By Tom Byrnes
At the core of every ISO's business is the ability to balance a spectrum of risk factors. The challenge lies between what a merchant wants to sell and what level of risk a processor will accept. Each bank has a different risk appetite, so ISOs must carefully assess a new merchant's profile before submitting an account.
Some processors may be concerned with direct financial risk; others may be focused on the long-term impact of reputational risk. Financial risk can cover everything from merchants who offer future sales such as timeshare deals, drop shipments that are fulfilled later, annual memberships that auto-renew, or multilevel marketing programs. Reputational risk categories include adult, cannabis, vape-based products, some gun sales, and drugs that aren't FDA-approved.
Although those lines are clear, ISOs often must do extra due diligence daily to protect themselves. For example, they may pass on businesses with track records of high chargebacks to avoid headaches and extra expense later. Or, while a regular business like a car dealership may be accepted by the bank, an ISO might reject one if it has a bad reputation. In certain situations, the line between risk and reward is less clear. A bank might accept a new account on a SIC-code basis, but the ISO may determine the merchant is riskier than normal and impose a higher reserve—such as a hold on a percentage of sales for six months—to offset potential risk.
That's where the underwriting team comes in. When a merchant application arrives, underwriters use a refined set of metrics to evaluate the business. First, they'll look at SIC code, percentage of non-CNP transactions and type of product being sold to evaluate potential risk factors. Then they'll factor in four classic merchant profiles most ISOs use to evaluate potential accounts:
Typically, each of these has a number of variables, but if underwriters choose to approve an account with risk attached, they build reserves into the contract to hedge against potential loss.
Risk assessment is both a key to an ISO's success and a major operational burden. It takes time to learn what each processor's appetite for risk really is and, because it takes multiple banks to support a broad portfolio, the resulting matrix of thresholds extends the learning curve and the time it takes to get a merchant up and processing.
But what if there was another approach, one designed with an ISO's business dynamics in mind rather than the "take it or leave it" way most processors package their services?
Although cloud architecture has been around for at least 20 years, it has virtually redefined most technology sectors during the last decade. Unfortunately, payment processing and many day-to-day ISO operations have remained stubborn holdouts.
Cloud-based processing changes the game for ISOs. It facilitates rapid deployment of new forms of innovation, enabling ISOs to take advantage of automated tools to instantly assess risk scores by SIC code upon submission. This streamlines underwriting and allows accounts to begin processing immediately. When additional information is required or a risk profile is in the "medium" range, applications are automatically flagged and fed into a manual review to shorten the timeline to getting an account up and running.
The highest risk profiles are ported directly to underwriting where other tools review a merchant's history to calculate average monthly transaction volumes and automatically set a reserve to cover potential exposure. Every transaction within each account is also continually scored in background through a rules engine set for each merchant SC code to account for variables. Transactions that come through after hours for tickets that are out of proportion to regular charges are instantly referred to a manual review to protect the ISO and the merchant.
This approach is designed to use the latest in technology to streamline the operational heart of every ISO's business, allowing a renewed focus on what matters most: Eliminating bottlenecks that delay revenue recognition.
Tom Byrnes is vice president of marketing at Ledgerpay, a cloud-based processor designed for ISOs. Contact him at Tom.Byrnes@quisitive.com.
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