Mike Gardner, CEO of Recombo, discusses developing a strategic roadmap for automated underwriting. He outlines the ETA guidelines for underwriting and how to develop an automated underwriting roadmap based on a crawl, walk, run approach. This involves first establishing processes and criteria, then introducing assisted scoring, and increasing automation over time to eventually achieve fully automated underwriting. He emphasizes continuously evaluating the underwriting model and risk threshold to minimize false positives and declinations.

1. Developing a Strategic Roadmap
for Automated Underwriting
Presented by Mike Gardner

2. Mike Gardner is CEO of Recombo Inc – the makers of Agreement Express, a SaaS based automated
onboarding and underwriting solution for the financial services industry. Since joining Recombo in
2005, Gardner has evolved the product into a solution trusted by Fortune 500 financial institutions
and top global acquirers. Prior to joining Recombo, Gardner, a 20-year veteran of the software
industry, spent six years at Cayenta – an international ERP software vendor for the utility and public
sector markets. Between 1998 and 2004 Gardner led Cayenta to profitable growth through
challenging economic conditions. His past experience has taken him through several firms including
Canadian Pacific (Interlink), Cryptologic, and Price Waterhouse Coopers. Mike has an MBA from
Queen’s University, in addition to advanced education in Economics, Statistics, and Business
Economic Decision Support Systems.
Mike Gardner
CEO,
Recombo

3. Today’s headlines are increasingly frightening…
On March 27, CardFlex Inc., and its principals Andrew Phillips and John Blaugrund,
settled FTC charges that they illegally processed more than $26 million in
unauthorized consumer charges on behalf of a company called I Works.
• CardFlex, Phillips, and Blaugrund are prohibited from acting as a payment
processor, ISO, or sales agent on behalf of several categories of merchants
• There is a $3.3. million judgement imposed against CardFlex and Phillips.

4. Before you say it will never happen to you
remember…
The defendants provided I Works with full access to
payment networks and did not engage in required
underwriting processes when they opened I Works
accounts

5. “You can measure opportunity with the same
yardstick that measures the risk involved. They
go together.”
- Earl Nightingale

6. What you will learn today:
1. What the ETA Guidelines for underwriting can do for
your organization
2. How to develop an automated underwriting roadmap
based on the ETA guidelines
3. How your underwriting team can contribute to your
growth strategy
4. What a strategic underwriting scorecard evaluation
looks like
5. What your organization needs to do to move towards
automating underwriting

7. But before we begin…
Most organizations today are underwriting with people, doing a largely
manual assessment, to determine if merchants fall into a “bucket” of
Pass, Fail or Monitor.
If you try and move from this, directly to automated underwriting,
you’re in for a long hard road

8. • The ETA (Electronic Transactions Association) is the
trade association representing the payments market.
In 2014 they published a 109 page document
providing guidelines for merchant and ISO
underwriting. It is important to note that the ETA
does not set policy for its members, it provides
recommendations. Members are not required to
adhere to the guidelines provided.
The ETA Risk Guidelines

9. Setting the Stage
• Statement of Intent: Organizations applying the ETA guidelines are
expected to have a “statement of intent”. In this they declare what types
of merchants they desire to do business with, and by that virtue those that
they do not. This Statement of Intent should guide the particular Payment
Co’s underwriting configuration.
• Underwriting vs. Monitoring: The ETA guidelines cross the divide between
underwriting new merchants (score card) and monitoring existing
merchants (re-scoring). Emphasis of this presentation is on Underwriting
New Merchants.
• Restricted vs. Prohibited Merchants: There is a material difference
between a Prohibited Merchant (a merchant that should be blacklisted)
and one who is Restricted; be careful not to mix them up.

10. Underwriting Objectives
• Identity
– Know the identity of the merchant and business owners
• Validity
– Confirmation you know the business the merchant is really in
• Legitimacy
– Ensuring the business is bona-fide business
• Financial Acceptability
– Determining if the merchant fits the financial constraints of the
firm
• Risk Level
– Evaluating the level of risk associated with the merchant
Qualify
Score

11. Scoring Evaluation
• Prior processing history
– Credit and/or Bank Card processing history
• Products or services being Sold
– Seeking to identify prohibited or restricted merchants
• Methods of delivery
– Used to establish risk. Certain types of delivery, or delayed delivery,
increases the probability of chargeback or refund
• Type of business and how they conduct
business
– Seeking to identify high risk or prohibited merchants

12. Underwriting Policy Application
• The ETA recommends firms employ an
underwriting process that has the following
attributes:
• Timelines (SLA’s) for underwriting evaluation are established
• High Risk or Restricted Merchants are evaluated by more
senior staff (escalation) as appropriate
• Title and/or Position of ALL approvers are captured during
underwriting
• Escalation processes/criteria are documented
• The underwriting process is documented and auditable, as
well standardized as much as possible.

13. Why follow the ETA Guidelines?
• What’s really good about the guidelines
– Comprehensive
– Create a defensible framework
– Safety in numbers
• What’s the challenge with the guidelines
– Not easy to fully automate
– Directional in nature but not prescriptive
– Danger of over specification of risk model

14. Developing your Roadmap
14

15. People are People
• The most “unfair” assumption you can make is
that your underwriters are all coming to the
same conclusion every time.
• No two underwriters are going to underwrite
exactly the same way so don’t expect them to!

16. Crawl, Walk, Run
Statement of Intent Process Flow
Evaluation Criteria
Assisted Scoring
Increased Automation
Automated
Underwriting

17. Crawl, Walk, Run
Process Flow
Evaluation Criteria
Assisted Scoring
Increased Automation
Automate the flow to create a
consistent, auditable process
Codify each data-point into a
weighted numeric value
Tune and adjust automated score
values to match manual evaluations
Monitor and adjust while replacing
manual feeds with automatic

18. Why not straight to auto?
• It’s faster to get to “close” than to perfect
• Your underwriters probably won’t have the
faintest idea how to codify some of your
existing underwriting elements (and that’s OK)
• You don’t want to invest in integrations until
you know you’ve got the right mix of services

19. Contributing to Growth Starts with Evaluation

20. Once you begin to collect scores you will begin
to develop a profile of your merchant applicants
Too Risky to do
Business With

21. Risk isn’t a point – it’s a range. A risk score is
just an ESTIMATION of risk with a margin of
error, and your risk threshold is also just a
theoretical point. In reality you MUST look at
a range High Risk
Low Risk
Your Threshold of Risk
0 100Your Risk Score

22. The picture that emerges will tell you a lot about
your business and your underwriting
Risk Tolerance is set too high
OR
Sales are being too conservative
Risk Tolerance is set too low
OR
Sales are being too aggressive

23. Consider the following:
How much time, if
any, is your
organization spending
reviewing the
merchants you
declined, rather than
looking for new
merchants?

24. Before Full Automation

25. Remember that
underwriting is like a
court room; your
merchants are presumed
innocent, and your
underwriting team is a
prosecuting attorney

26. As the case stacks against merchants, the closer
they come to your risk threshold
Reputation
45pts
Delivery
Method68pts
Value
20Pts
Reputation
45pts
Delivery
Method 68 pts
Value
20 Pts
Identity75pts
Sorry,
too risky
High
Risk
Low
Risk
Your Threshold of Risk
0 100
Your Risk Score

27. But when we use lots and lots of data sources in
our underwriting, we increase the probability
that our data potentially “overlaps.”
This is a
“specification
error” and I can
almost guarantee
that if you’re
scoring, you’re
over specifying.

28. If we COULD calculate that overlap area (which
we can’t), and we took out that double
counting, we’d find our merchant is actually
within our threshold of risk – but we turned him
down!
Reputation
45pts
Delivery
Method 68 pts
Value
20 Pts
Hey, I’m not
risky; I’m a
false positive.

29. If you’re declining merchants “on the margin”
it’s costing you money. Do Your Own Math:
Assume the following:
• Average monthly value of a merchant $2500
• Average merchant applications per month 100
• 80% of merchants get approved
The cost of false positives in your risk model:
5%: $30,000/annum
15%: $90,000/annum
25%: $150,000/annum

30. As you tune your underwriting model you are
looking to do the following:
• Match your risk threshold of your calculated scores as
close as possible to the threshold your underwriters are
manually approving/declining
• Observe and analyze the shape of the distribution of
your underwriting scores to see what it tells you about
your business
• Determine if your model is properly specified, and if
your risk threshold is appropriate
• Assess which services you should be using (and
therefore automating) to minimize your model
complexity and cost

31. The ETA recommends that companies maintain
an “agile approach to underwriting…constantly
reflecting improvement”.
If you rush your
automated underwriting
process you will either be
leaving money on the
table, or assuming too
high of a level of risk

32. One Step at a Time
Statement of Intent Process Flow
Evaluation Criteria
Assisted Scoring
Increased Automation
Automated
Underwriting
Remember that
prescription without
diagnosis is
malpractice!
Get better first, not
just faster

33. To learn more about Rapid Customer
Onboarding, and how it impacts and shapes
underwriting in the payments market, come visit
us at www.recombo.com or contact me directly
at mgardner@recombo.com
To access the ETA Risk Guidelines visit
www.electran.org
Thank you!