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Merchant Perspective - United We Stand or Divided We Pay: Checking/ACH payment Conversions to Virtual Cards (MAG Quarterly- Volume Seven, Issue Two)

Kari 2015 211
By Grant Olsen, Senior IT Payment Specialist, ADT Security

June 6, 2019

There are many large companies profiting from the practice of intercepting checking account bill payments and converting them to Virtual Cards.  The practice is pretty simple, companies pay kickbacks to bill payment processors to process their checking account payments.  Instead of sending the payments as electronic checks to merchant electronic lockboxes like most large reputable banks, the companies have bots set up to pump Virtual Card payments in at merchant websites and IVRs.   They do this for one reason – to profit off the near 3% interchange fees.

One of the publicly traded banks that now owns the largest Virtual Card bot operator broke out this revenue stream separately in their quarterly conference call last week.  It’s now easier to project that this practice is intercepting well over $2B in payments annually and costing merchants over $60M in Virtual Card processing fees – the vast majority of which are to large merchants which accept electronic lockbox payments and don’t want payments hijacked.  There are plans to expand the deployment of these bots into new markets and we as merchants should be alarmed.  If this practice is allowed to continue without checks and balances, it’s only a matter of time until other pirates will start to siphon off other low-cost payments such as ACH and regulated debit cards for conversion to high cost Virtual Cards.

While it’s easy for merchants to focus on the financial impact of card processing fees, converting these payments introduces customer confusion and reputational damage for merchants.  Here’s an experience shared by my insurance agent who had a long-time valued customer sell his RV.  The insurance policy on the RV was cancelled which triggered an automatic refund to the customer’s credit card.  After several days the customer called to ask about the refund.  When the agent told his customer that his MasterCard had already been refunded, the customer said he didn’t have a MasterCard and paid through his credit union.  Understandably, the customer blamed the insurance company for the mix up and the agent spent several hours trying to track down what occurred.  After escalating within his internal customer service organization, the agent was told that the payment was a Virtual Card that likely originated as a payment from the customer’s credit union.  The insurance agent called the customer and apologized, and pleaded with the customer to call his credit union to ask about the original payment and the credit.   The angry customer still blamed the insurance company, but reluctantly agreed to call his credit union and ask whether they converted his payment to a Virtual Card payment.  The credit union had no idea what was going on saying they didn’t convert payments to virtual cards and the customer escalated the issue.   After a couple days, he received a call from the credit union saying the payment did indeed get converted to a virtual card and the credit had been located.

Customer experiences like this happen every day to thousands of our customers as merchant billing records reflect a virtual card payment rather than a bank account payment.  While it’s relatively easy to estimate the unnecessary fees, merchants pay to process these conversions to Virtual Cards, it’s harder to quantify the impact on customer service costs, customer satisfaction, chargebacks, and attrition.

As merchants we have a choice.  Our silence ensures that hijacking and converting low cost payments for profit will continue.  Our collective voice is powerful and is needed to stop this and other harmful practices from spreading.  Fortunately, the MAG is working on our behalf to address this issue, but merchants need to monitor their own house as the intruders will not leave without an escort.