INVICTA RISK MITIGATION SOLUTION FOR BANKS, PAYFACS & ISOS

PROBLEM:

Finding new clients who are willing to switch processors has become more challenging in recent years and even if you have a client who understands the benefits of switching, there are still some major hurdles both parties must overcome before a deal is completed.  One of the principal challenges facing for both parties has always been overcoming the processor’s risk assessment of a client vs the client’s willingness to cover that risk.

Due to the nature of the on-boarding process, the processor’s risk assessment is one of the last steps before a deal can be completed. Only once the risk assessment has been completed do we learn what reserve requirements for any particular client will be. A great many deals have fallen apart at this point in the process.

Is the client even willing to put up a reserve? Does the client have the cash flow or existing capital to cover the reserve requirements? Does the client currently have a reserve? If so, are they willing to put up a second reserve while they wait for the first reserve to be released? These are just some of the many questions that arise after the risk assessment has been completed.

There is also a great deal of downward pressure from the market on processors to keep the reserve requirement as low as possible. Due to the highly competitive nature of the credit card processing business, processors are sometimes forced to accept less of a reserve (or no reserve) than the risk calls for if they want to keep or obtain an account. This forces the processor to take on more and more risk and exposure in order to grow their business.

So how do we overcome these hurdles and still protect the processor against undo risk? That is what INVICTA has solved.

SOLUTION:

Several years ago, we developed an insurance solution called Chargeback & Fraud Portfolio insurance.  It was designed to insure the processor for up to $10 million dollars in case of losses due to chargebacks and/or fraud. There were several problems with this model. First, the insurance was very expensive and only a very large client could afford it.  Second, it was limited to a $10 million dollar policy. In addition, the processors were never truly convinced that should an account encounter issues, the insurance company would truly pay out without a lengthy fight.  Thus, this insurance product has not been the solution we were hoping for.

Learning from the foundational aspects of the Chargeback & Fraud Portfolio insurance and working with numerous surety bond consultants, we have developed a new risk mitigation tool called the INVICTA Risk Mitigation Bonds. This new surety bond is designed to protect the processor from any potential loss while providing the client the needed flexibility on any reserve requirements.

The Risk Mitigation Bonds are written specifically for the processor (the payout terms and conditions will be worked out and agreed upon between the processor and the surety bond company). Unlike the portfolio insurance, each bond is written specifically for each client and can be set to whatever limit is needed, with no upper limit.  These Risk Mitigation Bonds are also cheaper than a letter of credit and the client does not have to tie up their capital. The Risk Mitigation Bond is good for one year and can be renewed for as long as required. The Risk Mitigation Bond serves two important purposes, providing valuable protection to processors while allowing clients to have access to capital for continued business growth.

Another benefit of the Risk Mitigation Bonds is the fact that, unlike a cash reserve, the bonds cannot be tied up in a bankruptcy court hearing. There are several ways we see the Risk Mitigation Bonds being used. First, let’s take a familiar scenario. We have a client that the processor would like a $5,000 reserve on the account. However, the client, for one reason or another, does not feel they should have to tie up $5,000 in operations capital to open an account. We could issue a $10,000 Risk Mitigation Bond for approximately $200 per year. The client would not have to tie up capital they may need for business operations and the processor could be protected while on-boarding a client account that a competitor may have taken without a bond; all while providing the processor both greater protection and strength in the competitive marketplace. Another example would be if we had a client that needed to put up a reserve in the amount $1,200,000.  We could underwrite a Risk Mitigation Bond for $1,000,000 and collect $200,000 in cash. The bond would cost the client approximately $20,000 per year and allow the client to retain $1,000,000 in capital for business operations and growth. The processor would have a risk mitigation of the full $1,200,000 while affording the client the ability to retain needed operations and growth capital.

As stated previously there is also no upper limit to the amount a Risk Mitigation Bond could be underwritten for. If we had a client that needed a $35 million dollar reserve, the client could obtain a Risk Mitigation Bond at a considerably lower cost than paying for a letter of credit.