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The future is cloud-based • Low risk owner + low risk merchant
• Low risk owner + high risk merchant
risk assessment • Low risk merchant + high risk owner
• High risk owner + high risk merchant

Typically, each of these has a number of variables, but
if underwriters choose to approve an account with risk
attached, they build reserves into the contract to hedge
against potential loss.
Risk assessment is both a key to an ISO's success and a
major operational burden. It takes time to learn what each
processor's appetite for risk really is and, because it takes
multiple banks to support a broad portfolio, the resulting
matrix of thresholds extends the learning curve and the
By Tom Byrnes time it takes to get a merchant up and processing.
Ledgerpay Taking a new approach
t the core of every ISO's business is the abil- But what if there was another approach, one designed with
ity to balance a spectrum of risk factors. The an ISO's business dynamics in mind rather than the "take
challenge lies between what a merchant wants it or leave it" way most processors package their services?
A to sell and what level of risk a processor will
accept. Each bank has a different risk appetite, so ISOs Although cloud architecture has been around for at
must carefully assess a new merchant's profile before sub- least 20 years, it has virtually redefined most technology
mitting an account. sectors during the last decade. Unfortunately, payment
processing and many day-to-day ISO operations have
Some processors may be concerned with direct financial remained stubborn holdouts.
risk; others may be focused on the long-term impact of
reputational risk. Financial risk can cover everything Cloud-based processing changes the game for ISOs. It
from merchants who offer future sales such as timeshare facilitates rapid deployment of new forms of innovation,
deals, drop shipments that are fulfilled later, annual enabling ISOs to take advantage of automated tools to
memberships that auto-renew, or multilevel marketing instantly assess risk scores by SIC code upon submission.
programs. Reputational risk categories include adult, This streamlines underwriting and allows accounts
cannabis, vape-based products, some gun sales, and drugs to begin processing immediately. When additional
that aren't FDA-approved. information is required or a risk profile is in the "medium"
range, applications are automatically flagged and fed into
Although those lines are clear, ISOs often must do extra a manual review to shorten the timeline to getting an
due diligence daily to protect themselves. For example, account up and running.
they may pass on businesses with track records of high
chargebacks to avoid headaches and extra expense later. The highest risk profiles are ported directly to
Or, while a regular business like a car dealership may underwriting where other tools review a merchant's
be accepted by the bank, an ISO might reject one if it has history to calculate average monthly transaction volumes
a bad reputation. In certain situations, the line between and automatically set a reserve to cover potential exposure.
risk and reward is less clear. A bank might accept a new Every transaction within each account is also continually
account on a SIC-code basis, but the ISO may determine scored in background through a rules engine set for each
the merchant is riskier than normal and impose a higher merchant SC code to account for variables. Transactions
reserve—such as a hold on a percentage of sales for six that come through after hours for tickets that are out of
months—to offset potential risk. proportion to regular charges are instantly referred to a
Enter the underwriters manual review to protect the ISO and the merchant.

That's where the underwriting team comes in. When a This approach is designed to use the latest in technology
merchant application arrives, underwriters use a refined to streamline the operational heart of every ISO's
set of metrics to evaluate the business. First, they'll look at business, allowing a renewed focus on what matters most:
SIC code, percentage of non-CNP transactions and type of Eliminating bottlenecks that delay revenue recognition.
product being sold to evaluate potential risk factors. Then
they'll factor in four classic merchant profiles most ISOs Tom Byrnes is vice president of marketing at Ledgerpay, a cloud-based
use to evaluate potential accounts: processor designed for ISOs. Contact him at Tom.Byrnes@quisitive.com.

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