Risk management with Connect

Learn how Connect can help you manage risk and losses.

All business owners assume a certain amount of risk when accepting payments for goods and services. This guide defines the risks to consider as a Connect platform owner and the approaches you can take to mitigate those risks.

Components of payments risk

Any approach to risk management involves many potential sources of payments risk, which can be split into two general categories:

Transaction risk: The risk that a customer might charge back a transaction, such as disputes or fraud identified from card testing. With direct charges, transaction risk primarily affects connected accounts; with destination charges and separate charges and transfers, transaction risk primarily affects platforms.
Merchant risk: The risk that a connected account is unable or unwilling to cover the costs of chargebacks on its transactions, leading to unrecoverable negative balances. Merchant risk primarily affects platforms.

There are two main types of merchant risk: credit risk and fraud risk. Both can result in chargebacks and unrecoverable negative balances.

Type	Description	Examples
Credit risk	The risk that connected accounts are unable to fulfil their obligations to their customers, such as failing to deliver orders due to unforeseen supply issues. If a connected account accumulates more refunds and chargebacks than it can financially cover, it can result in default.	During the COVID pandemic, some hotels and short-term accommodation providers represented by connected accounts went out of business. As a result, customers who had pre-paid for future stays submitted chargebacks, which were covered by the platforms that processed those payments.
Fraud risk	The risk that dishonest owners or employees of connected accounts intentionally don’t fulfil their obligations to their customers, such as taking orders for unavailable goods and services.	No intent to deliver: A fraudulent online storefront charged customers for goods that they didn’t intend to deliver. The connected account then paid out the money to their external bank account. When the customers realised that their orders were never going to arrive, they submitted chargebacks, which were covered by the platform. Payment method cashing: A fraudster stole a customer’s credit card number, opened a connected account, and made purchases through that account using the stolen payment method credentials. When the customer discovered the fraudulent charges, they submitted chargebacks, which were covered by the platform.

Connect merchant risk options

Each connected account’s Account object has a controller.losses.payments property that determines who’s responsible for covering any negative payments balance on that account.

Note

The controller.losses.payments property applies only to the connected account’s payments balance. It doesn’t affect responsibility for covering negative Issuing or Treasury balances.

You can select whether you or Stripe is responsible for negative balance liabilities on your accounts. Because your choice of negative balance liability can have a significant impact on your platform and connected accounts, consider it carefully before onboarding any accounts. This table describes some important elements of the decision:

	Stripe	Platform
API value	`stripe`	`application`
Losses	Stripe covers losses due to your connected accounts’ negative balances.	Your platform can incur losses due to your connected accounts’ negative balances.
Operational responsibilities	Stripe’s risk teams fully manage all payments-related merchant risk.	The platform maintains an internal risk team capable of adequately managing all payments-related merchant risk.
Connected account experience	Stripe contacts your connected accounts directly to prevent, mitigate, and resolve payments risk-related issues, and in some cases can take action against them.	Your platform has a greater degree of control over the payments risk-related experience of your connected accounts.
Stripe fees	If you pay Stripe’s listed prices for other fees, we don’t charge additional fees for negative balance liability.	Stripe charges no additional fees.

We recommend that new platforms have Stripe take responsibility for negative balances on connected accounts. Only consider taking responsibility as the platform if you’re highly confident in your ability to manage merchant risk.

Stripe solutions for risk management

Stripe provides a variety of solutions to help manage both transaction and merchant risk. These solutions fall into two categories:

Tools to manage risk: Tools that Stripe provides to help platforms manage risks without Stripe being liable for any resulting losses.
Full service risk management: Risk-management services that Stripe provides where Stripe covers the costs of any resulting losses.

This table describes the main solution that Stripe provides in each category for each type of risk:

Risk type	Tools to manage risk	Full service risk management
Transaction risk	Radar: Scans every payment to help detect and prevent fraud.
Merchant risk	Merchant risk tooling: Tools that help your risk teams prevent, detect, and mitigate risks posed by your connected accounts.	Stripe Managed Risk: A full-service solution that protects your platform by managing risk and covering any negative balances on your connected accounts.

Know Your Customer (KYC) and compliance

In addition to operational risk management solutions, Stripe provides KYC and risk-based screening to help onboard connected accounts and maintain compliance with evolving regulations. Stripe screens include the following:

Identity verifications
Risk-based KYC and AML checks for individuals and businesses
Sanctions screening
MATCH (Member Alert To Control High-risk businesses) list checks
Secure credit card data tokenisation for PCI compliance
Money transmitter licences (MTL) in the US and e-money (EMI) licences in the EU
Prohibited business checks