Merchant verification confirms the validity of checks issued to a merchant and verifies the identity of merchants to eliminate potential sources of fraud. It involves running check information through a system to ensure it connects to a valid bank account and has enough funds to cover the check. Merchant verification systems vary in cost and are used by online marketplaces to protect consumers from fraud.
The term “merchant verification” is used in a variety of ways in the finance industry. In the first and broadest sense, it refers to a merchant check verification service that confirms that checks issued to a merchant are valid. Some online businesses use this term to refer to the process of verifying the identities of the merchants they list for the purpose of identifying and eliminating potential sources of fraud.
When discussing merchant verification, merchant verification involves running the information on a check through a system to ensure that it connects to a valid bank account, that there is enough money in the account to cover the check, and that the person writing it is writing the check has no history of checking accounts with insufficient funds or other adverse credit events. The purpose of these systems is to protect merchants from check fraud, as well as situations where people innocently write checks without having enough cash; in both cases, the merchant must follow the steps to collect the funds and this is costly and time consuming.
Some merchants avoid this problem by simply refusing to accept checks. Others use merchant verification. Very small businesses can use a system as simple as calling the bank or credit union where the check is drawn and asking if the person writing a check is a member or customer in good standing. Other systems can verify checks and run the data against a database that people can use to determine whether or not the check is valid. More advanced systems debit money immediately upon customer checkout to ensure the check covers the funds.
Using a merchant verification system costs money. The cost of the system varies depending on the services offered and the business a merchant is working on. Someone with a high-risk merchant account will have to pay more because the risk of bad checks is correspondingly higher. It is common to pay a monthly maintenance fee and a per-check fee for merchant verification processing.
In the other sense, merchant verification is used by websites that act as marketplaces, listing merchandise from multiple vendors. These sites ask their vendors to verify your identity and provide you with current and accurate contact information. This protects consumers against fraud by ensuring that only authorized suppliers are listed and providing consumers with a mechanism to contact a supplier in the event of a dispute or issue.
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