Part 2 – Heightened Due Diligence: How Should You Adjust Your Operations in Response to the Crisis in Ukraine?

By Dan Spalinger, VP of Global Advisory Services, Infinicept

Not two months old, the conflict in Ukraine has left its mark on numerous areas of our globalized economy.

The payments niche has not avoided this. Our first look at some of the impacts largely touched on fraudsters and other bad actors who might take advantage of the conflict for personal enrichment. Risk monitoring parameters aren’t always adjusted quickly enough. Sanction screenings are updated infrequently. These factors – along with a general lack of awareness about the impact of such events on payments networks – all lead to an environment rich with opportunities for those who seek to take advantage.

As a follow-up, we can look at additional areas where payment facilitators (and the payments industry as a whole) may want to focus, to block unwanted behavior and become educated on the conflict’s effects.

As I mentioned above, risk monitoring parameters are not always adjusted at a rate that adapts to rapidly changing situations. Whether it is the consumers in Ukraine and the conflict with Russia or consumers here in the U.S. with COVID, world events will lead to changes in cardholder behavior that payments providers must account for and react to accordingly.

For example, in Ukraine, payments providers are seeing large swings in the types of payments being processed, such as cash vs. card or card-not-present vs. card-present transactions.

People often turn to hard cash during a crisis. As an immediate reaction to the conflict, Ukrainians – fearing a loss of infrastructure like electricity, digital networks (cellular and otherwise), and terminal access points – began withdrawing their cash from banks (when they could get to them and they were open). They used it instead of cards or other digital methods. There are several anecdotal reports of retailers in Ukraine simply refusing to accept card or digital payments out of fear that they would never receive or be able to access the deposits if the conflict impacted future withdrawals or usage.

The situation is also not as simple as “stress equals more cash and fewer digital payments.” In fact, in a place like Ukraine, where cell phone penetration is high (greater than one cell account for every one citizen) and there is a high level of digital wallet adoption, there could be a spike in card-not-present or digital payment usage at the outset of an event.

Why? Because people who hold digital forms of payment may seek to spend money they perceive as potentially unreliable, using up what they have stored in digital wallets or lines of credit, while holding onto stores of value in hard currency.

As a party responsible for monitoring merchants (in Ukraine or anywhere a conflict or stress may arise), you must be aware of such material changes in behavior. If your merchant’s processing volume suddenly falls dramatically or swings from being more card-present to being more card-not-present, it may not mean they are out of business or have changed their business model. It may simply be that consumers and merchants have changed their behavior due to external stressors. That should be accounted for within your risk monitoring—whether it’s rules/exception-based or a more malleable machine learning system.

Human psychology is not often a topic we see brought up much in portfolio monitoring for payment facilitators and other payments providers. But during crises, it can cause broad behavior changes across books of business, making it a factor to be aware of. And none of the above examples even consider other contributing factors, such as the imposition of martial law, central bank pronouncements or voluntary suspension of service by other payments companies in affected regions.

Events like what we’re seeing in Ukraine are extremely complex and may warrant ringfencing those merchants most likely to be impacted with a comprehensive action plan or enhanced monitoring program. Such a program should be developed to meet the simultaneous desires of supporting legitimate commerce in a time of extreme hardship while monitoring for what is truly unusual behavior that warrants investigation and a response.