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The term “merchant verification” is used in several ways in the financial industry. In the first and more widespread sense, it refers to a merchant check verification service which confirms that checks written out to a merchant are valid. Some online companies use this term to refer to the process of verifying the identities of merchants they list for the purpose of identifying and eliminating potential sources of fraud.
When discussing merchant check verification, merchant verification involves running the information on a check through a system to make sure 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 the check does not have a history of writing checks on accounts with insufficient funds or other adverse credit events. The purpose of such systems is to protect merchants from check fraud as well as situations in which people write checks innocently without having enough money; in either case the merchant must pursue steps to collect the funds and this is expensive and time consuming.
Some merchants avoid this problem by simply refusing to accept checks. Others use merchant verification. Very small businesses may use a system as simple as calling the bank or credit union on which the check is drawn and asking if the person writing a check is a member or customer in good standing. Other systems may scan checks and run the data through a database which people can use to determine whether or not the check is likely to be valid. More advanced systems debit money immediately from the customer's checking out to ensure that the check will cover the funds.
Using a merchant verification system costs money. The cost of the system varies depending on the services it offers and the business in which a merchant is working. Someone with a high risk merchant account will have to pay more because the risk of bad checks is correspondingly higher. It is typical to pay both a monthly maintenance fee and a per-check fee for merchant verification processing.
In the other sense, merchant verification is used by sites which act as marketplaces, listing goods from multiple vendors. These sites ask their vendors to verify their identity and to provide current and accurate contact information. This protects consumers from fraud by ensuring that only authorized vendors are listed and providing consumers with a mechanism for contacting a vendor in the event of a dispute or problem.
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