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Managing Payments Risk During COVID-19: Why Vertically Focused Payment Facilitators Are Better Equipped

Shopper in mask

Recently, Square has made national news for holding back up to 30% of the funds owed to some of its merchants to mitigate risk in light of the COVID-19 pandemic. Some of the merchants affected have spoken out, saying that the holds have made an already difficult economic situation much worse for them.

These types of holdbacks – also known as reserves – can be a useful tool for payment providers looking to control their financial exposure in high-risk situations. But as these stories demonstrate, they can also create hardship for struggling merchants.

Walking the fine line between managing payment risk and causing harm to merchants is a balancing act, but it’s one that vertically focused payment facilitators are especially well-equipped to perform.

Reserves and COVID-19

Reserves are a tool that payment companies – including payment facilitators – sometimes use to manage risk in case of a large number of customers requesting refunds or chargebacks and the merchant does not have the offsetting sales volume to accommodate. During COVID-19, various industries are seeing an uptick in these refund and/or chargeback requests.

In one example scenario, a wedding photographer might take a deposit from customers months in advance to book a photo shoot. The service is then provided with the photos delivered much later. However, if the wedding is canceled, as many are during COVID-19, or the photographer goes out of business before the shoot, its customers could initiate a chargeback to recover the money they paid when the photographer is not able to refund the cardholder.

Reserves are typically used in high-risk verticals, but they are becoming more widespread during the pandemic as the potential for chargebacks across industries has become greater. This has led some payment providers such as Square to begin collecting reserves from merchants in areas where the practice hasn’t historically been used, catching many of them by surprise.

Compounding the frustration has been the fact that some businesses impacted by new reserve policies are not facing increased risk, even in the current atmosphere. A horizontal payments company such as Square, who doesn’t have deep industry specialization, would likely treat businesses within a specific business category the same way regardless of how they may operate differently.

How vertical providers are different

Returning to the photography example, the wedding photographer who takes payment well in advance of delivering a service likely does represent increased risk during the pandemic. But also within the photography category could be a photographer who simply sells images directly from their website, delivering the goods at the same time they take payment and representing no increased risk from chargebacks at all.

A software provider in the photography vertical, might see activities in their software that show the difference between a wedding photographer and one selling existing photos on their site. This puts them in a far better position to effectively evaluate the risk involved with their customers, determine whether reserves are necessary and, if so, how best to implement them. Vertical payment facilitators know their industries better than outside payment providers ever could and often have more data about how their customers operate.

As providers of the systems their customers use to run their businesses, software companies are also in a better position to work directly with those customers to find creative solutions and to effectively communicate with them, resulting in much higher customer satisfaction.

Real world example: RunSignup

We talked with Kevin Harris, Chief Finance & Operations Officer of payment facilitator RunSignup, to better understand how his company has navigated a new risk environment in a vertical that was severely impacted by COVID-19. The company provides a platform that enables registration for races and other athletic events.

According to Harris, RunSignup has not historically held funds in reserve. But as race cancellations rose dramatically in March, his team became concerned about the very real potential for overwhelming refund requests from race participants who had signed up for events that were postponed, cancelled or otherwise dramatically changed.

After reviewing the data they had on chargeback rates from cancelled events in the past, the company implemented an initial standard holdback of 20% to build a reserve of funds to help meet these needs, Harris said. They quickly realized, however, that chargebacks were happening at a lower rate than they expected, so they reduced the reserve amount twice, first to 10% and then to 5%.

The chargeback rates were less than expected in part because RunSignup’s customers quickly found new and creative ways to provide value to their participants. As the software provider, RunSignUp was then able to act quickly and support their new requirements as the space rapidly evolved.

“Race organizers did a tremendous job understanding their participants and delivering creative options to be able to reduce or prevent chargebacks,” Harris said.

“RunSignup then quickly created tools to allow races to be able to do that. For instance, we created a survey tool that races could use to ask their participants if they would like to defer their registration fee to the next year’s race or use it as a donation to the race’s cause.”

The company even built new capabilities to support virtual events, including new and creative “challenge events”, which were seeing record signups.

Finally, throughout the process of adapting to the new coronavirus reality, RunSignup has been transparent with their customers about what the company was doing and why. They communicated with customers regularly about how the pandemic was affecting events in general, what the company was doing to manage risk and support race organizers, and how races across the country were adapting and finding creative solutions to the predicament they all faced.

This transparency helped minimize the disruption to and dissatisfaction from its customers as much as possible, Harris said.

“There was certainly an understanding on behalf of most, if not all, of our customers around this unprecedented event that was impacting our industry and how it was creating the need for them as submerchants and for RunSignup to have some type of protection in place for refunds and for chargebacks that could occur,” he said.


Vertical software providers who become payment facilitators must protect themselves from financial risk as much as any other payment provider. However, their deep knowledge of how their specific industries operate enables them to manage risk more effectively. And a substantive relationship with their customers enables them to work closely with them as partners to help everyone mitigate the risk involved.

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