Winter is the time when many things go dormant. Animals like bears, chipmunks and raccoons take little breaks when the weather gets cold. Certain plants and insects also slow down. In the payments world, however, dormancy can be a problem.
A dormant account is considered any account with no activity for greater than 90 days and/or no commitment of future activity. These inactive accounts can cause headaches for compliance teams and acquirers — and cause financial challenges for you.
Showing a large number of dormant accounts to regulators creates concerns and requires explanation as to why these accounts are inactive and the rationale behind keeping them open.
When I first started my payments business 18 years ago, it was hard to convince merchants to switch over from a competitor to give us a try. When you’re new, everyone is hesitant to take that leap of faith and do business with a company with little history. To get our foot in the door, we would encourage a merchant to set us up as their “backup” provider. We even had an internal joke that we were everyone’s favorite secondary provider.
Little did I know that, years later, being someone’s No. 2 would mean carrying dead weight and increasing risks in our client profile with our partners. So while we still support dreamers and startups, there needs to be a firm commitment on the merchant’s side to deliver. Unfortunately, if those deliverables are not met, we are left in a situation where we are incurring costs and risks.
Recently, our head of compliance brought it to my attention that any “dormant” accounts we had on the books would need to be closed. While we have long outgrown our initial strategy of “give us a try” to gain new business, we do occasionally still have merchants that go through that onboarding process but take many months to move us to their development queue. I’m sure others have experienced this as well. This month, we look at the challenges of these dormant accounts and why it’s so important to clean them up.
Cost of Setup
Setting up a new account takes considerable time and effort from both the merchant and the payment service provider. The merchant invests their time getting the site ready for the new payment service provider by adding disclosures and making sure the content meets both the payment service provider and bank’s standards. The payment service provider has to provide dedicated staff members for the onboarding process, to review the business model and websites as well as identify and verify the ownership and control structure of the merchant entity.
They have to invest in third-party onboarding compliance tools to validate directors, UBOs, the associated bank accounts, and check and scan the site. Merchants pay high-risk registration fees of up to 1,500 dollars upfront.
Maintenance Fees
Here’s the big issue with dormant accounts: there are ongoing costs for payment service providers and acquirers. Once the merchant has been approved for processing, there are maintenance monitoring fees that are imposed by the acquirer and payment service provider, and they occur even when the account is inactive. These fees include monthly URL scans, global sanctions and enforcement checks, and adverse media monitoring of the entity including its UBOs and directors. From a regulatory standpoint, acquirers and payment service providers are required to risk-score merchants and perform periodic KYB (know your business) and ODD (ongoing due diligence) checks, which look at each merchant file to make sure things like proof of ID, proof of address, banks and other corporate documents are up to date.
All these documents have to be gathered by staff and validated. There is also a recurring effort on time and costs associated with periodic checks on these inactive accounts. This means compliance teams need to validate and ensure all scans are updated with the correct data. When the account is dormant, it is a lot of work and cost for no return. The reality is, it’s much easier to shut down the account than to invest the resources to make sure the account is compliant.
Risky Business
Dormant accounts also create additional risk for acquirers and payment service providers. Fraudsters will often maintain inactive accounts, hoping they will fall off the enhanced monitoring of the acquirer or payment service provider. Then, later on, a bad merchant will slam the inactive account with fraudulent transactions. There is also a risk that dormant accounts can be used to help launder funds in the future, if a bad merchant suddenly activates the account to receive proceeds for illegal activities.
On the regulatory side, most banks expect quarterly reporting of your merchant base. Showing a large number of dormant accounts to regulators creates concerns and requires explanation as to why these accounts are inactive and the rationale behind keeping them open.
Let’s face it, time is money. As a merchant, investing your team’s time to meet all the onboarding and KYB/ODD requirements, paying the initial fees and investing your technical resources to integrate but then not use the account is not very efficient. If you have set up a direct account with a bank, you will incur monthly fees for inactivity and you will be put through the paces annually during the required KYB/ODD updates acquirers and payment service providers must complete. Lastly, it is also considered a best practice by the card brands and acquirers to keep inactive accounts to a minimum.
As with everything in life, we must use our time wisely. Making sure we invest resources where there is a return is important for merchants, payment service providers and acquirers.
Cathy Beardsley is president and CEO of Segpay, a merchant services provider offering a wide range of custom financial solutions including payment facilitator, direct merchant accounts and secure gateway services. Under her direction, Segpay has become one of four companies approved by Visa to operate as a high-risk internet payment services provider. Segpay offers secure turnkey solutions to accept online payments, with a guarantee that funds are kept safe and protected with its proprietary Fraud Mitigation System and customer service and support. For any questions or help, contact sales@segpay.com or compliance@segpay.com.
