Conservative web merchants take a cautious approach to processing payments and managing risk
By Mark Brohan
There’s nothing flashy about web retailers and their no-nonsense approach to processing payments and managing risk. Rather than make major changes, most retailers aren’t looking to replace their current merchant bank and payments processor. They’re also offering customers different ways to pay for a purchase, but remain cautious about implementing new alternative payment and check-out programs too quickly, according to Internet Retailer’s latest monthly survey.
The survey finds that 81.1% of merchants have no immediate plan to replace their merchant bank and 68.6% aren’t planning to sever ties with their payments processor. The survey, which includes a detailed response from 19 chain retailers, 15 catalog companies, 103 virtual merchants and 13 consumer brand manufacturers, also reveals that shoppers use Visa more than any other bank card to pay for a purchase, even though almost two-thirds of online retailers—60.9%—offer some form of alternative payment.
Credit cards are the dominant method of payment for the Internet retailers taking part in the survey, with 83.3% citing Visa as the card shoppers use most, followed by MasterCard at 12.9%, American Express and Discover at 1.5% each, and private label cards at 0.8%. Of the alternative payments offered by retailers, 41% list PayPal as their top alternative, compared with electronic checks at 15.8% and other methods at 11.5%.
Retailers are diversifying their payment options and giving customers different ways to complete a purchase. But the Internet Retailer survey also finds that web merchants are slow to roll out most new forms of alternative payments and many merchants still accept only card-based payments. For example, 40.5% of merchants have no plans to offer any alternative payments and only 7.2% offer Bill Me Later, a deferred payments and financing program for qualified buyers offered by Bill Me Later Inc. The acceptance of other non card-based financial options is even lower with just 4.3% of merchants signed up for eBillme (formerly known as Secure-eBill) Saf-T-Pay, PaidByCash, PayCash Mobile Wallet and similar programs.
Check it out
Google Inc. and PayPal Inc. are developing and refining payment processing services Google Checkout and PayPal Express Checkout, which act as online wallets and allow consumers to register their bank cards and store account information in order to speed the completion of an online purchase. But 61.9% of merchants aren’t offering their customers any expedited check-out program and only 21.7% are deploying PayPal Express Checkout and 4.5% Google Checkout. “Payments processing is very complicated and most merchants prefer to keep their program the way it is unless they encounter problems or experience a big spike in processing fees,” says Steve Mott, principal, BetterBuyDesign, a Stamford, Conn., payments system consulting firm. “Merchants don’t want surprises about something as vital to their business as payments. They will add more alternative payments when they think there’s enough customer demand.”
The survey was e-mailed in early August to all subscribers of IRNewsLink, the magazine’s e-newsletter, and all responses were collected and analyzed by Vovici Corp. (formerly WebSurveyor), which has partnered with Internet Retailer in a series of surveys on the e-retailing industry.
Spotting trouble
64.9% of merchants in the survey are spending the same amount on fraud prevention tools and procedures as one year ago. An address verification system is the top automated fraud prevention tool used by 77% of all retailers, followed by a card verification program at 72.7% and internally developed fraud screens at 30.9%. Other popular fraud prevention programs and tools include Verified by Visa at 22.3% and MasterCard SecureCode at 17.3%. In general 65.4% of merchants physically screen their transactions prior to any further processing, with almost one-half of all merchants—44.9%—manually reviewing more than 25% of all orders, followed by 16.5% between 10.1% and 25% and 9.5% from 5.1% to 10%.
The rate for a chargeback, which occurs when a buyer asks a credit card company to reverse a transaction that has already cleared, is also running at 1% or less of all monthly transactions for 70.3% of the 150 retailers participating in the survey versus 23.4% with a chargeback rate of 1.1% to 3%, 4.8% from 3.1% to 6% and 1.5% from 6.1% to 10%. For the majority of merchants, chargeback rates are in line with accepted industry standards, say industry payments systems and risk management experts.
High risk
But if the chargeback rate consistently exceeds more than 0.5% of monthly transactions, a merchant will be considered a bigger risk by its processor and merchant bank and hit with substantially higher processing fees and larger reserve requirements. “Anything over 1% means that a merchant really has to examine their risk management program because their chargeback rate is too high,” says Ezzie Schaff, vice president of risk management for online jewelry retailer Ice.com, which also owns and operates Diamond.com. “The ideal rate is about 0.2% and 0.5% is what should be considered acceptable.”
Merchants are willing to accept some potentially risky transactions rather than alienate some big-ticket customers and repeat shoppers, the Internet Retailer survey finds. For example, 60.8% of retailers would accept a fraud rate of up to 0.25% of their monthly credit card transactions in order to make sure they are not declining valid transactions. Another 18.5% would accept 0.26% to 0.50%, and the balance more than 0.51%. “These rates are generally acceptable because they show most merchants probably have some type of automated system in place to review these orders and manage a comfortable level of risk,” says Schaff. “The criminals are always looking at new ways to perpetuate fraud, but most retailers I know are doing a good job of screening their transactions.”
While retailers appear content with their current fraud management program, the survey also finds that many merchants are not in full compliance with Payment Card Industry, or PCI, data security standards. The PCI standards from Visa, MasterCard, American Express and Discover are requirements for the handling of credit card information, classification of merchants and validation of retailers’ compliance.
Partial compliance
Merchants are also responsible for the security of cardholder data and must be careful not to store certain types of data in their systems or the systems of their third-party service providers. But only 36.4% of retailers participating in the Internet Retailer survey are fully compliant with PCI standards. “Given that this program is only several years old, the compliance rate is actually pretty good,” says Julie Fergerson, founder of the Merchants’ Risk Council and vice president of Debix Inc., a developer of identity protection applications and services. “Obtaining PCI standardization is very expensive and many smaller merchants would rather risk a fine from the bankcard associations than spend a lot of money on compliance up front.”
Sales paid for in U.S. dollars represent the majority of transactions occurring on most retail web sites. However, merchants are also slowly increasing the number of orders where the merchandise is paid for with a foreign currency, the survey finds. For example, 88.1% of merchants give online shoppers the option of paying for a purchase with currency other than U.S. dollars and foreign currencies account for more than 25% of all monthly transactions at 40% of merchants participating in the Internet Retailer survey.
The fact that more merchants are accepting foreign currency as payment demonstrates that retailers are extending their brands into other international markets and finding a new source of visitors and shoppers. “Most of the foreign payments retailers are accepting are coming from consumers in Canada shopping online in the U.S.,” says Mott. “That’s a good trend because it shows that online merchants here are flexible to accommodate new groups of customers and give them ways to pay for merchandise in ways they are used to.”
mark@verticalwebmedia.com
