How the insurtech, bank relationship may change

It's hard to say whether the ramifications of the collapse of Silicon Valley Bank (SVB), First Republic and Credit Suisse are truly over. Interest rates were blamed for both banks' failures, and opinion is split between whether the event was the result of 'internet bullying' or whether it is a 'canary in the coal mine' that portends that no bank, and therefore no bank customer, may be safe.

For digital insurance companies, this could mean paying more to use banking services that have previously been virtually free to use as banks tighten their regulations and increase prices. This concern is particularly acute in companies and industries that banks typically view as "high risk." They know that if their bank has problems, then they will be the first to suffer from higher fees or restrictions. This is also true of the various payment processing companies that a given merchant may work with, from small fintechs to major players like Visa and Mastercard. In an economic downturn, which is typically when fraud increases, many players in the payments industry may decide that perceived high-risk companies are either more trouble than they're worth — or that they need to compensate the financial services provider for the trouble.

The truth is, although there are undercapitalized banks like SVB, the majority of banks, big and small, are conservative by nature. The likelihood of any particular bank, especially the older and more established banks, disappearing with their clients' money is low, and we have seen both recently and in 2008 that governments are willing to pay staggering amounts of money to bail out banks. However, when there is unrest in the economy, banks become even more conservative in order to limit risk and thereby avert a scenario in which they are undercapitalized. So, what can companies do to protect themselves from banks turning against them during uncertain times?

'High risk' sectors

There are many sectors that pay a premium for banking and card processing because they are either in legal grey areas or subject to higher-than-normal levels of fraud and chargebacks. However, high-risk designation isn't restricted to what is broadly referred to as 'vice,' and our own clients that deal with being deemed risky are from more mundane sectors. The travel and tourism industry is also subject to high fees and stricter limits on chargebacks for reasons that airlines, travel agencies, tour operators, and ticket comparison sites largely can't control. Airline tickets and hotel reservations are high value, and since they are digital, they are easy to transfer anonymously. A fraud network can use stolen or synthetic identities to purchase tickets and sell them for very high profits, which will in turn cause a chargeback when the person whose identity was stolen discovers the unwanted charge on their card.

Insurance sector under the microscope

While the insurance sector in general isn't regarded as high a risk as, say, gambling, it is still an industry that generates $308.6 billion of fraud damage to consumers every year, and that number is rising. Some form of fraud was suspected in 20% of insurance claims in 2021, up from 18% the previous year. Banks, card schemes and the like must factor this fraud into the fees that insurers pay on each transaction and the regulations that they are expected to adhere to. Even though these increases in fees might be slight, they will affect every transaction that the insurer makes, cutting into their profit margins at a time of economic downturn.

Chargebacks are also a factor for the industry. If a client dies or cancels a new policy through a chargeback, then insurance agents will have to pay back a portion of their commission through a chargeback, and chargebacks are something that banks and payment processors try to avoid wherever possible. Major payment processors like Visa and Mastercard have stringent limits for how high a percentage of transactions from any one company can be chargebacks, and once a company crosses this threshold they have to take immediate action to bring chargebacks down or they will see their fees go up. Too many chargebacks and they will be cut off from these vital payment services altogether. During difficult economic conditions, card processors are going to be even less inclined than usual to let their clients rack up an excessive amount of chargebacks.

…and the threat of shut down

Also, it's no secret that banks have the power to shut a client off in a split second—or prevent them from issuing payments at all. I've seen this happen many times over the years. For example, just recently I know of a company in the broker space that was processing hundreds of millions of dollars per year through their bank. However, this company's former bank recently shut them off from issuing virtual cards because this broker was functioning as a payments intermediary and not fulfilling the product or service directly. It pains me to see companies like this being treated so harshly by their banks.

How can insurance companies protect themselves?

We've covered what insurance businesses are subject to, and there is an element where those companies must balance accepting that they will always pay more than other merchants while also doing what they can to ensure that they don't incur further penalties. They must show their banks and card schemes that they can be trusted and not deemed "high risk" in its truest sense.

One way of fundamentally de-risking the payment process is by using a payments solution that handles both incoming and outgoing transactions, plus a fraud prevention solution for further protection. By removing risk from the transaction scenario, they can then enjoy lower merchant processing fees, and save money while also improving cash flow.