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What is Reputational Risk And Why Does It Matter?

Reputational risk management is the practice of safeguarding your brand against damaging attention. Read more to understand what reputational harm is, how it may cause a payment service provider to lose value, and how it affects recruiting talent.

What is reputational risk?

Reputational harm refers to the damage a company’s brand could experience as a result of negative publicity from customers, employees, stakeholders, or the public. The potential for harm can come from myriad sources such as negative media coverage, dissatisfied merchants, disgruntled employees, or competitors. Damage to a company's reputation can reduce market value, brand equity, revenue, and its ability to recruit and retain talent.

According to a global study conducted in 2020, executives report 63% of their organization’s market value can be attributed to the company's overall reputation, and 71% of leadership monitors the organization's reputation.

Reputational Risk Goes Hand in Hand with Brand Equity

While it’s difficult to ascribe a specific value, a company’s brand is an important part of its worth. Brand equity is the value of a company based on the perception of customers and the public. Companies viewed positively — whether through the quality of their offerings, their customer service, or their ethos — have inherently more value than ones viewed negatively.

Brand equity can often be the deciding factor when a prospective merchant is making a decision between two payment service providers with similar offerings. The perception of the company may ultimately determine which one the prospective merchant chooses.

Damage to brand equity can reduce a company’s overall value, sale price, and revenue. For example, Twitter’s stock prices fell more than 45% roughly two months after the platform began receiving negative press for its legal battle surrounding a change in ownership. Twitter incurred more reputational damage after multiple rounds of layoffs under the new ownership reduced the number of employees from 7,500 to 1,800. And although the company went private, experts have estimated that revenue has significantly declined.

Reputational Damage Impacts a Company's Ability to Attract Talent

Nearly 50% of professionals in the United States stated they would not work for a company that has experienced significant reputational damage. A study by the Harvard Business Review found that a poorly perceived company with 10,000 employees pays up to $7.6 million in additional wages to make up for its bad reputation.

Furthermore, it’s estimated that companies that don’t protect their brand's reputation may be paying up to $4,723 more per new employee. According to a LinkedIn study, “A pay raise of 10% would only tempt 28% of us to sign on the dotted line.”

How Payments Companies Can Protect Their Reputation

Building brand equity involves two key components: purposefully creating positive experiences and proactively working to avoid negative ones.

To build a positive reputation with prospective merchants, payments companies can differentiate themselves by providing a good user experience, offering competitive rates, providing good customer support, and building a strong company ethos.

To avoid reputational harm more publicly, it’s important first to understand what type of incident could draw negative attention. In the payment processing world, facilitating transactions for merchants engaged in illicit and dangerous sales is the type of incident most likely to draw negative media exposure. Therefore, a company’s risk of exposure to reputational harm increases when they fail to set in place safeguards to prevent this type of negative incident.

Examples of behavior that could lead to a brand-damaging event include:

  • Conducting only superficial underwriting
  • Inconsistently applying your terms and conditions
  • Failing to review merchants periodically
  • Ignoring red flags such as sudden changes in transaction volume
  • Entering markets without fully understanding them
  • Accepting high-risk merchants without a proper risk mitigation plan

Conversely, safeguarding your reputation involves setting in place policies and practices to prevent a negative incident.

Examples of positive reputation-building include:

  • Developing thorough and fair terms and conditions
  • Using effective solutions to both vet and monitor merchants
  • Educating merchants about new trends and regulations
  • Taking quick action against violative or problematic merchants
  • Participating in thought leadership around issues of risk and compliance

Essentially, many of the practices that will help you avoid card brand fines and regulatory scrutiny are the same that will help you avoid reputational harm. While card brand fines may seem more pressing because of their quantifiable impact, reputational harm can erode a company’s value over time. Ultimately, but are important to consider as part of a company’s robust risk mitigation strategy.

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