Getting On Board With Underwriters

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Hold on to your hats, because we’re about to tell you that the customer shouldn’t always come first. Should it be the most important thing? In the end, sure. But, as Mike Gardner, CEO of Agreement Express, shared with MPD CEO Karen Webster during a recent webinar, what’s sometimes best for the customer is putting the merchant onboarding process ahead of them.

Merchant onboarding: it’s an important concept that MPD CEO Karen Webster notes can be “a little bit on the dry side.”

For the purposes of her webinar with Mike Gardner, CEO of Agreement Express, a SaaS solution that automates the onboarding and underwriting process for the financial services industry — she sets out to “turn it on its head.”

Everyone, everywhere, seems obsessed with the customer experience. Everyone wants to make the customer happy and is therefore re-engineering their business processes to start with the customer, and work backwards from there.

But that doesn’t really work when it comes to building (or improving) the merchant onboarding process.

Webster and Gardner want to debunk some commonly held misconceptions about what should drive the merchant onboarding experience. For one thing, it should begin with the underwriting process — and that it is a process in which one size certainly doesn’t fit all. In fact, the metrics used to measure success in that area are often wrong; to properly address that situation is to make the customer happy and improve the speed and quality of the underwriting process overall. Everybody wins.

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Webster asks Gardner, “Why are you on a mission to bring the customer experience to underwriting and risk management?”

Merchants, explains Gardner, want to begin with the customer experience because that’s where they drive the revenue from; that’s where the excitement in the marketplace and “sexy, cool software” exists. It’s fun for Web developers.

“But the reality,” he says, “ is if you don’t look back at the systems that need to be fed, the processes like underwriting, it creates speed bumps that prevent the creation of a great experience on the front end onboarding side.”

Agreement Express‘ mission— is to bring down the time that experience takes, and that begins with underwriting.

He begins talking Webster and the webinar attendees through the process. Previous webinar attendees, Gardner notes, have asked for a focus on customer experience. Which leads to:

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Does your organization plan to improve customer experience this year (Yes / No / Not sure)?

Webster calls that question a “softball”; she’d like to see who’s going to answer “no.”

Gardner remarks that a lot of people actually say “not sure” to this question because, while they wish they could improve customer experience, they either don’t know how or they don’t know if it’s possible to be made a top priority for their IT department. Agreement Express, he notes, is focused on taking that work away from the IT team.

Webster announces the results of the question: 97 percent say “yes”; a few “not sures”; and “no ‘nos,’ thankfully.”

Gardner calls that tally a “good setup” for the next portion…

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The notion that a great underwriting process begets an extraordinary client experience, admits Gardner, is confusing to a lot of people because it seems counterintuitive.

It makes more sense, he attests, when you break down the process of how client experience relates to underwriting:

  • Human buying behavior and key drivers
  • How those behaviors shape consumption and adoption
  • What your underwriting process can do to positively, or negatively, influence that behavior
  • What to consider when developing an automated underwriting roadmap
  • How your underwriting team can contribute to your growth strategy

When Gardner hears the term “buying behavior,” he thinks — as a lot of people do — about Black Friday sales, crowds of people in malls and stores, ”mass buying” types of scenarios.

That’s obviously not the case for merchant onboarding and B2B. What defines “buying behavior” in that realm is people gravitating to solutions.

Payments solutions providers are not attracting merchants for the same reasons that merchants are attracting consumers for Black Friday shopping (save perhaps for the first point below). Instead, the questions that drive merchants to providers are:

  • Are they paying too much today?
  • Do they want to increase their profits?
  • Are customers abandoning them because they don’t offer payment options they want?
  • Do they have employees complaining that their current payment process is too hard?

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3 Ps AND A C

Gardner examines the classic marketing rationale of what draws customers to a business: “The 4 Ps”: Price, Promotion, Product and Place.

When you’re dealing with software, as Gardner is, he likes to take “Place” out of the equation, and replace it with “Convenience.” 3 Ps and a C, then.

Convenience plays a big part in consumer behavior, and — resultantly — adoption and buying behavior. Gardner provides a list of real world examples of this phenomenon, and explains that the same logic applies in both the merchant onboarding experience and the underwriting experience.

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Consumers and users, explains Gardner, fall into two broad groups:

  • Those with choice
  • Those without choice (or minimal choices)

He notes that “you can kind of force an inconvenient solution in front of” the latter group, but that’s an increasingly unlikely opportunity in today’s marketplace.

The group that a target client falls into will dictate which of the three possible adoption profiles will be in play: Attrition, Hype-Cycle, and Continuous.

Attrition occurs when people try something, find it too difficult, and drop off.

Hype-Cycle (which Gardner credits Gartner Research for coining, name similarity aside) is defined by an early peak of over-heightened expectations, followed by a “trough of disillusionment,” then a rise back to mainstream adoption.

Continuous is pretty self-explanatory; usage of the iPhone is a prime example.

Notes Gardner, “unless your target merchants have no other choice than to work with you, and your sales channels have no other choice than to sell for you, you won’t ever have Hype-Cycle adoption.”

What Agreement Express is really after is continuous adoption — and the key to that is making sure that you have a convenient process.

Webster intercedes, wanting to know what exactly Gardner means by “convenience” — speed? simplicity?

“Both easy and frictionless — or minimal friction,” says Gardner.

There are mandated steps — the Electronic Transaction Association (ETA) guidelines — in doing underwriting, but there are others that people do for their own due diligence that may not be necessary. That can create friction for merchants, and make the process inconvenient.

It is important to work with underwriters to determine “minimum viable process” for the type of merchant that is being brought forward; that, according to Gardner, dictates “how seamless and how cool” the onboarding experience can be made.

Webster concludes, then, that Gardner’s view of “convenience” in this context is really about simplification, and understanding that different types of merchants require different processes.

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Referring to a slide showing three different colored buckets (red, blue and green), Gardner explains that most organizations today are underwriting with people, doing a largely manual assessment, to determine if merchants fall into a “bucket” of Pass (green), Fail (red) or Monitor (blue).

Merchants in the red bucket are prohibitive; ones that you are not going to do business with. Green bucket merchants, you absolutely want, while blue bucket merchants, says Gardner, are “sort of on the borderline.”

What’s “really critical,” he espouses, is understanding that you don’t necessarily want to ask the same questions of green-bucket merchants that you do of blue-bucket ones; otherwise, it creates inconvenience for your most desired clients.

The three-bucket system is “great when you start,” but as you move to more advanced, rigorous, and automated underwriting, it can create hurdles.

The more complex your underwriting requirements, the more your onboarding experience will reflect that complexity.

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How straightforward are your underwriting requirements (very quick and straightforward / somewhat straightforward / complex / I don’t know)?

“Without leading the witness,” Webster asks Gardner for his sense of a typical response.

Gardner says that most go between “somewhat straightforward” and “complex.” The former group feels like they’re collecting too much information, while the latter group bases its opinion on their “not in good order” (NIGO) rates — a term used extensively in insurance business to refer to incomplete applications that Gardner would like to see adopted by payments.

He “loves” the term, he says, because the best measure of processes is the NIGO rate. And in payments overall, there exists a 40 to 45 percent NIGO rate, where the underwriter has to go back to a merchant for additional info.

High NIGO rate portends high customer abandonment rate. According to Gardner, customer abandonment rate is often 50 percent of the NIGO rate. “It’s a big deal; an important number.”

Webster agrees that it’s “quite significant,” particularly in light of how competitive the space is and how many choices merchants have.

Gardner explains that, if you’re at the average, with a 40 percent NIGO rate, that equates to 20 percent abandonment, which means that — given your marketing and related efforts — “you’re losing one day per week of sales.”

On the flip side, he notes that Agreement Express sees a NIGO rate of 2 percent or less from its customers. Not only does that create a more productive organization, it brings customer abandonment down to 1 percent — in effect providing an extra day a week of sales.

Webster gets the poll results: Only 13 percent of respondents say “very quick and straightforward.” Gardner’s joke that the 13 percent “must be Agreement Express customers” aside, Webster observes, “there’s a lot of work to be done.”

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As you design your underwriting process, you are designing your customer experience — “even if you don’t realize it,” says Gardner. You need to determine if information is:

  • “Nice to have” or necessary
  • Difficult to gather instead of at hand
  • Challenging to execute vs. easy
  • Hard to sell

And while there are rules to follow, Agreement Express isn’t working in a vacuum, either, when they give this advice. The 109-page document that the ETA published in 2014 that provides guidelines for merchant and ISO underwriting does not, Gardner points out, set policy for its members or require merchants to adhere to the guidelines.

The ETA guidelines, says Gardner, “do a great job of laying out what is necessary vs. what’s nice to have.”

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Once Gardner finishes reviewing the objectives of underwriting, listener questions start coming in.

Webster notes that “NIGO rate,” true to Gardner’s wishes, appears to be catching on as a term among the webinar audience members. A few people want to know:

What goes into calculating it?

Gardner posits to think of having a “magical rewind button” on a merchant application (which he notes is actually a “real” one for Agreement Express customers). You have to press that button any time information is missing info or illegible. That percentage of “button pushes,” in effect, translates to the NIGO rate.

In putting forth the next question. Webster refers to the “Goldilocks principle” of categorizing things as too hot, too cold, or just right. What type of information is “just right” to complete underwriting process for merchants?

“Generally speaking,” says Gardner, “the goal should always be minimum viable underwriting. ‘What’s the minimum information I need to collect to, one, satisfy the regulations and, two, assess the level of risk that my organization needs me to assess?’”

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The amount of information you need to collect will be dictated by your organization’s Statement of Intent — something, Gardner notes, that lot of companies don’t actually have.

One reason for this dearth in the industry is that the ETA hasn’t provided a sample of one. Additionally, a lot of organizations don’t have internal agreement as to who they want to do business with and with whom they don’t. Gardner has seen “rooms full of payments executives that are split on the matter.”

Noting that Agreement Express is including a Digital Guide to underwriting with the webinar, Gardner points to the necessity of a framework, such as the following:

  • Define your Statement of Intent and use it as your base filter
    • Organizations applying the ETA guidelines are expected to have a “Statement of Intent.”
      • Declare who you’re planning on doing business with and why and bias your process to move them through quickly
      • Be clear about which types of companies, areas of business, and marketing practices you absolutely won’t do business with and knock them out fast
  • Understand the difference between Restricted and Prohibited Merchants
    • There is a material difference between a Prohibited Merchant (a merchant that should be blacklisted) and one that is Restricted
      • Don’t treat restricted merchants like they are criminals

Gardner’s talk of disagreement in the room brings to mind a question for Webster: Based on Gardner’s experience, who does he believe should be in charge of creating the policy in underwriting?

Gardner believes that “it’s got to be a larger group.” While underwriting “would give you a narrow answer” in terms of who to do business with, sales would give a broad range. “It’s got to be somewhere inbetween,” says Gardner, noting that “a lot of people haven’t had the discussion about who’s on the margin” (i.e., blue-bucket merchants in the Restricted group).

As Webster observes, these are of course not static decisions; they could evolve as the landscape evolves.

“Absolutely,” concurs Gardner. “It has to evolve. You can’t just set your underwriting guidelines and say that’s it, forever. The markets will change; the dynamics of the markets will change; your competition will change; even the industry itself will evolve. Underwriting — and the onboarding process — must change with it.”

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Using a number of slides, Gardner walks us through what he describes as “the core bullet points” related to the minimum viable process.

He explains what using a Statement of Intent as your base filter can put in motion:

  • It biases your process to move your target merchants through quickly
  • It knocks out merchants you don’t want fast and efficiently
  • It hides the complexities in the back-end process, not in the front-end onboarding

Going further, he highlights the importance (and benefits) of appropriately categorizing restricted merchants:

  • If they just require more frequent monitoring then don’t add more data collection to the onboarding
  • You need to simplify your requests for merchant information and consider the form factor of the source information you’re requesting

In terms of process flow and evaluation, here’s what matters most:

  • Automating the flow to create a consistent, auditable process
  • Codifying each data point into a weighted numeric value
  • Tuning and adjusting automated score values to match manual evaluations
  • Monitoring and adjusting while replacing manual feeds with automatic ones

When it comes to what Gardner calls “good process flow hygiene,” he refers to the ETA recommendation of an underwriting process that contains the following attributes:

  • Timelines (SLAs) for underwriting evaluation are established
  • High Risk or Restricted Merchants are evaluated by more senior staff (escalation) as appropriate
  • Title and/or position of ALL approvers are captured during underwriting
  • Escalation processes/criteria are documented
  • Underwriting process is documented and audible, as well as standardized as much as possible

In general, what Gardner feels is “really good” about the ETA guidelines is that they are comprehensive, they create a defensible framework, and — in effect — provide “safety in numbers.” Some challenges of the guidelines, on the other hand, are that they are not easy to fully automate; they’re directional in nature but not prescriptive; and they pose a potential danger of overly specifying the risk model.

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The collection of scores will, over time, allow for the development of a profile of your merchant applications. Even using the aforementioned buckets, though, Gardner says is “not quite good enough.”

“You want to codify every merchant that’s coming in and their results as actual values,” he adds. “You want a real score for every single merchant.”

Most organizations go from 0 (good) to 100 (bad), and set a threshold of risk over 30 or 40. The reason to score “absolutely everything,” explains Gardner, is to develop a histogram — a picture of the profile of your merchants. That picture will tell you all the elements that are changing.

Just measuring rates of pass or fail simply isn’t good enough. Visual graphs — which Gardner shares examples of in a slide — give a much more robust picture (no pun intended) of scores, which is essential in monitoring and understanding the distribution of a company’s underwriting.

He does warn, however, that the more data sources you use, the higher the probability there is for overlaps, which devalue the risk model.

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Gardner wraps up his overall points in a single slide:

  • Refine your Statement of Intent so that it is clear who you are after and who you are not
  • Determine if your targets have abundant choice or limited choice
  • Define the Minimum Viable Process for underwriting the various target groups
  • Minimize the complexities and eliminate any over specification
  • Continuously monitor the shape and distribution of your scores, not just the rate of pass or fail

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As Gardner discusses the details for downloading Agreement Express’ supplementary digital guide “Building Your Roadmap to Underwriting Automation,” Webster inquires about the increase in speed that Agreement Express can bring to the merchant onboarding process.

While traditionally the process can take anywhere between 2-9 days (even ballooning to 21, when thing don’t go so well), Gardner states that Agreement Express’ goal is for “85 percent of application processes to complete in under an hour.” The client process should take minutes, according to him, while the entire end-to-end process should last minutes or a few hours.

“If you’re currently measuring in days or weeks,” says Gardner, “you’ve got some work to do.”

He adds, however, that not sacrificing quality for speed is “the key to the whole thing.”

It appears to Webster, then, that this is really about figuring out how to calibrate the strategic objectives. It can bring a lot of value to an entire organization, not just the underwriting process.

Gardner concurs, as he sees the underwriting team as an “incredibly important strategic component of any payment organization” — not just in minimizing costs. They should be coming back to retail, sales, and distribution, showing them the profiles of their prospective merchants and risk value, and adjust procedures accordingly. This manner of operation can increase business without assuming extraordinary risk.

“In doing that,” says Gardner, “[underwriters] are influencing the onboarding process — not only who you’re going after but how you’re going after them.”

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To learn more about building your roadmap to underwriting automation download the digital guide by clicking the below button. 

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