed to be a young seller. The thought process is that since these merchants have yet to prove that they will honour all purchases, the payment hold enables payment facilitators to honour customer refund requests or chargebacks without any further difficulty. This strategy is effective in mitigating short term risks but cannot be relied upon in the long term as it causes too much of a cash crunch to merchants.


1) Effectiveness - Without a doubt, payment holds are the most effective way of mitigating risk as it holds almost all the money a merchant receives for a period of time. This means that almost the entire exposure amount has been covered.

2) Cost - The downside to having a strategy like holds is that good merchants, bad merchants and everyone in between gets treated the same ie: their funds are held. This blanket approach means that even good customers will have to go through payment holds, almost as a right of passage.

3) Impact - Merchants are sure to find this strategy invasive and even more damaging then reserves as they will see no funds despite making sales. Holds would require the merchant to have sufficient capital to continue business without having to rely on the funds from actual sales.

4) Reversibility - Similar to reserves, payment holds can easily be reversed provided the payment facilitator has a well-designed system. However, as a principle, most payment facilitators who use payment holds tend not to reverse them as the segment that is subject to holds tend to be the highest risk segment of merchants.

This is just two strategies that a payment facilitator or marketplace could use to mitigate the risks posed by businesses using their platforms. Do you think these are fair on merchants? How should these strategies be implemented without causing harm to merchants? Let us know your thoughts in the comments below.

Join us again next week for part 2 of risk mitigation strategies: a guide. In the meantime, get in touch with us if you want to learn more about risk mitigation strategies and which one could suit your business.

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1 Comment

Nov 24, 2020

Very informative, thank you!

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