Payment Pulse – Ep. 10

Payment Pulse: The Power of Social Proof: Learn how influencer endorsements, online reviews, and peer behavior shape our buying habits.

Status Spending and Luxury Psychology: Understand why consumers use high-end payment methods to signal prestige and how brands capitalize on the “Keeping up with the Joneses” mentality.

FOMO and Impulse Purchases: Explore the role of limited-time offers and BNPL services in reducing purchase friction and triggering rapid spending.

Digital Trends on Social Media: See how platforms like Instagram, TikTok, and YouTube are revolutionizing product discovery and checkout experiences.

Cultural Influences on Spending: Discover how global payment preferences vary and why adapting to local norms is key for businesses expanding into new markets.

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Episode Transcript

Steve Bell: Welcome back to Payment Pulse, the podcast by Clearent by Xplor, where our goal is to humanize and simplify the complex world of payments. My name is Steve, and as always, I’m here with my co-host, Max. How are we doing today, Max?

What’s going on? What are we covering in today’s episode?

Max Kent: Yeah, I’m doing well, Steve. It’s a good day to talk about a crucial topic for. All software providers or ISOs or even just sales reps who have their own merchant portfolio, and so that topic of the day is how to assess the health and risk of your merchant portfolio.

Steve Bell: Appreciate that Max. Yeah, this was actually a topic that we did write a blog post about, but I feel like it was of high value, again, to all three of those channels and just generally, good information. But it is a really important one, due to the shifts really, especially for software providers, but again, ISOs, sales reps alike, it’s important to understand these topics.

But for a software provider specifically, like the level of control that. Is now being desired, that being, true payment facilitation or even more control with the payback as a service approach it’s really critical to understand these pieces long term as the market shifts. And so ultimately the goal of today’s podcast is really to provide some of the insight into how each of these parties can better maintain the the health of their merchant portfolio.

Max Kent: Yeah, I mean, it’s interesting. I was looking at some of the data. Today and in the US alone merchants processed over $8 trillion in e-commerce transactions last year and even more at the point of sale. So that much volume flying around just in the US alone, keeping your portfolio balanced in terms of risk and reward is really essential to the bottom line of.

Your company or your ISO or I guess said sales reps p and l.

Steve Bell: Yeah, no, exactly. Ignoring these warning signs really can lead to higher chargeback fees, fraud losses, and even termination potentially by the processor. And so in [00:02:00] this episode, we’re gonna break down the key risk levels, the KPIs you need on your dashboard and within your merchant and partner portals, as well as the proactive strategies that you can use to.

To keep your portfolio healthy and growing long term. So again, biggest goal here is to really just provide education into these subjects and take what you will from it. But yeah really good points coming along the way here.

Max Kent: Great. Let’s jump into it. So let’s start from the top, Steve. What exactly do we mean when we say a merchant portfolio?

Steve Bell: Yeah, a merchant portfolio is simply the collection of businesses, using your software or under your iso ISO account to accept payments. And whether that’s online stores, brick and mortar shops, subscription platforms, or any kind of, hybrid model. Really each merchant brings its own transaction patterns, volumes and risk factors to your first your first.

Line of defense, essentially. And so it’s really critical to know who they are [00:03:00] and what they do, and to to understand how each of them operate to, again, protect and maintain the health of your portfolio over time.

Max Kent: Yeah. Yeah. And it, the hard part is that not. All merchants carry the same risks, right?

A shop, a corner shop, and a pharmacy. And the liquor store down the street, all are a little different in that regard, right?

Steve Bell: No, definitely. And there’s really three main categories that, merchants fall into. And that’s low risk, that’s medium risk, and then that’s high risk for low risk.

Those are typically more stable industries that have predictable sales. That’s things like utilities. Or, recurring SaaS subscriptions where medium risk is more like retail, restaurants, personal services, something that has a little bit more, variability in the transaction volumes and potentially higher disputes as well.

High risk. On the other hand, think travel, think tobacco products subscription box startups, these verticals all have. A higher dispute rate, which is a big topic for today, but sudden spikes in volume as well. And fraud attempts is another area where, these these higher risk portfolios add impact and it’s something that we as a provider really pay close attention to.

Max, like how do payment providers spot high risk accounts early? Can you provide any insight into that? Yeah, and I won’t spend too much time on this point, but because we want to focus on what ISVs and ISOs and Merchant or, reps can do to manage their own portfolios, but from a high level, payment providers generally can get a good starting point on risk.

Max Kent: Just from the industry examples we mentioned. If we see a bunch of merchants coming through from the tobacco industry, like that’s going to raise some flags. We also have, most payment, all payment providers. There’s no really exceptions to this rule, have their own risk scoring models and transaction monitoring systems.

And just legions of people working in the back in, in the back office, trying to make sure that there’s minimizing as much risk as possible. They’re looking at historical chargeback data. They’re looking at transaction velocity and industry benchmarks that. Then they feed into these systems. So anything that lands above a certain threshold of risk alerts their system so that they can, zoom in and identify an issue before it really starts to snowball.

So let’s step back out of the payment pro provider scope and go back into what are some like ways that a. So ISV reps can monitor their own portfolio health. What, Steve, what are some metrics that these stakeholders should be watching daily or weekly?

Steve Bell: Yeah, there’s four kind of main key KPIs that should be monitored.

First one transaction volume. I feel like this one’s pretty clear cut. But it’s important to track, both overall per merchant volumes, or excuse me, it’s important to track overall volumes for the portfolio and then per merchant volumes as well. And so when you see a sudden drop, that might signal.

Technical issues potentially a lost customer while a spike in those transaction could also indicate potential fraud as well.

Max Kent: Yep.

Steve Bell: Perfect. What else? Chargeback ratio. On the other hand, this is this is chargebacks divided by total transactions, and so typically, we’re looking at that ratio to be 1% or lower.

If you’re consistently above that 1%, it might be time to dig into the dispute reasons and really tighten up your fraud filters.

Max Kent: Yeah, so that’s one in 100 transactions is seeing a chargeback which feels low, but at scale that’s typically the threshold we’re looking for is one in 100 transactions that, that have a chargeback.

If it’s higher, then yeah, something’s up.

Steve Bell: Yeah, and I mean that, that fraction of a percent is it can get businesses shut down. I’ve seen it before. It does happen. And so if you’re well above that, you might have a problem. But that’s chargeback ratio in a nutshell.

Really important to pay attention to that one because like I said, you can get shut down for that. The next one that we have on our list here is me merchant retention rate. And what percentage of merchants renew month over month? Essentially a healthy portfolio in the US tends to see retention north of 90%.

If merchants turn, it could point to pricing, performance, or support gaps, essentially. Yeah.

Max Kent: Just on this note here, when we look at our portfolios. Our ISOs and ISVs that we work with, we really see folks on a month to month basis only dropping off, somewhere in the 2% to 3% month to month churn rate.

If we see higher, that’s a pretty bad sign that this partner or this whether it’s an ISV or an ISO can’t rate retain their business that well. Payment providers don’t like to work with that because that’s a lot of work on their end. It’s also not a great. It’s really hard for businesses to forecast out what the rest of the year’s production’s going to look like.

So this is almost like business 101, people want to know that they’re partnering with good businesses and ensuring that like they’re, the businesses that they’re providing payments to or services to can maintain future business. So this is almost more of a business 101 case.

But again, it’s also like a signal to, Hey, is there something up with your, your software per platform or your ISO platform? Sorry, just a quick, yeah, just a quick no,

Steve Bell: That’s a sidetrack on that one. No, that’s a good point. And it again, highlights that we as the payments provider are also looking at these details.

And so getting ahead of it, on your own behalf for your own portfolios is going to lead to, a better relationship with your partner and ultimately a goal of having a healthier business and portfolio again, long term. Really good point there, Max. The final one that we have on our list for this segment is revenue per merchant.

And segment your merchants by revenue tiers. You want to know who the top 10% are and you also want to know who the bottom 20% are because that’s going to allow you to prioritize where you need to add support or potentially even change your pricing plans. But again, that’s just going to give you a better insight into.

The types of, businesses that you’re working with and, with a higher perc or with a higher percentage, you might not need to support them as much, but also maybe that means you’re giving them a higher white glove service. So there’s other beneficial factors other than just, risk and onboarding and underwriting and everything.

But those are those are kind of like the four for that category. I don’t know if there’s anything you want to add to that final point there, Max.

Max Kent: Yeah, I think the only point I would add is there’s always the. The maximum that like, your business is probably being, you’re probably earning 70% of your, or 90% of your revenue from 10% of your customers or something like that.

And like most business owners know that, right? They have the biggest, their biggest merchants or they have their biggest partners. And that’s where their growth drivers are. What, why this applies to risk is that, when you look at the rest of your portfolio, if it’s not your top, 20% of merchants understanding how to also monitor at scale the rest of the portfolio that might be smaller in a way that is efficient, but also diligent is super important.

That’s why I think the payment providers like Clarence have such a massive role going forward, is that if you’re a, if you’re a software platform and you’re bringing on 50 merchants every, every month, but only really five of them are. Really big growth drivers. You need to have a payments provider that can effectively manage and partner with you to ensure that those other 45 are taken care of in a way that’s efficient and, effective. So whether that’s risk management, just revenue management and revenue operations and I think that’s where people see self-service platforms and self-service payment providers to not have as much support and help in that kind of like management of. Portfolio if that makes sense.

So all four of them, transaction volume management, chargeback ratio management, merchant retention rate and revenue per merchant is real. They’re all really key. But what underlines this is this, as you’re growing, it’s gets harder and harder to manage all of them. So that’s where having a good payments provider really comes into play.

So these are all good points, Steve. Like these KPIs are great. Obviously, we just gave homework to give some homework to our friends in the IS SV and ISO world. So what are some proactive steps that software providers and ISOs can take as it pertains to these KPIs? What are some like maybe more qualitative steps that they can take to ensure that they’re minimizing risk and building a healthy portfolio?

Steve Bell: Yeah, there’s four tactics. And these four, again, like that’s why working with a payments partner that’s going to support you along this journey is important. You don’t necessarily have to build out the solutions to support these on your own, but again, that, that’s the purpose of this, educational podcast is to just provide insight and you can pick and choose the pieces that.

You need to implement but they’re all really good best practices that should be understood at a bare minimum. But those four that we’re working with in this this area for those tactics is rigorous onboarding, advanced fraud detection, ongoing merchant education, and then regular audits and reviews.

Starting with rigorous onboarding, before you, you board a [00:13:00] merchant, it’s important to, run KYC I’m sure you’ve heard KYC before. That’s know your customer, but that’s also another kind of leg to KYC is also a ML and that’s anti-money laundering. And those are two different types of checks that are essentially going to give you, insight into the type of business that you’re, and the customers that you’re you’re working with.

There’s also credit reviews and industry specific risk assess risk assessments, kind of like we mentioned earlier. You can generally get a pretty good idea just based on the industry alone. So somewhat of a a standard rule there. But then also, you want to decline or require extra controls for merchants that don’t meet the tolerance that you have.

The next one here, advanced fraud detection. And so that’s, investing in real time money or real time monitoring with machine learning models, these systems, they’re going to learn your portfolios normal patterns, and they’re going to flag anomalies. They a new merchant subtly processing 10 times their normal volume.

That’s another one I’ve again seen in the past, where I used to work in the customer service department the merchant service department, and you’d see a, a hundred thousand dollars transaction try to go through that’s going to get flagged right away if that’s well outside your, your typical range.

There are preventative measures to that if you know that’s coming. That’s just a brief insight into the rigorous onboarding processes or I’m sorry, the advanced fraud detection processes and systems that you put into place. The next one here. Ongoing merchant education.

And so again, like we’re big on education here and it’s important to make sure that you’re, staying consistent with your merchants and providing them the education that they need to be better. And hosting things like quarterly webinars or sending best practice guides on dispute management and fraud prevention is really going to yield you a benefit.

We here as a partner, again, like it’s a huge approach for us is to be educational. We’ll help our partners, with some of that education as well down to their merchants. So that’s a key thing to know as well. The last one that we have here, regular audits and reviews. I feel like that’s a standard, again, for what we’re talking about here, but schedule monthly or quarterly portfolio reviews and really look, into the chargeback ratios, the retention dips, and then you can work with those affected merchants to, correct course.

And again, try and get them into a healthier state. It’s going to yield a better benefit for you as a provider, whether you’re a software provider, iso, again, sales rep, it’s going to, it’s going to lead to a better result long term.

Max Kent: Yep. These are all great points, Steve, and it’s good to think about these four steps and in almost like a timeline, before you onboard merchants, you have you have to do some rigorous onboarding exercises and ensure that you’re bringing on.

Safe, low risk or medium risk merchant. And if you’re bringing on a high risk merchant that you understand what you have to meet from a regulatory standpoint in order to have them in your portfolio. And then you go into like having them part of your portfolio and introducing them into your systems.

And that is, implementing fraud detection systems ensuring that you’ve educated them at the forefront of them starting to process with you and your provider. And then lastly is like the post productivity, I’ll call it like exercise. And that is like reviewing, auditing activity.

We’ve said this because. As, because as a payment’s provider, as a payments partner, we also are trying to, do that with our ISVs and I, our ISOs and that’s the process we go through. So it’s a kind of a two tiered step, like where the payments provider’s going to do that with you and your hopefully doing that with your merchants.

Steve Bell: No, I love the timeline perspective there. I think that’s a great kind of summarization of it. Yeah, I think that was a great point there, Max. And sometimes too it’s like the changes and the monitoring it, like it doesn’t always have to be groundbreaking, right?

It doesn’t have to be a huge change, especially like thinking about just achar, like chargebacks as an example. You might only need to make a small tweak in a merchant’s, policy to essentially prevent those or aid in, in the reversal of those. And so that’s something that hopefully you can go to, into it with a at ease perspective where it doesn’t have to be this huge ordeal.

But to make those changes and those tweaks could, could dramatically impact your portfolio long term. Yeah. Yeah. Awesome. With that said. Let’s wrap up today’s episode, summarizing it here. Managing the health of your merchant portfolio, as we’ve discussed is critical.

Like it’s going to set you up for success. And so it’s not just a one and done task either again, there might not be the biggest lift, but it is really important to stay proactive with these efforts. And it’s going to take, vigilance it’s going to take risk-based onboarding, automated monitoring, again, data-driven KPIs and direct one-to-one merchant support.

Max Kent: When you combine those elements, you not only reduce risk, which is the focus here, but on the back of that, you build trust, you boost retention. You grow your revenue across the entire portfolio. So again, if you’re unsure like about any of this, we have a lot of great professionals here at Clear and.

And we, as much as we are like a payment processor we want to be consultants and advisors to our partners. So, help you always happy to help you guide through this process and ensure that your questions are answered person to person, not just via a template or a, step by step tutorial that we’re going to send a PDF.

So, we are real people looking to help, people build great things. So, Steve, yeah. Wanna close us out on that note? Real quick.

Steve Bell: I just want to re-highlight that building trust comment that you just made because that’s important to understand and just emphasize like.

You’re showing your willingness to support the health of, your merchant portfolio and your merchants, and that’s going to go a long way. So I just want to reiterate that point, but it’s an incredible point there, Max.

But yeah, just wrapping it up again. Thanks, Max. I always love, having these conversations with you always learn a lot when we’re just discussing these both in the planning process and then as we go through the conversation.

Wrapping this up, just into a quick highlight. Again, assessing your merchant portfolio and the health and supporting them long term is going to allow you to do better. And just like Max said, like we’re here to help. That. If you do well, we do well. You don’t necessarily have to partner us with us.

That’s obviously we would love that, but we want to see, good business being done and we want to cut the fluff of payments and just make sure that, business is running smoothly for everybody. We want you to be successful. And so that’s a final note on that.

But please join in the conversation. Drop a comment below on the YouTube video if you’re watching there. Come to us on social media. Those are all going to be in the description of the YouTube video. Or if you’re listening on Spotify, apple Podcasts, it’s all going to be there. We’d love to hear what you have to say.

But until next time, again, thank you, Max. This is Payment Pulse and we will see you next week.