By Ken Musante
Napa Payments and Consulting
In April, Visa introduced the Visa Integrity Risk Program (VIRP) to keep merchants operating illegally out of the system. VIRP replaces the Global Brand Protection Program and requires acquirers to institute controls and oversight and prescribes a fee schedule should the controls not be properly enforced.
These new requirements are daunting and will eliminate some acquirers from supporting individual merchants within these categories. These displaced merchants will continue to process, however, and will be attracted to stable acquirers building the support and infrastructure necessary to board and serve this unique merchant type.
Visa designates merchants as High-Integrity Risk (HIR) merchants when they operate in business types that are legal, but are in a category where illicit transactions have been known to flourish. HIR merchants are classified by business type and risk level.
HIR merchants require more stringent underwriting standards and due diligence as well as enhanced monitoring to mitigate risk. They are classified by tier in accordance with their perceived risk.
Visa will update initial application fees in line with the new risk tiers and introduce an annual renewal fee for HIR acquiring. Acquirers must be granted an HIR acquiring registration before boarding HIR merchants. Each tier category has successively greater requirements such that if an acquirer is approved for Tier 2, it may board merchants in Tier 2 and Tier 3.
Tier 1 has the most stringent vetting; each of its four merchant types requires independent approval from Visa before an acquirer may process for that MCC. An acquirer approved for Tier 1, for example, may board merchants in Tier 2 and Tier 3, but they may only board Tier 1 MCCs for the specific MCC they were approved to board.
To be approved for Tier 1 or Tier 2 categories, the acquirer must undergo a control assessment to validate the acquirer has the ability to and will properly monitor HIR merchants. Acquirers with existing merchants in the respective Tiers may continue processing for their clients, but they will need to apply and pass the annual assessments on going forward.
The fees for supporting HIR merchants are significant. The initial and annual registration fee is $950 per merchant. The fee to the acquirer for supporting HIR merchants is even greater making it impractical to process for only a very small number of merchants within an HIR tier.
For Tiers 1 and 2, initial registration and annual renewal fee is $100,000 each; for Tier 3, initial registration and annual renewal are $25,000 each.
In addition, processing fees for card-not-present transactions from select Tier 1 MCCs are increasing. Visa will introduce an Integrity Risk Fee for MCCs 5967 (direct marketing-inbound tele-services); 7273 (dating services); and 7995 (Gambling). The fee is $0.10 for each transaction and 10 bps of the payment volume processed and is in addition to the higher standard interchange some MCC's already pay to the issuers.
Compliance is mandatory. Non-compliance fees are enormous: up to $400,000. Visa believes these merchant types have allowed illegal activity to be conducted over its network and is ratcheting up the controls and costs to support HIR merchant types.
While this process and fee structure is sobering, it will weed out those that are not committed to maintaining the necessary and long-term controls to build the infrastructure and support to ensure compliance with Visa rules and governing laws.
Acquirers seeking to properly process for HIR merchants can build a recession proof, non-interest income stream and stable core deposit base. They must do so, however, within an environment that is acknowledging the greater risk from these merchant types and mandating minimum controls.
Experienced acquiring managers should espouse these new requirements and build a team that fully understands and embraces their intent. Certainly the costs will be many times greater than the traditional mega acquirer, but through appropriate technology and third party partnerships, a loyal and growing merchant base could be fostered to adequately cover the costs and ongoing development.
Knowledge of the rules and industry are prerequisites. Sound merchant adjudication practices and active monitoring will provide for a successful and resilient portfolio with sustainable margins.
Visa's VIRP is an opportunity. It will level the playing field for acquirers and their partners and reward the ones who employ the requisite controls to protect the brand.
As founder of Humboldt Merchant Services, co-founder of Eureka Payments, and a former executive for such payments innovators as WePay, a division of JPMorgan Chase, Ken Musante has experience in all aspects of successful ISO building. He currently provides consulting services and expert witness testimony as founder of Napa Payments and Consulting, www.napapaymentsandconsulting.com. Contact him at email@example.com 707-601-7656 orwww.linkedin.com/in/ken-musante-us.
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