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CHAPTER 1
Understanding Online Payment Options
After reading this chapter, you will be able to: ā¢ Discuss the payment options merchants have to do business online through mail order and telephone order.
ā¢ Describe the primary factors a company should use to evaluate and select payment options for its business.
ā¢ Describe the role and importance of credit cards and alternative payments in the e-commerce channel.
How do you begin to understand consumer-not-present (CNP) payments and fraud, and the mechanics behind it? You start with the CNP payment process. This gives you a basic understanding of the touch points and the order, people, and organizations that facilitate those touch points. Starting with a good understanding of e-commerce payments will help you see how the fraudster can manipulate these people and business processes to their advantage.
Donāt shortchange yourself on understanding this process. Too often I see that fraudsters understand the business processes around payment better than the merchant doesāand you canāt afford that. You donāt have to be an expert in e-commerce payments, but you had better understand the basics, or you will struggle in developing an effective strategy. How will you know where the best points are to implement fraud-prevention techniques if you donāt understand the payment processes? How will you know how to balance your fraud-prevention goals with the sales and administration goals if you donāt understand the impact of your strategies on the payment processes?
You will also find the need to understand the payment process because you and your staff will naturally gravitate to what you know best. If you are like most merchants, you probably donāt come from a law enforcement background. Depending on your background and the background of your team, you will find certain topics in developing your new fraud-prevention strategy more difficult than others.
Think about your background and othersā on your team. If they came from the web site development or content teams, they will understand the buy page and shopping cart. If they came from the credit or finance side, they will understand the money flow, but not how the order is placed or filled. If they came from the call center, they will understand the order page, but not where it goes from there. You, as the fraud practitioner, are responsible for making sure everyone on the team understands how fraud touches all these points. You are also the one who has to create a seamless fraud-prevention business process that spans all these departments.
Remember, although your primary goal is fraud prevention and reduction, that is not every departmentās goal. Envision three major goals in a business:
1. Increase revenue.
2. Lower costs.
3. Reduce losses.
These goals can be in direct conflict, and your job is really to balance these goals to ensure maximum profitability to the company.
A good way to understand this is to look at it from a sales, finance, and operations perspective. Your finance department will focus on profitability, and profitability means looking at how much the business is losing, how much it is spending to manage the processes today, and how revenue is impacted. In working with your finance department, you have to be prepared to explain the impact of any changes in terms of profitability.
Your operations and customer service departments will focus on managing administration costs. In working with them, you can expect to get questions about associated head counts. Does your new strategy reduce the need for people? Does it increase the head count? Does it add any costs to completing sales, such as transaction costs?
Your sales department will be focused on sales conversion, making sure it can get every possible sale it can. Those fraudulent orders still represent sales to these employees, so they are very leery of anything that might kill a potential sale. You will have to show the sales force that your efforts are not barriers to sales and are not insulting good customers.
For all of these departments, fraud is not the primary goal, so you have to be the champion to get them to feel the pain and to help in finding the right solution to stop fraud.
In Chapter 1, we discuss the payments landscape to lay the groundwork, so to speak, for fraud management.
The Payments Landscape
When most people think of online payments, they immediately think of credit card payments. While it is true that credit cards represent the majority of online payments today, there are a number of other payment options available. In all, eight categories of payment solutions exist with hundreds of service providers offering their services globally:
1. Credit card payments
2. Automated Clearing House (ACH) and bank payments
3. Payment aggregators
4. Credit-term providers
5. Cash-alternative providers
6. Advertising/promotional providers
7. Mobile payment providers
8. Invoicing payment providers
Payment methods other than credit card payments are called alternative payments.
Alternative payment solutions offer merchants payment methods they can offer to their consumers that donāt require the use of one of the major credit card associations. Merchants and consumers look into alternative payment types for a number of reasons. Fundamentally, the market drivers are cost, security/trust, and ease of use.
The best-known alternative payment type is PayPal, which has grown exponentially and is becoming very much a mainstream payment method. If you research the market, a lot of providers out there are competing for mind share and market share. The risk for any merchant is adopting a payment type that will eventually die on the vine due to lack of adoption.
Most merchants view the alternative payment market as a limited competitive field with few real differentiators between the players. More often than not, merchants investigating alternative payments are limiting their discussion to ACH, PayPal, Amazon, and Google Check-out. In fact, there are a number of payment options and a rapidly growing number of service providers offering them.
TIPS AND TECHNIQUES
Not all alternative payment options will produce the same results; determining the right alternative payment options for your company means evaluating payment options based on regional support, consumer preference, customer base, and return on investment (ROI).
Regional Support: No one payment option is equally effective in all regions worldwide. Credit cards are accepted worldwide, but while they have dominated the U.S. and Western European e-commerce markets, they have not shown the same dominance in emerging markets such as Africa, South America, Asia, and Eastern Europe. In these markets, merchants need to support other payment options; otherwise, they will be limiting their potential customer base to only a small fraction of the overall population.
Consumer Preference: It is not enough to simply find an alternative payment method supported in the region you are doing business in; the payment method needs to be one that consumers in the region recognize, trust, and want to use. In Germany, credit cards are present and used, but they are not the preferred payment method. The preferred payment method is direct debit, Elektronisches Lastschriftverfahren.
Customer Base: The best alternative payment option has little value if the supported customer base isnāt large enough to warrant the effort to integrate and support it. Evaluating a customer base should be done on two levels, potential and current. Consider China: 93 percent of the population of 1.3 billion people have access to direct debit, while according to China Daily, there were just over 100 million credit cards in circulation in China as of June 2008. In contrast, there were more than 596 million mobile phone subscribers as of June 2008. In terms of potential use, the ranking would be direct debit, mobile phones, and then credit cards. In terms of current use, the ranking would be direct debit, credit cards, and then mobile phones. Mobile payments offer excellent potential in China, but it is not the current preferred choice for paying for services in China. Does this mean you should not be looking at mobile payments? Not at all; in some regions, mobile payments are the dominant payment method, and three out of the top five alternative payment providers are working on plans to support mobile payments.
Return on Investment (ROI): The reasons why a merchant may implement alternative payments vary, from access to markets to cost reduction or easier supportability to consumer preference.
In a majority of cases, merchants are able to show a favorable ROI on integrating alternative payments in a time frame that is more tactical than strategic. This is primarily attributed to increased sales from new consumer populations, lower costs than traditional credit cards, and better fraud protection.
Online customers and merchants have begun to turn to alternative payment methods for a variety of reasons ranging from lower costs, improved technology, and increased availability to security reasons. The debate is ongoing as to whether alternative payments are taking away market share from credit cards or are adding to it, but the fact remains that online credit card sales have been rising right along with alternative payment types.
According to E-Commerce Times, by 2012 online payments will gross USD $355 billion in value with alternative payments holding a 30 percent market share.1 Javelin Strategy and Research predicts that overall growth for online payments is expected to reach $268 billion by 2013. Alternative payments will likely grow at a faster pace than credit cards with certain brands experiencing significant growth. More established brands are best poised to increase market share in this time of growth.
