What is Credit Risk in the payment processing in the industry?

There are different kinds of risks involved in the payment processing industry and credit risk is one of the most dreaded risks. Credit risk primarily means that the merchant who is getting onboarded or is being underwritten by the underwriters has got the liability to honor the chargebacks. In case if the financial institution has not done the proper due diligent analysis while onboarding the merchant or is not properly monitoring the activities of the merchant and implementing risk mitigation measures, then this can attract a huge credit risk to the financial institution.

In case of chargebacks, the acquiring bank intimates the merchant to honor the same. In case, if the merchant is not financially sound or is not in a position to pay the chargeback amount then the liability is eventually on the merchant account acquirer in most of the cases. Generally, there is an agreement between the merchant and the account acquirer defining the liability of chargeback amounts. To bear this risk, at times the acquirer imposes higher rates and rolling reserve clause. The underwriting team at the payment processing organization or the payment service provider the merchant account acquiring bank should take adequate measures to onboard only those merchants who are in good financial condition and who have got the capacity to handle the future risk and return request arising because of high chargebacks.

There have been instances in the past, where the merchant has gone bankrupt or is no longer in the position of honoring chargebacks because of financial challenges. This has resulted in massive loss for payment service providers and acquiring banks. Financial Institutions should closely monitor the merchant’s activities by utilizing different reports that help these organizations to understand the present risk and the future risk forecast.

Thus, Credit risk can actually have severe impact on the financial stronghold of an acquirer. This is recommended that the underwriting guidelines and background verification should be managed in such a way that the acquiring bank gets absolute speculations of the account applicant. Quadrapay.com has ensured this since its establishment that both the high risk merchants and the acquiring banks sync properly to have the best possible relation between the two, and also resulting in benefit of both the parties.