The Green Sheet Online Edition

September 27, 2010 • Issue 10:09:02

Who's your counterparty?

By Barry Sloane
Newtek Business Services Inc.

I have been in the workplace for more than 30 years and have been trained in three industries: consumer retail, financial services and electronic payment processing. All of my mentors have stressed counterparty risk.

Why is it that in the merchant processing world, few participants focus on counterparty risk until it's too late? It is great to submit deals, but if the counterparty you select cannot perform, the sales you have worked so hard to make will have disappearing residuals due to nonpayment by a weak or disingenuous counterparty.

Do you need your ISOs or processors to file for bankruptcy before you look at their financials? Do you need to have a fraud issue before you do an extensive background check on a potential business partner? Would you transmit all of your or your clients' sensitive information (birth dates, addresses, Social Security numbers, bank account information) via fax without knowing if the information was secure? If you are a merchant level salesperson (MLS), do you know if you are covered by your ISO for security breaches?

Do your due diligence

Often, merchants are giving out sensitive data without understanding where that information can and will be going. Their business cash flows may be running through entities they have zero financial information on.

MLSs depend on residuals from processors and ISOs, but they often cannot assess the likelihood of receipt; they just assume funds will show up in their accounts and that the long-term financial health of the processors and ISOs is destined to be positive.

Things to do to protect yourself and your customers:

• Demand financials from any prospective counterparty.
• Ask what application information the company secures and how it ensures the information cannot be stolen or hacked.
• Ask whether the counterparty is a public company subject to Sarbanes-Oxley regulations. And if so, find out if it is compliant with the Statement on Auditing Standards No. 70. (For more information, visit http://sas70.com.)
• If the counterparty is a private company, determine whether its financials demonstrate sufficient capital, profitability and data security.
• Determine whether the company is compliant with all applicable Payment Card Industry device, application and data security standards. (For further information, visit https://www.pcisecuritystandards.org.)
• If the counterparty is a regulated bank, find out if it is in compliance with all regulatory requirements.
• If the counterparty is PayPal Inc. or eBay Inc., determine whether your funds will be secured or unsecured.
• Find out whether your money will be kept in a segregated account.

Gathering this information will help you make informed decisions. Know your risks, and do business only with counterparties that are respectful of them. It's not just about price.

Barry Sloane is the President, Chairman and Chief Executive Officer of Newtek Business Services Inc., The Small Business Authority, a direct distributor of a range of business services and financial products to the small and midsize business market (www.newtekbusinessservices.com). Prior to joining Newtek, Sloane was a Managing Director of Smith Barney Inc. In addition, he was founder and President of Aegis Capital Markets, as well as Senior Vice President of Donaldson, Lufkin and Jenrette. He can be reached at 212-356-9550 or bsloane@newtekbusinessservices.com.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.