Should startups trust their banks?
By Anant Patel, President, International Markets, at ConnexPay
Considering the financial collapses of Silicon Valley Bank (SVB), First Republic and Credit Suisse, it is hard to tell whether their effects are truly over. Many startups might be increasingly worried that the banks that should provide a solid foundation for their business may either be structurally flawed or not working in their best interests. This concern is particularly acute in those operating in industries that banks typically view as “high risk.”
They know that if their bank has problems, then they will be the first to suffer from higher fees or restrictions. This is also true of the various payment processing companies that a given startup may work with, from small FinTechs to major players like Visa and Mastercard. In an economic downturn, which is typically when fraud increases, many players in the payments industry may decide that perceived high-risk companies are either more trouble than they’re worth — or that they need to compensate the financial services provider for the trouble.
The truth is, although there are banks like SVB, the majority of banks, big and small, are conservative by nature. The likelihood of any particular bank, especially the older and more established banks, disappearing with their client’s money is low, and we have seen both recently and in 2008 that governments are willing to pay staggering amounts of money to bail out banks. However, when there is unrest in the economy, banks become even more conservative in order to limit risk and thereby avert a scenario in which they are undercapitalized. So, what can startups do to protect themselves from banks turning against them during uncertain times?
A closer look at ‘high risk’ Sectors
There are many sectors that pay a premium for banking and card processing because they are either in legal grey areas or subject to higher-than-normal levels of fraud and chargebacks. However, the high-risk designation isn’t restricted to what is broadly referred to as ‘vice,’ and our own clients who deal with being deemed risky are from more mundane sectors. The travel and tourism industry is also subject to high fees and stricter limits on chargebacks for reasons that airlines, travel agencies, tour operators, and ticket comparison sites largely can’t control. Airline tickets and hotel reservations are high value, and since they are digital, they are easy to transfer anonymously. A fraud network can use stolen or synthetic identities to purchase tickets and sell them for very high profits, which will in turn cause a chargeback when the person whose identity was stolen discovers the unwanted charge on their card.
Chargebacks are also a major problem for the travel industry. Flights are much more likely to be delayed or canceled than in previous years, and anywhere from 2% to 8% of passengers miss their flights. This causes a percentage of passengers to skip the airline’s own refund process and go straight to their card scheme to get their money back. Some even dispute transactions because they didn’t enjoy their trip. Card schemes will only tolerate chargebacks to a point – if a merchant’s ratio of payments to chargebacks becomes too high, then they will pay a financial penalty by way of increased transaction costs. This can stack with the penalty for being ‘high risk’ that the industry already pays to further erode merchants’ profits.
Additionally, it’s no secret that banks have the power to shut a client off in a split second—or prevent them from making payments at all—as I’ve seen happen many times over the years. For example, just recently I know of a company in the broker space that was processing hundreds of millions of dollars per year through their bank. However, this company’s former bank recently shut them off from issuing virtual cards because this broker was functioning as a payments intermediary and not fulfilling the product or service directly. It’s hard to see businesses like this getting treated so harshly by their banks.
How can startups protect themselves?
Startups in “high-risk” sectors must balance accepting that they will always pay more than other merchants with also doing what they can to ensure that they don’t incur further penalties. They must show their banks and card schemes that they can be trusted and not deemed “high risk” in the literal sense.
One way of de-risking the payment process is a single platform that handles incoming and outgoing transactions, with strong fraud prevention for further protection. By removing risk from the transaction scenario, startups in a range of sectors can get lower merchant processing fees, and save money, while also improving their cash flow.
About the author
Anant Patel is President, International Markets, at ConnexPay. With over 20 years of payments experience, Anant joined ConnexPay in January 2022. With his visionary core belief and mantra — “behaviors drive culture, and culture drives results” — Anant is a proven over-achiever and a new market creator, with an exceptional track record of identifying and maximizing new revenue opportunities. At ConnexPay, Anant is focused on building inclusive and diverse teams that consistently exceed expectations, driven by his outstanding relationship-building and client management skills.
With a wealth of experience built at companies spanning the entire payments ecosystem, Anant’s payments technology background has seen him lead both fintech and corporate payments businesses in Europe and internationally. Prior roles include Vice President at Mastercard, Managing Director of EMEA for eNett, and EMEA Managing Director for First Performance Global, where he was tasked with leading the revolution on processing and refining customer experience. Most recently, Anant was Vice President, EMEA & APAC, for Corporate Payments at WEX Inc.
Anant holds a bachelor’s degree in computer studies from Nottingham Trent University and an MBA from the University of Warwick, UK.