As we discussed a couple of weeks ago, more races are being cancelled. This is a major problem for our industry as it gives a negative image and may over time create more questions on the part of participants when they sign up for races. This also may have severe impacts on registration companies as well if the trend picks up speed, or hits one or more registration vendors harder than others.
RunSignup is in the process of increasing our underwriting standards and will be coming out with holdbacks for certain races based on our underwriting review. This will also mean RunSignup will likely begin rejecting some races we feel have too high of a risk factor.
This blog will review the details of what is happening, as well as where various responsibilities lie. This blog is useful to any race or registration company, and may also be useful for participants who were in a cancelled race.
Merchant – Customer
The way the credit card system works is that a merchant provides goods or services to a customer, and the credit card network moves the money from the customer to the merchant. There may be banks, credit cards, payment processors and registration companies in the middle, but the fundamental relationship is between the merchant and the customer.
In the case of races, if they do not hold the race, then they have not delivered the service to the customer. Even with strong no refund policies, credit card companies will protect the customer from merchants who do not deliver – in this case races that are not held. Customers can do a chargeback on their credit card and get their money back from the merchant.
Races are Merchants
The credit card network is set up around this central idea of merchants. Since money is being transferred to the merchant, sometimes before the service is delivered, there are stringent requirements for becoming a merchant. Merchants are a part of the banking system, and you can think of the banking system lending the money to the merchant before the merchant delivers the service.
Race Registration Company Merchant On-Boarding Alternatives
Registration companies handle the on-boarding of races as merchants in 3 major ways:
- Payment Aggregation into their own merchant account. This is not acceptable to credit card companies like VISA and MasterCard anymore, but the fact is that many are too small (or too big) to get onto the radar (or to change).
- Stripe or Braintree SaaS. Many registration companies have moved on to one of these types of vendors, who will create sub-merchant accounts for each race under the master account for the registration vendor.
- Payment Facilitator. I think RunSignup is the only company that has moved up to this level. We do the same process Stripe and Braintree do, but with more control over the underwriting and payment processing. Each race gets a sub-merchant account under our master merchant account.
In all 3 cases, the registration company is responsible for moving the money from the credit card customer and network to the merchant. As the “master merchant” in all three of these situations, the registration company is also the “backstop” to the sub-merchants. This means if the sub-merchant is not able to pay a chargeback, then the registration company has to.
Race Registration Company Risk
The problem for race registration companies comes when a race is cancelled, and funds have been forwarded to the race. In 3 cases over the past 6 months, RunSignup has been in that exact position with races and owners who refused to give the money back to RunSignup so refunds could be processed. These owners typically “disappear” and participants are rightfully angry at them. Unfortunately, if they process a chargeback, their refunds are taken out of RunSignUp’s bank account.
Underwriting
Since the credit card network, Stripe, Braintree and registration companies are all taking some level of responsibility, there is the concept of underwriting. This is the process by which a company is validating that a race is a good credit risk (kind of like applying for a loan at a bank). As a payment facilitator, we have a set of policies and procedures that include a lot of “KYC” (Know Your Customer) checks. Over the coming weeks, we will be increasing the level of information required before we process transactions on behalf of a race. And we will unfortunately be rejecting some races.
Holdbacks
RunSignUp has had a very generous track record of making daily payments and always paying on time. This works great for real races, but a huge financial risk for us if the race is cancelled. One of the ways we intend to handle some races in the future is to set a holdback % of say 10-20% of race fees held until after the event is handled. This will NOT apply to all races, and is more generous that some large processing companies like Eventbrite which increasingly is paying only after events happen in total.
Holdbacks are likely going to become more common in the industry. Some vendors do this already by effectively only paying every 2 weeks and using that float as their holdback. It is also likely vendors like Braintree and Stripe will begin to demand holdbacks and other financial commitments. For example, we recently had to sign personal guarantees for some of the processing volume we do with Braintree.
Summary
The previous growth of our industry hid some of these things in the past. With increasing competition and more pressure on race margins and registration margins, this issue is likely to become a big factor in the future.