Merchant Potential Liability - The way that apaleo Pay manages and calculates the risk of your merchant
Managing payments on behalf of hotels and accommodation providers has certain risks for the party processing payments.
Let’s bring an example to help us out here:
Let’s say that one hotel receives a 30k prepayment for a group arriving in 5 months. Let’s also assume that the hotel decides to use this prepayment to either buy some new furniture, to pay some payables or even to upgrade their tech stack.
Due to Covid ( or due to rental agreement for the property being cancelled, force majeur, quitting contract and the worst case is going out of business) the hotel has to close and is not able to provide the service to the group.
In this case, the hotel would not have the original money to refund the group and apaleo would become liable to refund the group straight away, given that the group would request a chargeback. Therefore, in order for apaleo to avoid carrying such a high risk for our customers, our payment partner ADYEN, which we rely upon for the KYC process and for the connectivity to many payment methods, has introduced a policy to manage this risk and to retain the value of the calculated risk as a security.
The risk, in this regard, is represented by the exposure that ADYEN calculates automatically for each merchant.
Let’s dig into it together!
Go to this link https://ca-live.adyen.com/ca/ca/finance/balancesoverview.shtml and click on the Deposit tab
The below is what you will see in this section:
Exposure: is the total of the risk that Adyen calculates based on the Liabilities(fulfilment), Chargebacks and Refunds, for the event of bankruptcy of the hotel, in which case apaleo will be the party to refund/pass funds for chargebacks to shoppers.
The Fulfilment exposure is calculated using the delivery date (arrival date of the reservation) of the prepayments. Every time a payment is captured, the delivery date is sent automatically to Adyen as metadata. When a prepayment occurs, Adyen will treat the value of the transaction as liability since the payment has been received but the service was not delivered yet.
The Chargeback exposure is calculated considering the chargebacks of the previous 120 days and therefore shows the expected risk for the next 120 days. The chargeback exposure gets updated every day. The number of chargebacks that a business receives impacts the risk that Adyen calculates per each merchant.
The Refund exposure is calculated considering the refunds of the previous 30 days and applies to the next 30 days. The refund exposure gets updated every day. The number of refunds that a business processes, impacts the risk that Adyen calculates per each merchant.
Transactions, coming from prepaid reservations, which are then refunded, do not impact the liability exposure. This means that if I have a prepayment for a reservation coming in 5 months, the value of the reservation will increase the exposure. However, if this prepayment gets refunded, then the value of the transaction will be deducted from the exposure.
The Required Deposit:
The Required Deposit reflects the amount of funds that Adyen calculates and which is required to cover the risk.
The Required deposit will be automatically lowered if the deposit is higher than 140% of the current exposure over a period of 7 calendar days.
The Required Deposit will be automatically increased if the deposit is lower than 60% of the current exposure over a period of 7 calendar days.
The Current Deposit:
The Current Deposit refers to the funds that are retained by Adyen to cover for the exposure.
The total Coverage reflects the amount of funds that are withheld in this specific moment by Adyen. This coverage consists of the Processing Coverage + Securities Coverage (current deposit).
The Processing Coverage: is the total of the pending (sent for settle) and payable (settled) balances.
The processing coverage counts towards the required deposit and will be used to fill up the current deposit in case the required deposit increases.
Pending Balances: Funds that are approved to be paid out (authorized and captured successfully) but have not been transferred to Adyen from the guest’s bank yet.
Payable Balances: Funds that have been settled and are about to be paid out to the merchant.
- An increase in the required deposit will trigger withholdings from payouts.
- A decrease in the required deposit will trigger payouts.
The merchant receives the money within 2 business days.
Refunds can be processed only when funds are available in the Processing Coverage (or Coverage) or when a certain threshold (Refund reserve) has been set in the merchant. In normal times, hotels receive payments daily so funds for refunds are almost always ensured. However, during lockdowns or with seasonal hotels, payments might not come for a certain period of time and funds might not be available to process refunds.
In these cases you can set a refund reserve to set a minimum of funds which will be available to process refunds.
In order to set it just go to https://ca-live.adyen.com/ca/ca/finance/balancesoverview.shtml and click on then Threshold and then “Change”.
If you set a refund reserve of 1000 GBP, for example, future payables will be allocated to the reserve until it’s covered and you will be ensured that X amounts of funds will be available for processing refunds. If used, the refund reserve will automatically be refilled from the future payouts.
- At which time of the day are the displayed balances updated (Balances Merchant > Deposit)?
Most likely overnight.
- Do prepayments that were refunded still impact the exposure?
- If I have a prepayment and then I want to refund it, how come that I can’t?
Refunds are not connected to the prepayment deposits. In order to process refunds, you need to have funds available in the processing coverage or into the refund reserve.
Read more on:
Deposit Requirements: https://www.adyen.com/dam/jcr:5d08ffb5-9130-4380-a0be-3c3952b9f58a/Adyen-NV-Terms-and-Conditions--version-5-December-2017.pdf