What Is Reputational Risk and Why Does It Matter?

Reputational Risk Goes Hand in Hand With Brand Equity—and Creates Missed Opportunities

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, customer service, or their ethos—have inherently more value than those 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, X (formerly known as Twitter) 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.

X 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.

Sometimes reputational harm can occur when it is undeserved. During the 2023 banking crisis in the US, many regional banks lost value even though they had no connection to the banks that failed. The perceived similarities in the size and scope of these banks caused collateral reputational damage and, by extension, actual loss in value.

Acquiring and sponsor banks face similar challenges. When a merchant chooses a different acquirer or sponsor, it’s a missed opportunity for revenue.

Reputational Damage Impacts a Company's Ability to Attract Talent and Influences Business Relationships

A study by the Harvard Business Review found nearly 50% of professionals in the United States stated they would not work for a company that has experienced significant reputational damage. Additionally, they discovered 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 the LinkedIn study, “A pay raise of 10% would only tempt 28% of us to sign on the dotted line.”

One example of how reputational damage could affect payfacs and ISOs is if it causes additional scrutiny from their acquirer. They need to maintain good relationships with their acquirers to ensure they and their merchants can still accept and/or process payments. In turn, payfacs and ISOs consider the acquirer’s reputation when deciding whether to try to establish a new relationship.

At the same time, acquirers have their unique upstream and downstream relationships to consider and protect. Their downstream’s reputation impacts their own reputation in the eyes of the public, stakeholders, and card networks, which can factor negatively or positively into an acquirer’s new and established relationships.

How Payments Companies Can Protect Their Reputation

Preventing reputational damage means identifying reputational risks—and that requires a solid risk mitigation strategy coupled with a positive reputation.

To build a positive reputation with prospective merchants, payments companies can differentiate themselves by providing a great user experience, offering competitive rates, providing superior 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 one of the types of incidents most likely to draw negative media exposure. Therefore, a company’s risk of reputational harm increases when it fails to set 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 establishing 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 risk and/or brand damage. While card brand fines may seem more pressing because of their quantifiable impact, reputational harm can erode a company’s value over time. Incorporating an effective risk mitigation strategy is critical to preventing reputational damage.