Risk Management

How The ‘Debbie Test’ Can Flag Sketchy Merchants

“Does this merchant pass the Debbie Test?”

That’s the first thing Donald Kasdon, chief executive officer of credit card processing and payment solutions provider T1 Payments, said he asks when considering whether the processor should take on a new merchant. Debbie is Kasdon’s mother and, according to Kasdon, she’s the perfect litmus test for a vendor’s risk level.

“She’s smart enough to be dangerous, but gullible enough to buy things,” Kasdon said, fondly, of course. He added that Debbie knows full well what role she’s playing to help her son’s company gauge merchant risk factors. Like any good mom, she’s only too happy to offer help and support.

Merchants, like individuals, don’t always fit into stereotypes, Kasdon told Karen Webster in a recent interview. Classically sketchy businesses like pawn shops or those in the gambling industry are not always the ones for which to look out. Some of these are on the up-and-up, while merchants in the seemingly less-risky travel sector can lead to one risk headache after another, Kasdon explained. Sometimes a bigger company is more stable and a smaller one has more issues, and sometimes it’s the opposite. Sometimes T1 can help a high-risk company dig itself out of a hole, but sometimes that ticking time bomb is bound to go off and Kasdon steers clear.

So, how is a processor to know which merchants to take on and which ones to avoid? Kasdon follows a few rules of thumb.

High-risk is not a deal breaker for T1 — which does often take on merchants that have been dropped or rejected by major processors— as long as those high-risk merchants meet T1’s criteria. The important thing to Kasdon is knowing what the company is getting into before it’s neck-deep. Headaches are inevitable, he said, but a smart processor knows how to pick its battles.

Digital Vs. Physical Goods

Generally speaking, anything that can’t be touched carries a higher risk, Kasdon said. Instant downloads are a challenge because they offer little time or data to show whether the cardholder has truly made the purchase him or herself, or whether the action was taken by a son, daughter, parent or someone else that is a chargeback waiting to happen.

The best guess a processor can make is often simply checking whether the address verification service (AVS) and shipping address match the card on file. If so, it has to assume the transaction is good unless the cardholder comes back to say otherwise.

Worst of all, in Kasdon’s experience? Anything to do with travel — and cruise ships are among the worst of the worst.

Imagine customers have booked a cruise and are in Miami, ready to take off, but then they learn Hurricane Irma is on its way and bail. Instead of calling the cruise company, they call their banks and have the financial institutions issue chargebacks. Meanwhile, the cruise ship has already allocated those funds to bring the ship to the dock and load it, so every person who charges back is costing the cruise company money it’s already spent.

Kasdon said the problem with travel is there are too many players in the space, all of whom believe their way is the new and unequivocally “right” way to do things. And, he said, it is rare for that to be the case. Merchants who offer membership discounts for travel don’t always have a good sense of how to run a program like that, making the merchant a riskier bet than Kasdon would like.

On the other side of the coin, “Anything you can touch lowers the risk window drastically,” Kasdon said.

That’s because there are mechanisms for proving physical goods have been received — things like UPS tracking numbers and confirmation emails. When a merchant can prove the goods were delivered, it slashes the number of chargebacks lodged against it because customers can’t make the case they never received the product.

For Every Rule, An Exception

That being said, a preference for merchants selling physical goods is just a rule of thumb. Kasdon has taken on reputable, low-risk merchants in the travel space and suffered the headaches of dealing with unexpectedly high-risk ones in spaces such as health and beauty, for example.

Merchants selling skincare products are a common example of fine print that may include hidden automatic charges, Kasdon said. Webster confirmed this, having fallen for a “free trial” miracle cream offer, herself. These merchants tempt customers with the offer of a free trial and then start charging them for monthly refills without additional notice, although the initial offer did say (in small font) that the customer would be billed next month.

It’s a sketchy move, said Kasdon, but when companies phrase such fine print correctly, there’s nothing illegal about it and nothing customers can do to get their money back. Merchants who use these kinds of tactics aren’t ones that T1 — or any processor — particularly wants to do business with, and they make it difficult for others with a similar product or model who are trying to do business by more honorable standards.

For example, if a company wants to launch a skincare business and use the same marketing strategy as some of the reputable players in the space — that is, try it now for free and pay later — then Kasdon wants to see proof that the product is better than others and that consumers want it more than they want that of the leading contenders. Otherwise, it’s just a “me too” product with the potential for a big line of chargebacks backing up, he explained.

The risk factor does not come from the new brand’s lack of history, said Kasdon. His concern is whether the product is real and whether it works.

That’s where the Debbie Test comes in. If Debbie and her friends want it, buy it, try it and love it, that’s good enough for Kasdon. Not only does the Debbie Test show him which products and services people actually want to buy, but it can also help ferret out the places in which customers may be overlooking fine print that could come back to bite them — and the processor.

But, the Debbie Test doesn’t just show Kasdon which merchants to avoid. His mother has also convinced him to take a second look at segments toward which Kadson might otherwise have turned a blind eye. Such is the case with a travel discounter T1 Payments later ended up taking on as a client. Skeptical at first, Kasdon said he saw the merchant was selling even deeper discounted memberships than Expedia, but after some research, he found it not to have the issues and chargebacks he had expected to find — something with which he was dealing from another merchant of the exact same type.

Bottom line?

“The difference is a person who knows how to run [his or her] business and a person who doesn’t,” said Kasdon. “Risk is not about the category. It’s about the company.”

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