Mitigating the Risks from Bank and Financial Market Failures to Online Business
The recent turmoil in the banking sector has spooked the markets. While it remains to be seen whether the contagion will spread to the wider banking industry, the collapse of Silicon Valley Bank in particular has highlighted the risk that online platforms are exposed to when relying on a single payments processor. The question is not if, but when the next banking crisis will hit.
Business on Hold
Online merchants face a variety of challenges, but few are as serious as being unable to make any sales at all. The sudden collapse of SVB left sellers on Etsy, a popular marketplace for crafts and handmade goods, in limbo. The platform is reliant on payment processors both to accept payments from customers and to pay out earnings to sellers on the platform. Etsy was using SVB to process payouts to some of its sellers, with these payouts being put on hold following the collapse of the bank. As a result, many sellers on Etsy put their stores into “vacation mode”, essentially shutting down their businesses through no fault of their own. While the situation has since eased and payouts are flowing again, the collapse of SVB - and Wirecard before it - illustrates the inherent risks associated with payments providers going out of business.
No business wants to find itself in a situation like sellers on Etsy - unable to accept orders and process payments, nor access their cash reserves and thus be unable to pay suppliers. The collapse of Silicon Valley Bank is not the first time a scenario like this has occurred. The Wirecard scandal of 2020 also served as a stark warning of the consequences for businesses who rely on a single payments processor with no fallback options in place.
The Risk of Becoming a Victim Overnight
Much like with the recent collapse of SVB, the demise of Wirecard was swift. Businesses relying on Wirecard for the ability to process payments were left high and dry - unable to process transactions, and needing to quickly pivot to an alternative provider to keep their business running. This resulted in a mad scramble to integrate alternative payment providers on an extremely tight deadline among businesses without a fallback solution in place.
Even if switching to a new provider solves the immediate problem of payments processing, it does not address the longer shadow cast by these events. In the case of Etsy, where payouts to sellers on the platform were delayed and communication was viewed as sub-par, the results go far beyond taking a hit to revenue. Customer confidence is hard to build up and easy to lose - a single bad experience with a platform or merchant can leave a bitter aftertaste that lasts far beyond the time needed to integrate an alternative payments solution. Regaining the goodwill of sellers, suppliers and consumers can be a hard and lengthy process.
Safeguarding Your Business Transactions in a Volatile Banking Environment
As such, it makes business sense to take risk mitigation measures early and to have a backup plan in place for the worst case scenario. For online merchants or marketplaces, this means having fallback options for processing payments and/or making payouts in place before they are needed. This also requires the ability to quickly switch between integrated providers if needed (using a so-called “multi-acquirer setup”).
A payment platform like IXOPAY can help merchants and marketplaces easily integrate multiple payment processors, as well as make it quick and easy to route payments through an alternative provider if needed. Acting as a technical layer that consolidates all payment providers and processes under a single umbrella, a payment platform serves as a single command and control center for all a merchant’s payments.
A payment platform offers a few key advantages:
- All payment providers are integrated using the same API, rather than relying on the disparate APIs of multiple providers. This makes integrating new payment providers much quicker and easier, as there is no long lead time required for the integration of a new API.
- Once a payment provider has been integrated, routing payments to a specific provider is easy to configure and can be changed at short notice, if necessary.
- Fallback routing rules can be defined in advance, allowing payments to automatically be routed through an alternative payments provider as needed. From the outside, this switchover is transparent, and the perception among end users is “business as usual”.
However, things are (unfortunately) not quite that simple. While routing transactions to a different provider as needed is easy with a payment orchestration platform, it still requires a contract with the payment providers in order to process transactions. The contract for any fallback solutions should therefore already be in place before the fallback solution is required, in order to reduce the impact of an important payments processor suddenly going out of business. As a bonus, having these alternatives in place also helps mitigate additional risks associated with a provider being unavailable - be these technical issues with connectivity, or the provider deciding to terminate the merchant’s contract.
Understanding the Implications and Strategies for Risk Mitigation
In short, a good risk mitigation strategy includes the following:
- Contracts with multiple payment providers that serve the merchant’s target markets
- A platform that makes it easy to integrate multiple payment providers with minimal overheads
- Failover routing strategies defined ahead of time that the merchant can rely on without manual intervention that mitigate the impact of outages
- A platform that scales according to your business’s needs and markets
While some hard lessons were learned from the demise of Wirecard, the issues with handling payments following the collapse of SVB indicate that not everyone heeded the warning signs. Nonetheless, at IXOPAY, we have noticed a significant uptick in the number of RFPs explicitly requesting payment orchestration as enterprises seek to minimize their risk exposure by putting robust fallback options in place. Even if your business was not directly affected by events at SVB or Wirecard, with all the uncertainty in the market, now is as good a time as any to ask yourself whether your business is prepared to withstand further shocks to the system; or whether you are entirely reliant on a single payments provider, and consequently, a single point of failure that threatens the success of your business.
About IXOPAY
IXOPAY is a best-of-breed payment orchestration platform offering flexible and independent global payment processing options. Fully PCI-DSS Level 1 certified and highly scalable, IXOPAY caters to the needs of enterprise merchants and white label clients, including payment service providers (PSPs), acquirers and independent sales organizations (ISOs). Built upon modern, easily extendable architecture, IXOPAY provides smart transaction routing with cascading, state-of-the-art risk and fraud management, fully automated reconciliation and settlements processing, comprehensive reporting and access to hundreds of acquirers, payment service providers and alternative payment methods.
IXOPAY is trusted by national and international enterprises and has offices in Austria and the USA. The owner-led and financed company has grown from 2 to nearly 100 employees by delivering innovative eCommerce solutions.
For more information, visit: https://www.ixopay.com