Virtually every business has been impacted in some way by COVID-19. But arguably dine-in restaurants have been among the hardest-hit. And among the cities struggling with the pandemic, New York is near the top of the list.
So what’s a NYC restauranteur to do, with dine-in still prohibited and over $2B in sales collectively lost according to one study?
A Clever Solution: The Dining Bond Initiative
One novel solution has been proposed by NYC publicists Steven Hall and Helen Patrikis, as reported in the Wall St. Journal: restaurants should sell “bonds” to raise some needed short-term cash and try to keep their staff employed until things open back up.
How it works: The restaurant sells a “future” gift card at a discount from retail price. For example, they might sell a $100 gift card for only $75, with one catch – the gift card can’t be used for at least 30 days. While restaurants can do this all on their own, the Hall PR team have set up a website, http://supportrestaurants.org/, that will help restaurants get started with this approach and spread the word.
Steven Hall was quoted to say, “Even if this little bit of money helps a restaurant keep one staff member paid, then it’s worth it.”
As merchant advocates committed to supporting small businesses, we agree 100%. This is a clever way for the local community to pitch in and contribute to their beloved local eateries.
With that said, as a payment processor specialized in managed-risk businesses, we’re concerned about how these restaurants’ merchant banks will respond.
What’s the Risk?
Restaurants are typically “low-risk” customers for a merchant bank. With most of their transactions done in person, with a signed receipt, there’s a much lower risk of fraud than with, for example, an ecommerce website.
For this reason, restaurants typically pay very low fees for their processing because processors know the risk of fraud or loss is low; and processors that specialize in restaurants haven’t ever had to deal with managing risk in any real sense.
In managed risk or “high risk” processing, when the product is delivered matters a lot. “Future delivery” businesses, such as travel agencies, concert tickets, or furniture stores, have a higher risk profile and thus pay higher fees for their processing.
Shifting from a typical restaurant sale to a scenario where patrons buy a gift card they can’t redeem for months shifts these transactions to a very different risk category. This is exacerbated by the fact that the very reason for implementing such a program is that these restaurants are in a difficult financial position. Regrettably, the reality is that some restaurants implementing this program won’t survive – and people holding those gift cards are likely to “charge back” those purchases.
We’re thrilled to see this new initiative launching to help these vital local businesses, but we’re concerned that as merchant banks become aware of these strategies, many restaurants could find their processing terminated or greatly increased cash reserves being required.
“I’m concerned that many of these restaurants’ merchant banks are going to panic when they start seeing these transactions,” said Heather Altepeter, CEO of NMA. “These transactions will have a totally different risk profile, and if the processor has that restaurant priced for low-risk, in-person orders, the processor could terminate that merchant or hold their funds, which would be catastrophic for a cash-strapped business. Frankly most processors don’t understand how to manage risk, so their ‘solution’ is to terminate or hold funds whenever they perceive an elevated risk level.”
At NMA we’ve built our business from day one on providing a thoughtful and collaborative approach to risk that helps businesses make the moves they need to in order to grow, while ensuring that there isn’t an undue risk of loss.
We’re actively exploring ways that NMA can help, including specialized managed risk merchant accounts as well as contactless and online payment solutions. We’ll be leveraging our experience with managed risk to help restaurants create these “dining bonds” while ensuring their processing is safe and fairly priced.
If you’re a restaurant owner considering this strategy, please reach out and let us know how we can help. As always, We Work For You®.