In the Time of Covid-19, Risk And Underwriting Practices Must Adapt, Experts Say

Payments providers and acquirers are having to quickly adjust to evolving risk practices as chargeback volume and return rates change during the nationwide Covid-19 containment. That’s important because the Federal Trade Commission, in particular, is using these two metrics as potential indicators of misdeeds, advised panelists Wednesday in the “Regulatory Update: Risk and Underwriting in a Time of Crisis” session at Transact Connect, the Electronic Transactions Association’s virtual conference underway this week.

With more consumers shopping online—online processor Adyen’s volume increased 38% in the first quarter, for example—chargeback ratios and return rates are changing. These are but two metrics recently identified as red flags, said Theresa Kananen, a partner at Atlanta-based Arnall Golden Gregory LLP law firm. Past FTC enforcement inquiries might have been triggered by chargeback ratios in the 30s, but the bar is lowering, in Kananen’s estimation to as low as anything over 1%, and the FTC is viewing chargebacks as a potential problem, she said.

The regulator is also focusing on return rates. Applying a uniform figure for all merchants may not accurately reflect the merchant’s business, she said. It might not be unusual for an online shoe retailer to have a high return rate, especially if consumers purchase multiple pairs of shoes online and return all but one or two.

“While the Federal Trade Commission has done a lot to learn a lot about the industry…there are certain pieces where you can see the FTC view departs from what is standard or acceptable or within the bounds of ‘We can cure that within the industry,’” Kananen said. “A high return rate is not necessarily a problem.”

On the risk side, payments providers have to watch for merchants that may fall victim to bad actors, said Deana Rich, cofounder and co-chief executive of Infinicept, a payment-facilitator advisory firm. A struggling merchant might be tempted to add a new product, unaware of the backer’s criminal intent. Payments providers have to be alert for even long-time merchants registering a new Web site selling new products that may garner regulatory scrutiny. 

Independent of the channel, Rich said routine merchant monitoring should include the average ticket, chargeback rates, and return rates. Criminals have adapted to changes in shopping behavior, she said, adding, “As we are locked down in our homes, so are the bad guys.”