Can insurers still trust their banks?
Although there are undercapitalized banks like SVB, banks remain conservative by nature regardless of their size and scope.
It is difficult to predict if there will be continued fallout from the Silicon Valley Bank (SVB), First Republic and Credit Suisse debacles and what that might look like. There isn’t even certainty on whether their collapse was a result of ‘‘internet bullying’’ or if the situation is a “canary in the coal mine” that heralds troubling times for all banks, and subsequently, all customers.
For insurance companies, this could mean having to pay much higher rates for banking services that up until now were virtually free of charge as banks raise prices and tighten regulations. Naturally, this is far more of an issue for companies that banks deem to be “high risk.” Such businesses are well aware that they will be the first to bear the brunt, which will take the form of higher fees and myriad restrictions if banks find themselves in difficulty.
The same can be said of the various payment processing companies that a given merchant may work with, from small FinTechs to major players like Visa and Mastercard. It is typical to see a marked increase in fraud during times of economic strife, and in such times it is common for many players in the payments industry to decide that perceived “high-risk” companies are simply more trouble than they’re worth or insist upon greater compensation for their trouble.
In truth, although there are undercapitalized banks like SVB, banks remain conservative by nature regardless of their size and scope. The eventuality that a bank would disappear with its clients’ money is a remote one, especially for older, more established banks. Cementing this is the fact that even in dire straits – like 2008 and more recently – governments have shown they are willing to make colossal amounts of money materialize to bail banks out. That being said, during economic turmoil, banks become decidedly more conservative to limit risk and avoid being undercapitalized. So, in all this confusion, what can insurance companies do to avoid falling foul of the situation and having their banks turn against them?
Defining ‘high-risk’ industries
Various industries face higher fees for banking and card processing due to their involvement in legal grey areas or an increased risk of fraud and chargebacks. Despite popular belief, this high-risk designation is not limited to the so-called “vice” sector. Our clients in more mundane sectors also grapple with the burden of being deemed risky. Take, for example, the travel and tourism industry. Within this sector, airlines, travel agencies, tour operators and ticket comparison sites must endure high fees and stricter chargeback limits due to a problem they largely cannot control – the ease with which digital airline tickets and hotel reservations can be anonymously transferred. Fraudsters utilize stolen or synthetic identities to purchase tickets and resell them at an exorbitant profit, leading to chargebacks when the identity owner discovers the unauthorized transaction on their card.
Fees and the fear of fraud
The insurance industry may not be seen as high-risk as the likes of the gambling sector, for instance, but it can still inflict a serious blow to consumers, with an annual fraud damage of $308.6 billion, and this number continues to grow. Around 20% of insurance claims in 2021 were suspected of fraud, up from 18% the preceding year. Consequently, banks and card schemes must take this into account when determining fees that insurers must pay for each transaction, as well as the industry’s regulatory compliance. Even though these hikes may seem minor, they will decrease the insurer’s profit margins notably during an economic crisis.
Chargebacks are another issue plaguing the sector. When a client cancels a new policy through a chargeback, insurance providers are obligated to provide a refund, a situation banks and payment processors make every effort to avoid. Major payment processors like Visa and Mastercard have strict limits on the percentage of transactions from any one company that can be chargebacks, and once a company crosses this threshold, they must take immediate action to bring this number down or face increased fees. Too many chargebacks and they will be cut off from these vital payment services altogether. During difficult economic conditions, card processors are going to be even less inclined than usual to let their clients rack up a high number of chargebacks.
The upshot could be a shut down
Of course, banks have the power shut a client off or block them from issuing payments altogether. Over the course of my career, I’ve witnessed this happen time and time again. Take for instance a recent incident I was privy to involving a company in the broker space that was processing hundreds of millions of dollars annually through their bank. Sadly, this company’s former bank put a halt to their ability to issue virtual cards due to their operating as a middleman for payments — rather than fulfilling the product or service directly. It’s disheartening to see financial institutions treat businesses in this manner.
Striking a balance
The way forward for insurance companies in this space is to accept that their position means they will always need to pay more than other merchants, but also strive to ensure they incur as few extra penalties by lowering perceived risk as much as possible.
A route to fundamentally de-risking the payment process is by using a payments solution that handles both incoming and outgoing transactions, plus a fraud prevention solution for further protection — all inside a single platform. By removing risk from the transaction scenario, they can then attain lower merchant processing fees, and save money, while also improving cash flow.
Bob Kaufman is the Founder and CEO of ConnexPay. Prior to founding ConnexPay in 2017, Bob spent nearly 20 years at U.S. Bank, where his tenure included serving as CFO of the Payments Services division as well as Senior Vice President, leading innovation projects across the bank’s payments division. In addition, Bob served as the General Manager of U.S. Bank’s Virtual Pay division, where he led product, marketing, and supplier enablement for all virtual payment solutions, as well as a sales team focused on virtual payments.