ETA Expert Insights: The Role of Risk and Underwriting in a Time of the COVID-19 Crisis
By Edward A. Marshall, Partner, Arnall Golden Gregory LLP.
To state the obvious, the COVID-19 pandemic has profoundly affected the economy. Some merchants have been shuttered, at least temporarily. Others see sales booming. And entrepreneurs have reacted quickly, sometimes starting new businesses to address the needs of consumers and other market players at a time of crisis.
What that means for any particular acquirer depends on the types of merchants it serves. Like segments within the broader economy, some processors and ISOs—such as those focused on card-not-present sales—may experience impressive growth. Others may see sharp declines in processing volumes and revenues.
What remains constant across the industry, however, is the fundamental importance of underwriting and risk monitoring. Processors, acquirers, ISOs, and payment facilitators have an important role to play in keeping the economy functioning while protecting their businesses and the consuming public.
The unfortunate reality is that, as many merchants are working tirelessly to meet legitimate needs, bad actors seize on times of crisis to victimize the most vulnerable. Acquirers are seeing an increase in various forms of potential consumer deception. Although the precise tactics vary, ETA members have reported seeing:
- merchants making false claims about COVID-19 testing products and remedies, including by “repurposing” existing inventory to allegedly meet market demand;
- merchants promising the delivery of personal protective equipment they cannot meet (or being untruthful about the quality of the products being offered);
- disreputable pharmacy networks offering the foregoing or selling products that are illegal in the United States (such as chloroquine without a prescription);
- fraudsters posing as charities to exploit the outpouring of donations from well-meaning individuals; and
- merchants making false or misleading claims about their ability to facilitate government assistance under the CARES Act or offering “early access” to such funds in exchange for fees or personal information.
And in addition to the foregoing, certain otherwise legitimate merchants may try to gain from public panic through price gouging or by allowing other businesses to “borrow” their merchant IDs for a cut of the revenue (i.e., transaction laundering).
As always, underwriters and risk monitors should vigilantly guard their portfolios against those seeking to defraud, exploit, or deceive the consuming public. Relying on best practices, such as those outlined in the ETA’s Guidelines on Merchant and ISO Underwriting and Risk Monitoring, can combat these exploitive behaviors and protect acquirers from the financial fallout that accompanies such processing activity—including the potential for unreimbursed chargebacks or regulatory enforcement actions by the FTC or CFPB.
Acquirers should also protect themselves against the credit risks associated with merchants who may be struggling financially. In certain situations, a merchant’s precarious financial position may unfortunately warrant account termination. But often, other measures—such as principal guarantees, increased reserves, or reduced processing volumes, especially for future-delivery orders or gift cards—may be all that is needed to contain the economic risk.
Moreover, wherever possible, acquirers should strive to be sensitive to the needs of merchants—both existing and prospective. While underwriting and risk monitoring must be rigorous, acquirers should use careful analysis and discretion to avoid creating unrealistic barriers to entering or remaining in the ecosystem. For example, on-site inspections for new merchants may need to yield to Google Maps reviews and videoconferencing tours of merchant facilities.
Likewise, acquirers may need to depart from traditional responses to higher chargeback and return ratios for historically trustworthy merchants, which may be experiencing an unusual number of transaction reversals due to the nature of their services (think: travel, hospitality, gym memberships) or “friendly fraud” from a consuming public reluctant to part with their money. In that regard, Visa recently announced that it would suspend its Dispute Monitoring and Fraud Programs for merchants in the travel and entertainment verticals and be open to waiving program fees for other impacted merchants. Likewise, merchants may need the flexibility to vary substantially from historical average ticket sizes or volumes, as their businesses either contract or spike in response to changing consumer behavior. Those metrics all remain important and may warrant adverse action, but in aberrant times, aberrant numbers are to be expected. Intelligently responding to them against the backdrop of an economic shock may prevent compounding the hardship on otherwise valuable merchant partners.
Simply put, underwriting and risk monitoring at a time of crisis is as important as ever – if not more so. Being vigilant against consumer deception, carefully minding the creditworthiness of merchants, and facilitating the processing activity of businesses as they navigate this crisis will leave the payments industry poised for growth, both during the crisis and following its inevitable end.
In closing, we are all in this together. To that end, if you or your organization have information or ideas regarding how our industry can better adapt to the current environment, please let the ETA know by sending an email to [email protected].
Members can access the 3rd Edition of the Guidelines on Merchant and ISO Underwriting and Risk Monitoring through their membership portals. If you have any questions on membership, email Brad Brewer at [email protected].
Edward Marshall is a partner at Arnall Golden Gregory LLP, where he serves as co-chair of the payment systems and fintech industry team. He partnered with a working group within the ETA Risk, Fraud & Security Committee to prepare this bulletin, and thanks Eric Thomson (KYC Systems), Jim Bibles (Aperia), Dan Frechtling (G2), Tom Humphrey (Finix Payments), Sam Pfanstiel (ControlScan), and Amy Zirkle (ETA) for their insights and input.