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CyberSource’s marketing strategy is to offer merchants a buffet of bundled back-office services. The value proposition is simple: If you’re Nike, your specialty is shoes, not e-commerce software. The services that CyberSource provides are mission-critical, says Donahoo, but they don’t differentiate a merchant’s site. “No one goes to Amazon because they have a great tax calculator or payment processor. But if their buy button doesn’t work, everything else is for naught. It’s something that they can only mess up. That’s what makes transaction services perfect for outsourcing.”
CyberSource Fraud Screen is a starting point for many customers who later go on to buy other services. The offering is further strengthened by CyberSource’s relationship with Visa International. Visa has its own fraud modeling group and maintains an historical database of fraudulent transactions that allows the two companies to compare predicted fraud with actual occurrences, fine tuning the system.
According to a recent study commissioned by CyberSource and Visa International, 75% of Web merchants consider online fraud a problem. On average, the respondents estimated, about 5% of total transactions on their systems are fraudulent, though the numbers ranged up to 25%, depending on location, industry and type of product. In terms of dollar volume, International Data Corp., a market research firm in Framingham. Mass., calculates that in 1998, 2.3% of all Web sales were bad payments or fraudulent transactions. The results are costly for merchants. Along with the lost cost of goods stolen, excessive fraud can raise merchant’s discount rates, cause chargeback penalties and introduce costs for settling disputes.
Representing more than 70 man-years and millions of dollars in software development, Fraud Screen 4.0 is arguably one of the most sophisticated identity verification tool on the market today. The artificial intelligence based software, which resides on CyberSource’s servers, performs real-time data analysis on more than 150 variables in several stages.
When a consumer clicks on the merchant’s buy button, the data he or she inputs, along with merchant data regarding the item, quantity and product risk profile, is routed to CyberSource’s servers. Fraud Screen first performs a series of checks for consistency, scrutinizes the consumer’s Internet identity and geographical information, compares the transaction against an historical database to look for high-risk patterns, and analyzes the velocity of the consumer’s past purchases: Has the customer been buying similar goods every 15 minutes for the last two hours?
After completing its analysis, Fraud Screen sends the merchant a score that represents the likelihood that the consumer is legitimate and whether the transaction is valid. It also provides a risk profile code to explain how the score was compiled. The merchant then decides whether to accept the order or divert it for special handling. “We have an aggregate view of the bad guys,” explains Donahoo. “You don’t get that as a single merchant. We take our cumulative learning and apply it to their site.”
Across the payment services market, CyberSource’s competition is cumulative, too. The company squares off against single point providers such as HNC Software, which offers neural network-based fraud detection software widely used by credit card issuers, as well as integrated service providers like CyberCash and ClearCommerce. In addition to offering a suite of payment services per transaction, ClearCommerce sells its merchant software outright. But CyberSource’s biggest competitor is in-house software, Donahoo acknowledges. According to a CyberSource survey, only about 40% of Web merchants outsource or plan to outsource their payment services.
Jupiter Communications, a market research firm based in New York, estimates that online transactions will increase elevenfold by 2003. Over the next year alone, the number of online merchants is expected to grow from 1 million to 5 million. The skyrocketing transaction volumes-hence transaction fees-will drive down prices and force merchants to look more closely at bringing these services in-house, says Jupiter analyst David Schatsky. “We see it as a real choice point. Merchants are going to take a hard look at the fees that they’re paying out.”
Joseph Marino, an e-commerce analyst at Current Analysis in Sterling, Va., agrees with Schatsky’s assessment. “Payment services are rapidly becoming a commodity. The transaction vendors like CyberSource, ClearCommerce, Signio and others are all trying to figure out how to make money,” he says. “There will be lots of pressure on prices.”
New and enhanced services will become increasingly important as this squeeze occurs. And that’s an opportunity CyberSource plans to capitalize on. The company’s current focus is to develop a host of new services, including gift certificates, new payment methods, affiliate programs and e-mail support.
But McKiernan and his colleagues will have lots of company. Marino expects to see growing competition from banks and credit card companies entering the market as e-commerce grows. “Third-party vendors are taking over their business,” he contends. “There will soon come a point when the credit card companies will have to become more aggressive.”
But the prospect of increased competition-wherever it comes from-doesn’t seem to worry CyberSource’s top brass. “The Internet is a level playing field. And we have more experience than anyone else,” says Donahoo. “If we continue to provide solutions for our customers, we’ll have a very successful business.”