Anna Collins is the chief operating officer of Bulletproof.
There are more opportunities than ever to increase sales with new payment types and to deploy technology that keeps a lid on payment costs. But there are also new risks.
Online retailers typically devote most of their attention to encouraging consumers to reach the checkout page. But there’s still a lot of profit and loss at stake at that stage of the transaction. More payment options can help persuade a higher percentage of consumers to complete transactions. And as online retailers take advantage of the opportunity to sell to consumers anywhere in the world, localized payment options help increase conversion rates.
Meanwhile, more sophisticated fraud-detection tools enable retailers to keep pace with the ever-changing tactics used by criminals to perpetrate fraud, while minimizing the number of good transactions merchants reject as fraudulent. What’s more, close attention to the rules of credit and debit card networks can reduce a retailer’s costs.
In all these ways, payments play a big role in helping web retailers manage their businesses and grow profits.
“Payments are a big part of the e-commerce value chain, and retailers must take a balanced approach to integrating multiple payment options and fraud mitigation tools into their businesses to optimize conversion rates, reduce the risk of fraud-related losses, minimize the number of good transactions rejected as fraudulent, and lower their acceptance costs,” says Jan Manten, CEO of payment service provider GlobalCollect. “The right mix of payment products and fraud-detection tools can help retailers increase their top-line revenue and bring value to consumers in the form of popular payment methods.”
Under the hood
Among the decisions e-retailers face is which of the many available payment options to offer. Achieving the right mix begins with understanding the total cost of each payment option. That includes not just the cost per transaction, but also the cost of creating dispute-resolution processes, implementing security, customer service and persuading consumers to use a new payment option.
“Not every merchant understands the total cost of acceptance,” says Jason Pavona, executive vice president of sales and marketing for processor Litle & Co. “Some alternative payment options look attractive because they have a lower per-transaction cost, but if only a small percentage of consumers utilize it, the total cost of acceptance can often exceed that of payment options with higher per-transaction costs that generate more volume.”
Settlement times, that is the time it takes for funds to reach a merchant’s bank account, also play a role in the cost of acceptance, but often go overlooked by retailers. Unlike credit and debit cards, which settle within 24 hours, some low-cost payment alternatives can take up to 10 days to settle the transaction and deposit funds in the merchant’s account. Such lengthy settlement periods can crimp a merchant’s ability to run its business.
“Lengthy settlement periods can damage cash flow and end up costing the retailer dearly,” says Carl Clump, CEO of Retail Decisions Ltd (ReD), provider of fraud prevention, payments processing, and card-issuing services to retailers. “Length of settlement is an important cost of doing business.”
Fraud detection is another cost of business that e-retailers need to pay close attention to when crafting a payments strategy. Criminals are constantly probing for weaknesses in web retailers’ systems they can exploit for a quick profit, which means retailers must invest in fraud prevention.
“About 20% of online revenue is spent on fraud prevention and chargeback management,” says Stephen Kuzio, vice president of strategic planning for ClearCommerce, (ClearCommerce is a part of Certegy, an FIS Company). “Fraud prevention is a substantial cost of payment acceptance that retailers don’t always consider when adding a new form of payment or expanding the reach of their business into new geographic markets.”
The issues surrounding payments become even more complex as online retailers accept orders from consumers in more countries.
While international expansion is helping e-retailers grow their sales, retailers are discovering that catering to local payment preferences is as critical to success as offering the right product mix. The majority of consumers in China, for example, prefer making purchases using debit cards or cash. Retailers that fail to offer those payment options will in effect be turning away many of China’s consumers.
The popularity of debit cards in China is due in large part to Chinese consumers viewing them as a way to closely manage their spending by paying for purchases as they go. At the same time, many Chinese consumers pay with cash because they do not have a checking or savings account needed to qualify for a debit or credit card.
The same forces drive the use of debit and cash in other countries as well. “In Latin America, only 30% of consumers have bank accounts, so retailers that want to reach the other 70% need to offer alternative payment options available to that demographic customer segment and appeal to their preference of how to pay,” says Manten.
GlobalCollect offers payment options that appeal to local consumers’ payment preferences and simultaneously reduce the risk of fraud and chargebacks. One such product is online real-time bank transfers that connect shoppers directly to their bank accounts through financial institutions’ online banking systems.
To initiate a real-time bank transfer, the shopper selects that option on the merchant’s checkout page, triggering a pop-up window that links her to her online banking site. The customer authenticates herself with her log-in credentials and populates the merchant’s checkout page with her account information in a secure environment. The transaction information is encrypted before being routed to the retailer’s payment processor.
Besides providing retailers with a payment option to reach consumers that prefer to pay this way, real-time bank transfers reduce the risk of fraud since the consumer’s bank is responsible for validating the customer. And because the consumer must validate herself to her bank via password and unique transaction code before making the purchase, it is hard for her to claim later that she never made the authorized purchase.
“Offering payments geared to the preferences of local consumers and that reduce the risk of fraud and chargebacks, such as real-time bank transfers, can help increase conversion rates up to 20%,” says Manten. “Real-time bank transfers can also help merchants lower their acceptance costs, because they are charged a flat fee as opposed to a percentage of the transaction total.”