By Steve Duniec
Payment Advisors LLC
I started my career in merchant services in January of 1991. At that time, there were few business types that would be considered high-risk merchants. Obviously, ecommerce wasn't around. Reputational risk was an issue for many banks (processing payments for a business selling sexually explicit material, for example) and MO/TO was on the rise.
About four years in, I went to work for Chuck Burtzloff at Cardservice International. Chuck was one of the founders of the Bankcard Services Association, which shortly after became the Electronic Transactions Association as you now know it. In his wisdom at that time, he decided to pursue the high-risk industry that was out there ‒ merchants who had a difficult time getting approved elsewhere.
It was a niche few others were involved in. We would approve most accounts on the front end without a lot of scrutiny, and then watch them like a hawk after they were boarded. We charged a premium for our services since there was a lot of money spent on risk management.
CSI was later sold to First Data Corp. I became an employee of First Data for 17 great years, moving through a few different vice president roles. I had a terrific career there, but decided about three years ago that corporate life just wasn't for me anymore.
Over the years, I worked with many agents and ISOs who always asked me, "Where would I go to get approvals on accounts FD won't approve?" So I decided to go back to my contacts and help them solve this challenge. The high-risk landscape was full of opportunity.
Now, I devote my time exclusively to clients in the high-risk space. I first tell anyone that the biggest difference from when I started in this business is that the opportunity is immense. One reason is the Internet. However, it is where creative entrepreneurs have taken it that is the big difference. The bad news is that it has also brought in a corrupt, unprincipled element in many industries: people who are more interested in scamming as opposed to building a solid, legitimate business. This makes it more difficult for the good merchants.
The higher incidence of chargebacks and fraud makes processors and banks review and analyze their underwriting guidelines from time to time and remove certain merchant types. To people like me, that means opportunity. The list of such merchant types is growing every year.
But what has changed and what hasn't? One thing that hasn't is the margins. Margins are slightly lower than 20 years ago, but nothing like what has happened to the card-present industry. Those of us in the high-risk space are still demanding high margins. On average 125 to 150 basis points is not uncommon in a high-risk portfolio. Merchants will pay it and will increase shipping or bottom line pricing to their customers to cover it.
By the time they get to me, many of these merchants have been shut down or are under threat of being shut down. And they value doing business with a bank that they feel will allow them to continue to process as long as they keep their noses clean.
Retention in this space is surprisingly good. If anything, we lose merchants because their chargebacks shot up and they were shut down. But we rarely lose merchants over rate. When they feel secure, and you take great care of them, they stay put ‒ or at least consult with you if one of your competitors knocks on their door.
What is different? Most ISOs, agents and merchant level salespeople (MLSs) that come into this can't get used to the fact that the banks that have an appetite for this business aren't just going to roll over and allow you to throw any bad merchant at them. The CSI model of bringing them in and watching them on the back end is gone. So for the MLS or ISO, it takes patience and perseverance to board these merchants. The documentation required can seem endless. But, do you blame the banks? They are taking on a merchant that is a known risk. They are not going to make a mistake if they can help it.
What else has changed? Government oversight is much greater as of late. The Consumer Financial Protection Bureau is a good example. More online merchants are subject to Federal Trade Commission scrutiny, as well. This, however, is what creates opportunity. And this is a "new" risk factor. Most banks that are public entities don't want to be known to harbor specific merchants and sometimes entire industries where the CFPB and FTC have focused their efforts.
In addition, the EMV (Europay, Mastercard and Visa) liability shift occurred more than a year ago. Just as expected, fraud has moved online and is on the rise. Boston-based Aite Group LLC estimated that card-not-present fraud will account for 38 percent of all U.S. card fraud this year. This fact alone is scaring many acquiring banks off and changing the landscape.
The other thing that has changed greatly is that all of this is a constantly moving target. The bank that accepts a certain merchant type today isn't necessarily going to do so tomorrow. And the same goes for our sources. We have 15 different choices to place merchants, so we always need to keep an eye on their underwriting changes.
The CFPB even spends time in the shops of some of the acquirers that I do business with, often squeezing them out of certain industries for one reason or another. Operation Choke Point is a good phrase for what they're doing.
I'm all for the FTC and the CFPB doing their jobs with entities that are flat-out taking advantage of people. But in all industries, there are also the good guys, and that's where we like to focus our effort.
Sadly, one trend I've seen a lot of among us is salespeople who change Standard Industrial Classification codes, or paint an inaccurate, misleading picture of what the merchant really is to low-risk processors who might only ask for an application and a voided check. It happens far too often, and in such cases, it's only a matter of time before the merchants will be put at risk of being shut down, or worse yet, being placed on the MATCH (Member Alert to Control High Risk) list, also known as the Terminated Merchant File.
When this occurs, merchants are in a terrible spot. Unfortunately, merchants don't read much of what they sign. Ignorance is bliss, but it doesn't stand up in court.
During my time at CSI, I had the fantastic opportunity to meet "The Great One," Wayne Gretzky in a personal setting. We were talking about the business world, and he said something that is one of his famous quotes: "You miss 100 percent of the shots you never take." Take some shots at high risk. I think you'll like it.
Steve Duniec is founder and President of Payment Advisors LLC. With over 25 years of experience, Steve helps MLSs, agents and ISOs to place high risk merchants. He can be reached at firstname.lastname@example.org or 803-228-0019.
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