Writing for Payment Expert, Anant Patel, President of International Markets at ConnexPay takes a closer look at the relationship between banks and businesses – and why it is important at a time of economic strain.
When we see financial collapses such as the recent ones of Silicon Valley Bank (SVB), First Republic and Credit Suisse, it is hard to tell whether the ramifications are truly over. Many companies are increasingly worried that banks may either be structurally flawed or not working in their best interests, when typically, they might be seen as providing a solid foundation for their business.
This concern is heightened for those operating in sectors that banks view as “high risk”. However, the truth is the majority of banks are conservative by nature. The likelihood of any bank, especially the older and more established banks, disappearing with their clients’ money is low.
We have seen in 2008 that governments are willing to pay huge sums of money to bail out banks. But when there is unrest in the economy, banks become even more conservative, in order to limit risk and thereby avert a scenario in which they are undercapitalised. How then can companies protect themselves from banks turning against them during uncertain times?
Understanding the ‘High Risk’ Sectors
There are many sectors that pay a premium for banking and card processing because they are either in legal grey areas or subject to higher-than-normal levels of fraud and chargebacks. However, high-risk designation isn’t restricted to what is broadly referred to as ‘vice’, and our own clients who deal with being deemed risky are from more mundane sectors.
The travel and tourism industry is also subject to high fees and stricter limits on chargebacks for reasons that airlines, travel agencies, tour operators, and ticket comparison sites largely can’t control. Airline tickets and hotel reservations are high value, and since they are digital, they are easy to transfer anonymously. A fraud network can use stolen or synthetic identities to purchase tickets and sell them for very high profits, which will in turn cause a chargeback when the person whose identity was stolen discovers the unwanted charge on their card.
Chargebacks are also a major problem for the travel industry. Flights are much more likely to be delayed or cancelled than in previous years, and anywhere from 2% to 8% of passengers miss their flights. This causes a percentage of passengers to skip the airline’s own refund process and go straight to their card scheme to get their money back. Some even dispute transactions because they didn’t enjoy their trip. Card schemes will only tolerate chargebacks to a point – if a merchant’s ratio of payments to chargebacks becomes too high, then they will pay a financial penalty by way of increased transaction costs. This can stack with the penalty for being ‘high risk’ that the industry already pays to further erode merchants’ profits.
The travel industry is also subject to what is termed ‘future delivery risk,’ which means that if you were to buy a flight through an online travel agency and the flight was cancelled, the travel agency would have to issue a refund. Because these intermediary companies don’t have any control over exogenous events like flight cancellations, financial institutions are wary about them, leading to increased fees that they pass on to the merchant.
The same is true for other industries that function as a ‘middleman’ or intermediary when it comes to payments, such as online marketplaces and ticket broker sites. Because these industries connect a customer to a supplier and don’t fulfil the product or service themselves, financial institutions place them in a ‘high risk’ category as well.
Also, it’s no secret that banks have the power to shut a client off in a split second—or prevent them from making payments at all. We’ve seen a company in the broker space that was processing hundreds of millions of dollars per year through their bank. However, this company’s former bank recently shut them off from issuing virtual cards because this broker was functioning as a payments intermediary and not fulfilling the product or service directly. Companies shouldn’t be treated so harshly by their banks.
How can companies protect themselves?
Companies in “high risk” sectors must balance accepting that they will always pay more than other merchants while also doing what they can to ensure that they don’t incur further penalties. They must show their banks and card schemes that they can be trusted and not deemed “high risk” in the literal sense. One way of de-risking the payment process is a single platform that handles incoming and outgoing transactions, with strong fraud prevention and further protection. By removing risk from the transaction scenario, they can then enjoy lower merchant processing fees, and save money while also improving cash flow.
