Intelligent Risk in Retail Payments

More than ever, it’s crucial that sales and risk management collaborate.

Every Saturday morning, I lace up my gloves and step into the ring for a Muay Thai session. While the world of combat sports and payments might seem worlds apart, there’s a surprising parallel to draw in the art of identifying and managing pain.

In the ring, there’s the superficial pain of exertion, the kind that strengthens you with each punch and kick. Then, there’s the deeper, more dangerous pain that signals something is actually wrong. Learning to distinguish between the two is a hard-won lesson, but one that extends far beyond the ropes.

The same principle applies to the world of payments. There are instances where a company must decline a merchant, whether for non-compliance or blatant disregard for regulations. These are red flags that can’t be ignored.

However, there’s also a risk of being overly cautious, turning away potentially profitable merchants simply because of perceived risks. By taking the time to work collaboratively to mitigate risks, companies can unlock valuable opportunities.

Effective risk management is a delicate balance. Too stringent a policy can stifle growth, while a laissez-faire approach can lead to costly consequences. The key lies in a nuanced, risk-based approach. By striking a balance between caution and opportunity, payments companies can better protect their business while driving revenue.

Understanding Risk

Every transaction contains an element of risk. If you’ve ever seen somebody bite a coin to check that it’s genuine or hold up a banknote to the light, you’ve seen somebody try to reduce payments risk.

Today, online payments primarily carry risks of fraud and chargebacks. Some classes of merchant will be more prone to these risks than others, and a whole host of factors will have significant effects. These include everything from verticals the merchant operates in and the country in which the company is based to the time of year the payment is made (fraud and chargebacks are both more common during peak shopping seasons).

This is especially the case in real-time payments. When payments happen almost instantly—a rising trend in global commerce—organizations across the payments ecosystem have markedly less time to catch errors. This means companies working with real-time payments need partners that can balance speed and security. It means payments partners must take compliance very seriously, no matter the size or risk profile of the companies they work with.

Merchants that are classed as, or prove themselves to be, high-risk will typically pay more for transactions or be barred from dealing with certain payment providers. These high-risk companies provide goods and services such as firearms, adult content, or gambling.

Risk, Sales And Compliance

Risk management and compliance, while often intertwined, are distinct concepts. Compliance ensures adherence to regulatory and operational guidelines, while risk management assesses and mitigates potential financial, operational, and reputational threats.

A common misconception is that high-risk merchants are inherently non-compliant. This is a dangerous oversimplification. While some high-risk merchants may indeed be non-compliant, many are legitimate businesses operating in regulated industries. Conversely, low-risk merchants can sometimes fail to meet specific compliance criteria, perhaps due to administrative oversights or insufficient documentation.

A persistent challenge in the payments industry is the tension between sales and compliance teams. Sales teams often prioritize rapid growth and revenue generation, while compliance focuses on risk mitigation and regulatory adherence. This can lead to a zero-sum game, where sales pushes for aggressive onboarding, but compliance resists, leading to missed opportunities and potential risks.

Both teams must work together to achieve a common goal: sustainable growth with minimal risk. Sales teams should be well-versed in risk and compliance guidelines. They should be empowered to identify potential risks and escalate concerns to compliance, rather than push for deals that could jeopardize the company’s reputation.

Meanwhile, compliance teams should look to adopt a more flexible and nuanced approach. While it’s essential to maintain high standards, they should also explore innovative solutions to onboard legitimate merchants, even if they present unique challenges. By working closely with sales, compliance can identify opportunities to mitigate risk without compromising growth.

Ultimately, a successful payments business requires a delicate balance between risk and reward. By fostering collaboration, these businesses can unlock new opportunities while protecting their reputation and ensuring long-term sustainability.

Intelligent Risk Management

Striking the right balance between risk mitigation and business growth is paramount. By adopting a strategic approach to risk management, retailers can unlock new opportunities while safeguarding their operations.

A strong foundation for compliance is essential. By fostering a culture where risk and compliance are understood and valued by all employees, companies can ensure adherence to regulatory requirements and minimize potential liabilities. Clear and effective communication is key to building this culture, and educating merchants on the importance of compliance can facilitate smoother onboarding.

Automation can streamline certain aspects of the onboarding process, but human oversight remains crucial. Automating routine tasks can improve efficiency, but critical decisions should always be made by experienced professionals. By combining the power of technology with the judgment of experts, companies can strike the optimal balance of speed and accuracy.

Effective risk management considers all potential risks, including financial, operational, and reputational. Ultimately, the goal is to create a sustainable and profitable business model that balances growth with risk. By understanding the nuances of risk and compliance, companies can navigate the complexities of the payments industry and emerge as industry leaders.

—Scott Dawson is chief executive officer at DECTA.