Interview: Covid was a stress-test of safeguarding

Paysafe’s Daniel Stanbridge and Simon Chandramani tell Lee Hayhurst the pandemic proved the case for its model

The Covid pandemic has been a stress test on travel sector’s resilience like no other, and no more keenly has that been felt than in the area of payments.

Cancellations, refunds and credit notes threw a sector already considered high risk by banks, payment card firms and merchant acquirers into a period of unprecedented uncertainty.

However, one merchant acquirer that has set its stall out as a specialist in travel said the dark Covid cloud offered it a silver lining; proof its safeguarding trust arrangement could withstand any shock.

Paysafe had launched safeguarding three years earlier, partly in response to prior crises in travel, but mainly to differentiate itself against bigger competitors and demonstrate sector expertise.

It sees customer payments held independently and allows Paysafe to offer more beneficial merchant terms by managing its risk and therefore the cash collateral it requires from clients as security.

Daniel Stanbridge, senior vice president of merchant risk, described the start of the pandemic as ‘chaos’.

“There was a number of voices out there telling consumers, partners and merchants what the best course of action would be to appease consumers and resolve chargebacks,” he says.

“At least at the outset there wasn’t necessarily a clear path on how to deal with this issue. No one had been through something on this scale before. It was a period of unknown.

“You had the CAA saying one thing, card companies another, airlines going off and doing their own thing. That then impacted travel agencies.

“If the travel agency wasn’t getting money back from the airline, how would they possibly be able to refund the consumer?”

Once updated rules were available on how refunds and chargebacks should be managed, Paysafe was supported in sending the right message to its travel merchants.

“We were being strictly-governed by the card schemes so that helped. The message we were delivering to our merchants was that these would be the rules we were going to operate by.

“Ultimately the schemes, rightly or wrongly, govern that flow of money and the ability to contest chargebacks.

“If by following those rules it meant we could get money back for our merchant then that’s what we’ll do in order to support them.”

The situation remains far from resolved and with so many credit notes still in circulation travel firms are likely to face further claims from clients who opt to demand their money back.

But Stanbridge believes people have generally got used to this “new normal” and most consumers who want their money have already tried to get it.

“It does not change the fact that there is still a vast number of credit notes or vouchers out there which merchants have to at some point fulfil,” he said.

“The main reason any merchant didn’t really want to issue a refund was because of the huge liquidity burden that would create.

“Where we had our safeguarding methodology in place, with consumer money kept in a segregated independently run account, it meant those funds were available during Covid to support refunds.

“Merchants who had that safeguarding mechanism maintained liquidity and were able to issue refunds well in advance of some of their peers.”

Safeguarding, which was recently rolled out to airlines in the US, was introduced by Paysafe three years ago to address the high-risk profile of travel and to differentiate it from rivals.

“Last year was a live stress test of the safeguarding model,” Stanbridge says.

“When it came to refunds the funds were there, we could pull the money out and issue them without creating a detrimental impact to merchants’ liquidity base.

“We had instances where those funds came under stress because of administrative actions, but they were ringfenced so we could continue to fund our merchant from the trust and support refunds.

“The silver lining of Covid for us was it really proved the case for our safeguarding model and acted as a bit of a springboard into much heavier usage of trusts.”

Trusts have become seen increasingly as an answer to consumer financial protection and, although not considered the perfect solution, industry regulator the CAA has become an advocate.

Its latest Atol reform consultation sought views on the segregation of customer monies from working capital and a more risk-based approach to financial protection.

Stanbridge says: “Trusts are probably the preeminent solution moving forward. I don’t think bonds have got any future in terms of payments and securitising of consumer risk.

“The concept of Atol trusts is great. But operationally there needs to be further alignment across the industry.

“If you look back to the chaos at the beginning of Covid, you had all these different entities overseeing payments for merchants and it was all pretty disjointed.

“So, having funds go into an Atol trust is great, however, unless the acquirers have recourse to those funds it doesn’t offer that much comfort.

“As an example; if there are merchant failures the Atol trusts will pay out to the consumer, which is fine, but they will do that via bank wire.

“What that means is, if a consumer is savvy enough, they can still raise a chargeback and you can get the concept of ‘double-dipping’.

“Unless those refunds are done via the card network it doesn’t negate issues for the acquirer or the card schemes.

“There needs to be greater alignment on how that flow of funds move into the industry but then back out through the payments systems.”

Simon Chandramani, vice president sales for Europe, agrees: “What Atol is doing and what chargeback protection does is one and the same, they are trying to protect the consumer.

“Issues arise when Atol retains all of those funds and they do not go to the acquirer who is actually on risk for the chargebacks. That’s a disconnect.

“We’ve worked hard with Atol to get a relationship whereby we do get some access to those funds but that’s currently still not the case, although we do still accept Atol trusts.”

Paysafe expects many of the merchant acquirers who abandoned the travel sector or demanded additional security during Covid, to have a renewed interest as recovery sets in.

But it says merchants, payments firms, industry bodies and regulators must ensure they have a much better understanding of each other and the true risk they are being exposed to.

Stanbridge says: “There’s this concept of ‘revenge spend’ and travel’s one of those areas tipped as being a potential for people who have saved during Covid and are ready to splurge.

“As some of the more traditional players have calmed their appetite, or exited, there’s acquirers out there who have seen that as a potential opportunity.

“That’s fine, but you have to have a solid foundation because you can quickly unravel in this sector. It’s very complex.”

Chandramani says: “Acquirers are not scared of offering credit or of their exposure to risk, what they are scared of is the unknown. All we are trying to do is ensure we know exactly what the risk is.

“Travel clients are being squeezed by their current acquirer or they have gone through the application process with a new acquirer only to be offered unworkable security terms.

“We will look at you as a business, not just a high-risk travel client, and get to a position using all mechanisms at our disposal from unsecured terms to fully-secured and everything between.

“Having clear data and understanding of your business gives us the confidence to do that.”

Paysafe, which describes itself as a technology company as much as a payments firm, uses a blockchain partner to share data with partners to get a detailed insight into their businesses.

It also provides access to an increasingly wide array of payments options and orchestration platforms, something Stanbridge says is vital.

“Merchants need to have a better understanding of what the current payments environment looks like,” he said. “Things have changed over the last 12 to 18 months.

“There’s been a shift towards e-commerce and buying online and towards different payment methods like Klarna, iDeal, PAYGO (Pay As You Go), digital wallets such as Paysafe’s own Skrill and NETELLER, online cash solutions like paysafecard and Paysafecash and open banking.

“Cards are still the dominant way to make payments, but there’s a significant shift with alternatives being used through the use of open banking or any number of alternative payments.

“If a merchant can tap into that new environment and increase the size of their funnel as much as possible that can only be a positive in that they can attract as much consumer spend as possible.”

Paysafe, which listed in New York in March, has more than 200,000 business customers and processed $92 billion of transactions on an annualised basis in 2020, bills itself as a specialist with particular expertise in risk and compliance.

Chandramani said it expects to be one of a number of options for travel firms to partner with including the larger traditional banking acquirers and new fintech entrants.

While Paysafe will compete for a greater share of business based on its understanding of the travel sector, he says having multiple acquirers is beneficial for any medium to large travel firm.

“A lot of clients come to us because their current acquirer has changed risk policy so they needed that reassurance and an acquirer that would look at them not just as a travel business and high risk.

“Unsecured positions for a travel company from Paysafe were probably the norm pre-pandemic. We were not risk averse.

“The pandemic has put more focus on acquirers’ exposure and a tightening on the data and understanding of the true risk.

“Most medium to large companies need multiple acquirers and payment methods to protect themselves against changing risk appetites, and also a technology and product stack that really future proofs their payment needs.

“We have seen quite a large acquirer failure recently and there’s a phenomenal amount of consolidation in the payments sector, so having multiple acquirers is a must.

However the traditional credit card payment model has limitations in terms of risk. We see the rise of a new breed of specialised global acquirers who find very innovative ways to support verticals like travel and airlines. They figure it out and get very good at that vertical, while traditional one-size-fits-all ‘vanilla’ players do not adapt, and struggle as a result.”

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