See how we balance risks and rewards of digital payments.
The use of digital payments has sky-rocketed in recent years with growth increasing at twice the rate of expansion of GDP in Europe and America, and even higher growth rates in Asia. Digital payments offer consumers greater convenience and payment choices, and they give merchants more efficient ways to handle transactions and greater visibility into consumer behaviors. But digital payments have risks associated with them.
The total amount lost to financial crime is almost impossible to add up, but the UN recently published an estimate. Fraudulent payments, consumer scams, chargebacks, money laundering, and other financial crimes tally up somewhere between $800 billion and $2 trillion annually.
So, with every one of the trillions of daily digital transactions, there is a question of whether the transaction is legitimate. Payment companies need ways to navigate this terrain and limit their risks so they can continue to provide digital payment services but continue to operate profitably.
All risks are not the same.
Risks vary depending on the type of payment. For example, card-present (CP) vs. card-not-present transactions (CNP) have different risk profiles. CNP transactions have a higher risk than CP because, when the card is present, the merchant can usually verify that the card belongs to the consumer.
Different industries also are considered to have different risks. For example, merchants engaging in highly regulated industries, such as drug stores and pharmacies, along with direct marketing companies and merchants processing transactions in betting, lottery, and casino gaming, all carry intrinsically elevated risks.
Additionally, individual businesses’ risks will vary. One sign of a business with a high risk is a high chargeback rate. This is common for businesses in the travel industry or those that sell electronics, but they pose an elevated risk for payment companies.
New businesses that don’t have a history that payment companies can use as an indication of risk may be considered high risk by default, and a business owner’s bad personal credit may also be a red flag. Also, businesses with an average sale amount over $500 pose a risk to PSPs for the simple reason that bigger sales mean a higher risk to the payment company.
What is underwriting?
Payment companies weigh all of these factors when determining risks associated with processing payments for a business. Payment processors must go through the process of assessing the risks for each potential customer and then determining how much to charge in exchange for assuming that risk. High-risk businesses pay more than low-risk companies. Companies benefit from underwriting by paying the lowest possible fees based on their business and circumstances. And payment companies benefit by being fairly compensated for the risk they assume and the services they provide.
The process begins with the business owner filling out an application from the payment company. The application will require a range of information and documentation on the business and a realistic estimation of the transaction volumes, both the average ticket size and the average total sales volume per month. Then the payment processor’s underwriting department reviews the application based on the risk factors listed above and can either follow up with the business owner to answer additional questions or they can approve the application.
Who has liability for fraudulent transactions?
If a fraudulent transaction occurs, different players in the payment process may be liable depending on the circumstances. For example, If the merchant runs a physical card as an EMV transaction in-store, then the issuing bank typically covers the charges.
The answer is a little murkier with card-not-present transactions. The networks (Visa, Discover, Amex, etc.) all have different rules, and merchants are far more likely to be left holding the underwriting liability bag with these kinds of transactions.
In the case of a chargeback, funds are usually drawn from the merchant’s account, and the merchant can appeal the consumer’s claim that the charge wasn’t authorized or that the products or services received didn’t match up with what the merchant promised. Unfortunately, not all chargebacks are legitimate, creating a new category of fraud.
North American Bancard’s approach.
North American Bancard addresses the problem of fraud from different angles. Because we do our own in-house underwriting, NAB can minimize risk while enabling merchants, even those that pose a high risk, to control costs for payment processing. But we also equip our partners to help clients minimize fraud and chargebacks, so there’s less risk for everyone.
