The Vertical Advantage: Why Software Providers Are Better at Managing Payments Risk During a Crisis

As small businesses grapple with the economic conditions brought on by the pandemic, their payment partners must be careful to avoid making the hardship worse.

Square recently made headlines because it was holding back funds from more of its merchants in an effort to mitigate risk. Some of them saw the change as an unnecessarily broad policy that restricted their cash flow at a time when they needed it most.

Our partners at Infinicept have published a blog post outlining why vertically focused payment facilitators are better able to manage risk, including using reserves in ways that better walk that tricky line between reducing financial exposure and causing undue harm to merchants.

We share highlights of that post below. For more, check out the full article, Managing Payments Risk During COVID-19: Why Vertically Focused Payment Facilitators Are Better Equipped.

Payment companies sometimes hold back funds – a practice known as maintaining reserves – to reduce financial exposure in situations where there is a high risk of more refund or chargeback requests than the merchant has the sales volume to accommodate.

The Infinicept article uses the example of a wedding photographer who takes a deposit months in advance of a photo shoot. If the wedding is cancelled or the photographer goes out of business before the event – both of which are more likely now than they were pre-pandemic – the customer could request a refund. If the photographer is unable to refund the money, the customer might initiate a chargeback.

As certain verticals are currently seeing heightened risk, some payment providers are increasing their use of reserves in industries where they previously were not typically used, leading to customer frustration. But even more frustrating for many merchants is the fact that horizontal payments companies such as Square are likely to treat all businesses within a specific category the same whether they are at higher risk now or not.

The Infinicept article points out that the wedding photographer would be within the same category as a photographer who sells images from their web site. Because they’re delivering the goods immediately upon payment, this type of photographer would not represent increased risk.

Those distinctions are important ones to make as businesses across industries are experiencing varying impacts from the pandemic. And they are why vertically focused software companies are better able to evaluate risk within their own category.

Vertical software providers are close to their merchants’ businesses because, quite simply, their software manages many aspects of them. As a result, they know the nuances of their verticals and the ins and outs of those merchants’ operations better than anyone. That means that they are also better able to evaluate specific business activities to determine which customers need reserves and how much those reserves should be.

Just as importantly, software companies – serving as providers of essential business tools – are also more likely to work with their merchants to find creative solutions and to communicate effectively throughout a crisis.

As an example, the Infinicept article points to payment facilitator RunSignup, whose platform enables registration for races and other athletic events. The company’s vertical was severely impacted by COVID-19, with event cancellations growing rapidly throughout the spring.

According to the company’s chief finance and operations officer, Kevin Harris, this led to the need for RunSignup to begin holding reserves. But its customers quickly adapted to the environment created by the pandemic by offering creative options to their event participants. As a result, the industry saw fewer chargebacks than expected. Seeing this, RunSignup was able to reduce the reserve amount while moving quickly with tools to support their customers’ new requirements.

The company also tried to minimize the disruption to its customers by communicating openly and frequently about what changes they were making and why, as well as keeping them informed about how other businesses in their category were adapting.

RunSignup’s example shows how vertical software providers’ knowledge of their industries and substantive relationships with their customers mean they can work closely with their merchants to manage both their own risk and that of their merchants more effectively.

For more tips on using reserves wisely and managing financial risk responsibly during a crisis – and more details about how RunSignup has been supporting its customers – check out the post on Infinicept’s web site.