In recent weeks there have been a number of inaccurate characterizations of Visa's high-risk acquirer program, including a June 2 guest column in American Banker that critiqued Visa's risk-management programs. [Editor's Note: The column, "Flip-Flops at Visa Create Appearance of Impropriety," suggested that Visa policies would tend to push small banks out of the merchant processing business.]
On behalf of Visa and its member banks, I want to set the record straight. The Visa membership, which includes more than 14,000 financial institutions, has a strong interest in promoting safe and sound business practices. As one of the cornerstones of the nation's financial services industry, we have an obligation to manage risk for our entire system. That obligation compels us to adopt practices that protect all members involved and the goodwill of the system in order to ensure its continued viability.
The Visa program is intended to address high-risk activity among acquirers. It operates on two basic premises:
- Excessive risk should be managed.
- All members within the system should be protected from excessive risk.
Few banking professionals would argue with the simple logic employed here; in fact, very few have. To date, the vast majority of banks involved in the high-risk acquirer program support our efforts to manage risk on a system-wide basis.The Visa program identifies and minimizes the high-risk activity of individual members in merchant acceptance. High-risk activity by individual merchant acquirers presents real financial risk to the entire membership - and while the membership absorbs normal business risk, the system is not prepared to accept excessive risk presented by outliers.
The standards Visa uses in this program are developed from the performance of the entire membership, which is the best measure available on risk. These standards are then applied objectively to the entire membership - the fairest way possible to apply risk-management standards.
Over time Visa has enhanced this program to meet changing commercial, legal, and regulatory needs. In the past Visa has addressed high-risk acquiring members by requiring them to secure their financial obligations to the membership. But that is not the long-term solution our full membership seeks for managing financial risk.
Recently Visa took steps - with input from its membership - to clarify guidelines concerned with capital adequacy for merchant related obligations. Three simple measures were developed:
- The first and most important measure focuses on chargebacks relative to a member's capital, wherein no more than 5% of a member's capital should be at risk.
- Second, since chargebacks can be a lagging indicator, Visa guidelines address concentration in high-risk merchants, and provide that no more than 20% of a member's capital should be at risk to these merchant categories.
- Third, where performance measures are adequate but the member is highly leveraged, Visa guidelines address potential "shock" risk by clarifying requirements for member due diligence where total merchant volume leverage exceeds 20% of a member's capital.
These measures are part of an overall system of controls developed to meet the needs of the membership for effective private-sector risk management. As the marketplace evolves, Visa will continue to enhance these programs to manage high-risk member activity and to support the integrity of Visa payment services and the profitability of members' Visa programs.Our standards for financial responsibility have caused an extremely small number of acquirers that operate outside the bounds of acceptable risk to change their business practices. While we respect the right of these institutions to voice their opinions regarding these guidelines, we firmly stand by both the intent and the effect of these guidelines among our entire membership.
It is with these objective standards for the financial condition of each member and the performance of its Visa program that we protect the membership from excessive risk exposure.
Mr. Smith is a vice president, risk management, at Visa USA.