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Education

the terms and conditions of a policy before accepting
it. Further, any company involved in the payments in-
dustry will find cyber insurance polices very difficult
to attain because insurance carriers view the entire in-
dustry as high risk. The best practice is to ensure your
broker understands the payments industry and doesn't
think PSP stands for Playstation.

Underwriting, reserves, chargebacks
The MAC show wouldn't have been a payments
conference without discussion of acquirer chargeback
liability. This risk can be mitigated by due diligence,
reserves and rate. However, acquirers are now
increasingly accepting insurance and other financial
products in lieu of loss reserves, reducing the financial
burden on their processing channels while still
maintaining underwriting integrity.

Leveraging financial products and insurance is not
only less costly; the revenue from additional capacity
and verticals can also pay for the cost of the policy. In
this scenario, freed up capital is now put to use, and
letters of credit are no longer an issue, giving acquirers
a further competitive edge without the additional
exposure. A simple opportunity-cost calculation is to
take the return on assets, or ROA, that is lost by being
tied up in reserves that bear zero interest. By reducing
or replacing the reserve requirement with insurance, it
is easy to see how the cost is substantially less, and the
insurance essentially pays for itself.
CNP fraud

Experts at the conference confirmed it is no surprise
that card-not-present (CNP) fraud has and will
continue to increase. Fortunately, many strong front-
and back-end solutions can combat such losses. These
solutions present partnership opportunities to add
additional value to merchants by reducing losses from
both friendly fraud and fraud perpetrated by outsiders.
Coupling these solutions with an insurance-backed
transaction guarantee could present a significant
additional revenue source for acquirers.

CNP merchants can already attain insurance that will
pay losses stemming from fraudulent transactions.
However, what would an additional 10 or 20 basis
points in revenue on a CNP portfolio mean for an
ISO or processor? While a strong front-end solution
can reduce the risk, the revenue will be found in
eliminating the risk for the merchant.
Kevin Mendizabal, Director of Financial Institutions at Frates
Insurance and Risk Management, specializes in the electronic
payments industry. Prior to joining Frates, Kevin was part of the
Financial Institution division at AIG. Previously, he held underwrit-
ing and leadership roles in the mortgage banking sphere, as well
as at Bank of America. Kevin has a degree in computer science from
Rutgers University. You can reach him at kevin.mendizabal@frates-
insurance.com or at 405-290-5610.
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