Observations on FinTech and COVID-19

Waller’s Financial Technology practice has been providing advice to processors, banks, ISOs, financial technology providers, merchants and other participants in the payment processing ecosystem for over forty years.

Based on communications this week with our industry contacts and the other members of the Electronic Transactions Association (where Waller attorneys are members of the Government Relations and State Issues Committees and the COVID-19 Working Group), we offer the following observations:

• As everyone knows from personal experience, the many parts of the retail sector are taking a huge hit, and this is rippling through the payments industry. Based merchant data aggregated from Womply, in industries like transportation, entertainment and lodging businesses payments are down more than 50%, year-over-year, while sectors like restaurants/bars, recreation, health/wellness and education are seeing payment volumes drop 15-30%. Womply keeps its figures updated daily, and as the various forms of stay-at-home orders are expanded, this seems likely to get worse before it gets better.
• While thus far less significant than the drop in retail sales, many companies in the industry are also seeing increased chargebacks and refunds as retailers or consumers are forced to cancel advanced orders in anticipation of financial or supply limitations.
• Because the financing structure of the merchant processing industry (e.g., debt financing, equity investment, purchases of residual income and merchant accounts receivable purchasing) is predicated on “recurring revenue,” rapid and unexpected shifts in volume like this will be disruptive, to say the least. Parties throughout the risk and financing stack of the payments infrastructure are taking a hard look at their obligations and security positions on loans and purchases of payment streams, as well as responsibility for merchant losses.
• Many clients specializing in small business processing have high attrition even in the best of times, requiring them to “fill the hole” of lost merchants as a prerequisite to growth. Given the current economic conditions, new merchants will be tough to find, and we expect industry attrition to rise significantly.
• Any look at your e-mail spam filter will reveal a growing ecosystem of coronavirus-themed fraud in the pharma/health product segments, telemedicine, government payout and charity/fundraising scams. With company underwriting processes and operations disrupted, many bad actors will try to use this time of uncertainty as an opportunity to sign on with payment processors that usually accept only low-risk business. This is a recipe not just for losses down the road, but also potential state, FTC and CFPB enforcement action against legitimate payment processors who become unwittingly tangled up with fraudsters—much like we saw in the wake of the last financial crisis. Already stressed compliance and risk management operations teams will see increased pressure as a result.
• Like companies in all segments, payment processing companies are navigating a complex web of community restriction and social distancing orders, at many different levels of government. Luckily, most of these orders are based on federal Cybersecurity and Infrastructure Security Agency (CISA) Guidance to State and Local Governments on COVID-19, which broadly classify “financial services” (including products allowing customers to “make payments to other parties”) as “critical infrastructure” that should be exempt from stay-at-home orders. We believe, absent more specific guidance, that merchant processing and retail financial technology businesses fall under the financial services category as critical infrastructure. Nevertheless, these orders are ultimately made at the state and local level, and there is no obligation that the orders follow CISA Guidelines.
• While all companies face concerns about employee health and well-being, many payments industry companies have large call centers or other operations hubs where employees work in close quarters, and, to the extent these employees cannot easily work from home, well-defined policies and procedures dealing with screening and monitoring of employee health are critical, though historically overlooked, aspects of business continuity plans that are being dusted off and revised in real time. 

Members of Waller’s Financial Technology practice are monitoring developments and their impact on industry activities in real time. For additional information, contact Chris Phillips or Derek Edwards.