Counterparty Credit Risk Mitigation in Payment Service Providers

Abstract

Counterparty credit risk in payment service providers (PSPs) is prevalent in every company’s e-commerce payment processes. Counterparty credit risk in PSPs refers to the risk of facing non-payment before the company can receive their funds from the PSP. This contemporary issue is commonly excluded in companies’ credit management, resulting in uncertainty in smooth transfers of funds. A case study of Wirecard’s descent into insolvency, presented in this paper, offers insights to the risks associated with working with the new age PSPs and how companies can lose their trade receivables when working with unreliable PSPs. The research question at hand is whether the pre-existing credit risk management models and tools are usable in companies’ treasuries, in addition to whether they indicate the pivotal information about PSP’s financial health for the companies to make adequate decisions regarding the continuation of business relationships. Moreover, this paper offers analysis regarding whether online-based PSPs are riskier than traditional credit card PSPs. Through analysis of credit risk mitigation tools, alongside new ideas of implementing stress testing and credit risk mitigation models, the research has shown that counterparty credit risk in PSPs can be mitigated successfully by companies’ treasuries if companies modify their pre-existing credit risk structures. Credit risk mitigation practices supplies companies with sufficient information to determine the continuation of business relationships with different PSPs. Furthermore, the research indicates that online-based PSPs are riskier than credit card PSPs due to lack of historical data and credit ratings.