When you least expect it, expect it.
Truer words were never spoken, in terms of dealing with merchant fraud and chargeback losses. During the last few months, I have been involved with a handful of acquirers that risked virtual extinction due to chargeback losses. These companies were simply drawn into complacency, went after profits instead of declining or scrutinizing
accounts more thoroughly, and lost track of basic fundamentals.
There is a natural evolution for the risk-taking acquirer, but interestingly enough, in most loss cases the organizations had significant tenure in the industry along with a seasoned risk and underwriting team.
When organizations make the move to take on the liability and become “acquirers” they often do so with a bit of hesitation. After all, they have never been fully responsible for underwriting merchants or taken risk on merchant accounts. They often proceed very cautiously, only taking chances on very low-risk, “A-grade” paper, and sending higher-risk merchants to more-seasoned, higher-risk equipped acquirers. This process seems to work quite well for early entrants in the risk game as the acquirer can still keep the distribution
(sales) channel happy, but limit the risk. However, the margin made on accounts sent to these higher-risk equipped acquirers tends to be much lower as the higher-risk equipped acquirer is in need of his margin requirements too.
As the newer acquirer matures, he has a natural desire not to share margin dollars with other entities and begins to underwrite and keep more merchants under his direct portfolio. Often there is a progression as the savvy acquirer slowly weans himself from the seasoned, higher-risk acquirer. At some point, the need for a back- up may completely disappear. At this point the acquirer feels comfortable either taking or rejecting every merchant account and still maintaining the distribution channel.
The greatest risk of loss occurs when acquirers get complacent and a bit over zealous. Mistakes tend to happen when acquirers get “lax”
on their own internal policies and skip over the basics in search of the next big deal. In the excitement of securing new merchants or a new sales group, acquirers can’t skimp on basic underwriting and management principals and policies. Take, for example, the seasoned baseball player. When the baseball player becomes complacent and overly confident, the fundamentals begin to slip. It is then when slumps occur, strikeouts go up, and problems arise. Underwriting and risk are no different. The upstream financial institution has some basic guidelines in addition to industry best practices. To avoid the large loss, acquirers must always remember the basic fundamentals of the science.
There will always be risk associated with our business as a merchant account is a minimally-secured line of credit. Whether you are a merchant level sales person or a liability taking acquirer, you have a responsibility to help in mitigating losses. If the acquirer disappears due to a loss, the salesperson will lose their residual stream. For an acquirer, a large loss may mean the costly dismantling of your organization. All stakeholders can benefit by adhering to sound business practices and concentrating on fundamentals when it comes to soliciting, underwriting and managing merchant accounts.
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