Hayden: Jason, again, it is great to be back in the studio for another Wednesday recording session. I also saw that you were able to put your pilot's license to good use this weekend, which scared me with the forecast of 45-mile-an-hour winds in that area.

Jason: Hayden, it was certainly a fun landing. As soon as I heard that the steakhouses in Las Vegas were opening back up, I just had to go on a hot dinner date out there and enjoy being out of quarantine. The only downside of the trip was that my bank was not expecting me to do as much traveling as I did and ultimately froze my card.

Hayden: Yeah, that's a bummer. I've had similar issues in the past, Jason. Let's jump into today's stories. First, we have negative option nutra nonsense. The free trial is never really free.

Jason: Next, fraud freezing versus freezing friction: the delicate balance between protecting against frostbite.

Hayden: And last, we have CBD Compliance Chaos Part 2 with our experts Clint and Sarah from Khipu Technologies. Alright, let's jump into our first story. The owners of an online subscription scheme settled a Federal Trade Commission complaint saying that the defendants cheated consumers out of more than $74.5 million by baiting them with free trial offers, just to turn around and subscribe and bill them without their consent. Two weeks later, they charged a $90 fee for the trial product as well as enrolled them into a costly subscription plan that came after the trial period.

Jason: Hayden, it's literally like playing whack-a-mole with these guys. Before I go on my rant, I want to remind everyone that not every nutraceutical company is bad. There are lots of great products, but unfortunately, there are a bunch of bad actors that continuously give the industry a bad reputation. It's actually become quite simple these days to operate a nutraceutical e-commerce company. The card networks have rules for continuity billing, and it's really up to the supply chain to make sure that the merchants are following these rules. In the case of these scammy, nefarious merchants, most of the time the consumer is getting charged for the trial product before it even shows up at their door and they have a chance to cancel the charge. If you look at just about any subscription-based merchant out there today, prior to charging your card on a monthly basis, they send you a notification that your subscription is going to renew. That's what reputable companies do. These guys just try to stay under the radar, hoping the consumer doesn't notice the charge on their card so they can continue hitting them for a worthless subscription every month.

Hayden: The defendants allegedly used a network of shell companies and straw owners to open merchant accounts and process consumer payments.

Jason: Yeah, that's because most of them can't get their own merchant accounts themselves. They've been terminated by other merchant processing companies. They set up tons of companies with different owners, most of the time their friends, and promise them a percentage of their profits for using their identities. The vast majority of these products are manufactured in a handful of white-label fulfillment centers who will slap any label on them and ship them out.

Hayden: The FTC claims the defendants circumvented the underwriting requirements of payment processors.

Jason: Hayden, that is absolute nonsense. The only thing that was circumvented was integrity. The payment processors who aid and abet these scammy merchants know exactly what they're doing. This is why they charge them egregious rates and slap big reserves on them. And the fraudsters don't care because they pay $4 for something they're reselling for $90. They know they're never going to get the reserve back, and for them it's just the cost of doing business. The patterns are so easy to recognize, and the supply chain really needs to do more to protect consumers from these nefarious merchants.

Hayden: Well, while we're on the topic of protecting consumers, issuing financial institutions have faced newly emerged challenges of shifting consumer behavior as people are staying home and shopping mainly online, making purchases that the consumer normally wouldn't. Financial institutions have to make accurate decisions to freeze card payments and help against fraud, but at the same time not block legitimate customers from getting what they need.

Jason: Talk about blocking legitimate customers from getting what they need. I almost couldn't fly out of Vegas because my card wasn't working. But it makes sense and I understand. Generally, the way financial institutions do this is by transaction history. They look at card-not-present transactions, card-present transactions, and what merchants a consumer makes frequent purchases at. In the case of card-present merchants, they look at the cities where the card is swiped in a given day. Unless you're a pilot, it's hard to be in three cities in the same day. But ultimately, what the issuing financial institutions really need to do is make it easy for the cardholders to confirm the transaction. And in most cases, this process works very well, although in my case, I had to wait on hold for two and a half hours to get my card unlocked. There are really two sides to this story, though. The issuers are concerned about protecting the cardholders. On the other side of the fence, you have the payment processors that need to protect the merchants.

Hayden: Payment processors also need to have an understanding of what the normal transaction looks like for their merchants so that they can help protect the merchant from fraud and chargebacks. But the shift to card-not-present seems to have broken a lot of the models. So what other tools are available?

Jason: Well, you've got a lot of the common checks that you can do. One of the normal points of validation if you have a consumer that doesn't make a lot of e-commerce transactions is looking at the billing address versus the shipping address. If I'm making a purchase and having it shipped to Florida, but I live in Idaho, chances are that transaction might be fraudulent. In addition, the card networks have a lot of really great tools that can alert a merchant or a processor of a potential fraudulent transaction before the merchant provides the product or service. Things like Visa TC40 records, Mastercard SAFE records, or a great new tool from Visa called VMPI, Visa Merchant Purchase Inquiry, which provides real-time data communication between issuers, cardholders, and merchants. One of the great features is the merchant can receive instant fraud notifications that a consumer doesn't recognize a transaction before they ship goods or products to the merchant and potentially incur fraud chargebacks.

Hayden: Well, Jason, right now it seems like it's more critical than ever for merchants to find the right payments partners that are constantly evolving their technology to keep up with the threat models.

Jason: Absolutely. A merchant is going to lose a fraudulent chargeback 99% of the time, and they need to find ISVs and technology solutions that enable them to mitigate the risk. It's easier for service-based merchants because if somebody disputes the transaction, they can simply suspend the service. But when it comes to product-based merchants, they need to know it's fraud before the product goes out the door.

Hayden: Well, one technology solution that is not only helping merchants, but helping banks stay compliant, is our partner Khipu. If you missed our first segment on CBD compliance, check out last week's episode.

Jason: Yeah, we are super excited to welcome Clint and Sarah back for part two. Last week we discussed the headaches and chaos that financial institutions deal with when trying to launch and maintain a compliant CBD program. Today we're going to dive into the Khipu solution and how it simplifies life.

Hayden: So Clint, last time we talked, we discussed many of the challenges that can scare banks away from the CBD industry. For those banks that see big opportunity and want to enter the CBD payment space, what advice as an expert in the space can you give these banks?

Clint: Yeah, so the first thing I would say is don't try to go it alone. Unless a bank has significant in-house expertise in the CBD industry and a bunch of unused capacity in their compliance group, they're much better off partnering with a compliance vendor who knows this space. Most banks will decrease both their risks and costs by finding the right compliance partner to help them navigate the industry. The right tools and expertise will make everything more efficient, get them to market faster, and lead to a better customer experience as well. The next thing I'd say is make sure you really look carefully at the whole compliance picture for CBD, and not just the initial account underwriting process. In many industries, compliance is primarily about the underwriting and making sure you're only giving merchant accounts to a legitimate business. In the CBD industry, there's so much more to it. You want to make sure that any partner you choose supports a comprehensive compliance approach that includes a slew of ongoing monitoring activities beyond just the due diligence around new account opening. And I think the third thing I'd say is to take the long view. As I mentioned last week, this is an evolving industry in terms of the regulatory landscape, both at the state and federal levels. And that doesn't even consider the international environment for banks that might want to support global processing in the future. You don't want to implement a solution that might work okay for the current landscape, but doesn't scale or adapt well to what, frankly, could be significant changes and compliance requirements down the road. So as someone who's worked at large financial institutions and been in the fintech space for many years, I know how painful it can be to change vendors. The last thing you want as a bank is to partner with somebody that you're going to quickly outgrow. And all of this is why we created Khipu. We could see there was a definite need in the market to help legitimate businesses secure banking services. But for that to happen, the banks needed a way to feel confident that they could stay on top of the compliance requirements without spending a fortune or taking on too much risk.

Hayden: Awesome. Well, tell us a little bit about Khipu, what it is, and how does it help banks manage a compliant CBD program?

Clint: We like to refer to Khipu as a compliance-as-a-service solution. It's a combination of technology and managed services that helps legitimate businesses across higher-risk industries like CBD achieve and maintain compliance, which allows them to more easily qualify for banking and other critical services that they need to support their business. Khipu's CBD payment processing offering is designed specifically for financial institutions that want to provide merchant services to CBD businesses. We give banks and PSPs the tools they need to launch and manage a fully compliant CBD program so they can benefit from this rapidly growing industry while limiting the risks and headaches that can come with it. Khipu helps banks in a number of ways. First and foremost, we reduce their compliance risk by helping ensure that the merchants and their program continue to comply with all applicable regulations beyond just the initial underwriting process. We also reduce the overhead required to start a CBD program by providing automated tools and expertise so banks can avoid needing to staff up their compliance teams. We operate on a cost-of-goods-sold model, which means there's nothing out of pocket for the bank until they start generating revenue, which eliminates another potential barrier for them. We also help banks reduce their exposure to chargebacks. Our thorough compliance process is designed to encourage bad actors to, in many cases, weed themselves out. Those who don't want to follow the rules will seek out less rigorous processing solutions. And if you're a bank, that's exactly what you want. Let the shady ones go join your competitors. That's not volume that you want on your platform anyway, because it comes with a high chargeback rate and potential regulatory headaches. So in summary, Khipu helps banks mitigate or avoid the challenges that have scared many of them away from the CBD space in the first place. We make it easy for them to start supporting CBD merchants both quickly and efficiently, and we provide them with the flexibility for future growth and expansion.

Jason: So I want to go back to something Clint touched on earlier. Obviously, the new account underwriting process is a critical part of the CBD compliance program. But how does Khipu help banks ensure that their CBD merchants remain in compliance and don't become bad actors after the new account has been approved and successfully onboarded?

Sarah: Yeah, that's a great question. Khipu helps banks ensure that their portfolio of CBD merchants remains compliant through that mix of technology and service offerings to check the merchants' compliance in different places. Last week we touched a bit on the importance of COAs, and this actually relates to one aspect of those compliance checks. Khipu completes product-level underwriting on each CBD product SKU being sold. This happens both at initial onboarding as well as when the merchant business grows and they add on additional products. Khipu reviews every CBD product and the accompanying COA in order to underwrite and approve that product SKU for sales. But that isn't all that we do. Some additional checks include monitoring the merchant CBD website to ensure that, once they have been approved, they don't go right back and change their website content to reintroduce those unacceptable health claims they were told they couldn't have; running real-time screening at the transaction level, reviewing the order and where it's being sent to check that there's no product being shipped to a state where that product type is prohibited; and completing regular random audits on active accounts. This is in order to validate that there has not been a change in the business's good standing, nor has there been creep from their hemp-related business status toward that of a marijuana-related one. These are just a few of the ways that Khipu helps keep banks in the good graces of their regulators, providing auditable proof of compliance screening at the business, product, shipping, and even marketing levels.

Hayden: Well, Sarah, since banks are the ones who are at risk with regulators, I would imagine it would be challenging to convince them to outsource their compliance program to a third party. I know that if it was me at the bank, I'd still want to be in control. So how do you handle that type of dynamic?

Sarah: Yeah, I'm with you on that, Hayden. I want a bit of the control myself. And so with this in mind, we built our platform with the intent to be a partner to our banks and to empower them to manage their compliance in-house. As far as we're concerned, the bank can be as heavily or as lightly involved as they want. They can make the choice to outsource the majority of their CBD compliance burden to Khipu and use our platform to just check in on things periodically. Or alternatively, they can take our platform and use it as their internal tool. Then they can be extremely hands-on everywhere throughout the monitoring and decision-making process. Khipu can seamlessly integrate into any existing processes and systems that a bank has and provide them with the enhanced information needed for monitoring and auditing CBD merchants and their transactions. We provide bank users with an intuitive, interactive UI, including dashboard and program management screens, so that banks always have complete transparency into the program.

Jason: Well, Sarah, I can definitely attest to the sophistication but yet simplicity of the Khipu platform. You guys have not only been an amazing consulting partner, but also a tremendous integrated partner with a lot of the technology that we've built. We can't thank you and Clint enough for joining us on the podcast.

Sarah: Yeah, our pleasure.

Jason: Thanks for being our CBD experts.

Clint: Yeah, thanks for having us. Our pleasure.

Hayden: Alrighty, Jason. I think you know what time it is. Give me those takeaways.

Jason: Banks, there are a lot of great nutraceutical products available, and spotting the bad actors is easy when you understand the patterns. Supply chain, let's automate fraud detection and resolution with great technologies and protect our merchants. Banks, stop tracking your CBD merchants manually and embrace a technology solution that provides automation and assurance.

Hayden: Thanks for joining us today. And if you've got a topic you would like us to discuss, follow and message us on social media at Cents Chat. And as always, we would love your feedback. Hayden out.