Have we seen this movie before? The following article uses the mortgage crisis and related real estate bubble in 2008 as a harbinger of potential problems for the merchant acquiring industry. While the analogy may not be spot-on as the author states, nevertheless there are lessons learned when careless methods are used to make decisions on high volume financial transactions.
Much ink has been spilled about the 2008 Mortgage Crisis. In the U.S, $10 billion dollars worth of subprime mortgages dealt out by Mortgage Companies that were not prepared to assume the risks, inevitably found themselves into a race to the bottom when investor debt turned grotesque. How did this happen and what was the root cause? The answer, was a problem in underwriting processes.
Leading companies found initial success by implementing a risk model that incorporated industry assumptions into their onboarding process. The assumption was that 20% of the client base would inflate their income level by 20%. By doing so, companies significantly reduced the amount of work required to approve a new client.
There are major lessons for Merchant Acquirers to learn from the underwriting nightmare that was the 2008 Mortgage crisis. In the U.S., key mortgage players were pushing the competition to underwrite faster in order to keep up with onboarding new clients. The same thing is happening today in payments with the likes of Square, PayPal, Intuit, etc. Merchant Acquirers need a clear strategy to be able to win the onboarding race without burning out.
It is imperative that underwriters are able to not only pass, fail, and pend applications, but be able to identify how an application passed or failed. If you do not do this, you will never be able to intelligently use underwriting data to make smarter business decisions. Underwriting, when well executed with automated processes and thoughtful human analysts, can be turned into a strategic business asset, rather than a cost center.
The long tail of micro and small merchants makes up most of the prospective market for merchant acquiring. This become a resource intensive process for acquirers and their partner ISOs. As in any lengthy, data-driven procedure, automation becomes the great productivity enabler. The question is not if automation can streamline the process, but whether the right decisions are being made when onboarding new businesses to accept payments. In any case, the results of good or bad onboarding decisions will be apparent fairly soon. That’s when the assessment can be made on the quality of the approval determination.
Overview by Raymond Pucci, Associate Director, Research Services at Mercator Advisory Group
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