April 1, 2012, 12:00 AM

The Internet Retailer Survey: Lower debit card rates elude most online retailers, but it's still early

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Most retailers say they have fraud under control, with 71.7% reporting a fraud rate of less than 1.0%, 12.3% a fraud rate of between 1.0% and 2.0%, 8.7% between 2.0% and 3.0%, 5.8% between 3.0 and 5.0%, and 1.4% more than 5%. Fraud rates were unchanged in the past year for 62.5% of respondents, while rising for 21.8% and falling for 15.7%.

One way e-retailers block fraud is by manually reviewing suspicious transactions. This step may thwart a criminal or it could allow a legitimate transaction to proceed that automated systems might have halted. In the survey, 41.3% of e-retailers say they perform manual reviews on 5.0% or less of their transactions. 11.6% say they do so on between 6.0% and 10.0% of their transactions; 5.1% review between 11.0% and 15.0%; 2.2% between 16.0% and 20.0%; and 39.9% on more than 20.0% of their transactions.

For many e-retailers, the manual review process usually results in a sale. 83.1% say they reject fewer than 10.0% of transactions put through this step. 6.6% reject between 11.0% and 20.0%; 3.7% between 21.0% and 30.0%; 2.9% between 31.0% and 40.0%; and 3.6% more than 40.0%.

With few signs that online fraud is on the rise, online retailers may want to focus their attention on renegotiating processing contracts to benefit from the lower debit card rates the Fed has mandated.



Comments | 6 Responses

  • Banks are simply ignoring the new debit card fee rules - and getting away with it because of the lack of transparency and massively confusing fee matrix charged by the banks and their ISO sales partners. A class-action lawsuit by merchant groups against the banks and their ISO sales agents will eventually nix the bank policy of "ignore it and it will go away." Which makes me think, "Where's my class-action law firm when I need him?"

  • @greenblogger - you are sorely mistaken in your basic premise - the banks are not and in fact can't be ignoring the rules - the interchange they receive is driven by the card networks (MasterCard, Visa, as well as the likes of NYCE, etc) and what they are receiving from those entities is dramatically reduced - if you want independent/audited verification (if you don't trust them) is to just look at any "over $10 billion" FI's financials for 4th QTr 2011 and 1st Qtr 2012 - you'll see massive reductions in income - all directly attributable to the fact that they aren't getting the income due to networks compliance with what interchange they are passing on. While I am puzzled as to the articles results (as it seems is Forrester) it does seem likely this is more of a result of longer-term pre-existing contractual relationships merchants have with their processors - many of which don't have clauses to pass on any interchange savings due to changes like Durbin. So in other words - if they cut a deal that said all Signature transactions (debit or credit) were at a cost of "$X" - then just because the processor is not having a cost base of that any more doesn't mean they have to pass it on to the merchant. I'm sure contract language in the future for most merchants will include a "base cost" clause or agreement to simply pass thru costs to them directly.

  • Nomadprime, you are indeed correct that many of the processors/merchant acquiring banks are simply not passing the mandated fee reductions along onto their merchant clients. The big retailers almost all have a cost-plus pricing scheme; the small retailers do not (I'm thinking Square and Chase Bank, for example). Rather, the processors/merchant acquiring banks are using the reduction of fees as an underhanded means to fatten their bottom-lines. This was unintended by the legislation, and will be addressed when the retail groups seek reform on credit card transactions. Of course, several of the top ten issuing banks also own the acquiring side, making the issue more provocative in the eyes of merchants. You know who they are, I'm sure. Enjoy the windfall, processors/merchant acquiring banks, because your merchants and retailers are catching on to the accounting gimmick. Now, it I could only find the phone number of my class-action attorney...

  • When has a financial institution ever done the right thing or what they were supposed to do. In reality, they're probably at least not following the spirit of the law and trying or getting away without passing on savings through some innovative loophole that somebody found. I've been researching merchant rates and I can tell you that it appears nothing is being passed on but ridiculously high costs and fees on many of these merchant accounts. Want to see first hand how shady they are? Then just ask for an advanced copy of the actual legal agreements and contract documents. You will get a swarm of BS and run-around. After about 3-4 times of asking for them is when you will get them. The author and/or the person referenced as indicating that people like PayPal is obviously not grounded to planet earth. The truth is that millions of consumers and merchants can't stand PayPal, or it's evil mother, Ebay with a furious passion. Ebay and PayPal indeed commit fraud, ruin the consumer to merchant relationship and serve no real valid purpose. Using a "processor" such as PayPal, is akin to letting a *** on the street handle the financial transaction. The buyer and seller have no real protection using PayPal. Sticking with a REAL bank, regulated by REAL laws is what gives businesses and consumers their protections.

  • Our study showed card not present merchants saved the most as a result of Fed debit rates: 0.88%

  • I have looked at dozens of merchant statements and if there are a large percentage of debit transactions, then the savings should be significant, if the merchant is on an Interchange Plus pricing structure. The alternative - Tiered Pricing - affords no benefit to the Durbin Amendment and fees are much higher than need be. Processor fees compared to the non-negotiable Interchange charges set by Visa and MasterCard should be near a ratio of 20% to 80%. Tiered pricing markups are often 40% or more. Flat rate processing services are good for small volume businesses but are outrageous as the volume increases. The key to lower rates is having the right pricing structure.

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