Credit Card Processing: Eleven Pointers to Save Money, Part 2

Editor’s Note: This is Part 2 in a two-part series on ideas for ecommerce merchants to save money on credit card processing. The author is Michael Shatz, a veteran of the credit card processing industry. He now owns The Merchant’s Guide, a Massachusetts-based consulting and publishing firm dedicated to helping merchants lower credit card processing fees and improve revenues.

Shatz will soon launch a monthly feature for Practical eCommerce called “Credit Card Report Card,” whereby he’ll grade a merchant’s overall credit card processing set-up and suggest ways for the merchant to reduce costs. To request a “Credit Card Report Card,” email creditcard.report@practicalecommerce.com.

Nearly all ecommerce merchants process credit card payments. This is the second of two installments on eleven ideas for reducing processing costs. The first installment featured the first five ideas. What follows are ideas 6 through 11.

6. Weigh Low Cost Providers Versus Customer Service

It is a time-honored tenet that business should strive to obtain products and services at the lowest possible price. Frequently, merchants adhere to this principle a little too zealously. Payment processing is large, extremely fragmented industry, and it is filled with a plethora of players residing in numerous of layers. It’s simply not that difficult for a merchant to get “good” pricing in today’s highly competitive processing environment. It is, however, often difficult to get good customer service. Low pricing typically comes at a cost, and that cost is usually poor customer service. Determine whether the provider that sold you your account will inevitably be providing you with processing and customer service. Does the vendor offer a 24×7 call center? Is your processing firm a good fit for online business? Remember, payment processors handle virtually all of your cash and often affect your customers’ buying experience. Competent customer service is therefore a critical component in running an effective credit card operation. Consider spending a little bit more for outstanding customer service. Constantly review your own customer service processes.

7. Find a Specialist in “Card Not Present” Transactions

Online merchants tend to forget that ecommerce represents a relatively small percentage of all credit card use. As with most professions, there are specialists, and payment processing is no exception. With an online transaction, authorizations, refunds and chargebacks are handled in profoundly different ways than your typical brick-and-mortar sale. Fraud, for instance, is a particularly poignant example of one of these differences. Because the credit card is not physically present (“card-not-present” or “CNP”), the charge is more prone to misuse and is therefore more likely to spawn chargebacks.

Another example is recurring payments, which provide their own challenges in a CNP environment (and often time opportunities, as we’ll see below). Fortunately there are payment processors that specialize in CNP transactions like Litle & Co., Paymentech, Merchant e-Solutions, TransFirst, CyberSource, and others. Don’t rely on processors that focus on retail, point-of-sale transactions; CNP specialists will reduce fraud, mitigate chargeback costs, and in some instances, increase billings.

8. Make Sure Your Processor Understands Direct Marketing

During the Internet bubble, brash young executives extolled the virtues of their “new companies,” which were guided by an advanced, Internet-driven philosophy, and which didn’t necessarily need to deliver profits. When the bubble burst, so did most of these “new companies.” The ones that survived were the companies that knew all along that ecommerce is just another form of direct marketing.

This same principle applies today to payment processors catering to the Internet crowd. While these processors certainly need special technology, they also require a rich and deep knowledge of the direct marketing business. Whether you are selling clothing, electronics or subscriptions, direct marketing should play a significant role in your payment processing function. Recurring charge businesses, like record clubs, require direct input from payment processors that understand marketing. These processors must be adept at handling situations like expired cards and impermanent authorization declines in such a way as not to cause unnecessary customer cancellations. These processors should also be involved in payment-related customer communications, be they written or via email. Choose a processor with a deep and rich history supporting direct marketers.

9. Insist on State-of-the-Art Reporting

Cash is the life-blood of your business. Maximizing revenues means little, however, if there’s no competent means to account for your success. Payment processors, especially those operating some of the older platforms, are notorious for stagnant, hard-to-understand paper reports. What’s worse, these less-than-ideal reports are usually provided on a monthly basis, or weekly at most.

In today’s world of technological innovation, merchants should expect nothing less than real-time, web-based reporting. At a minimum, these reports should include summary and detail reports surrounding: 1) authorization successes; 2) authorization failures (with reason codes); 3) sales and refunds; 4) interchange qualifications (downgrades); 5) chargebacks; 6) fees from all of the players; and 7) merchant submissions and corresponding bank deposit reconciliations. Ideally, all of these reports should be exportable in .xls or .csv format. Given a proper reporting system, it should take a clerk from a medium sized company no more than 90 minutes to fully reconcile a month’s worth of credit card activity.

10. Monitor Chargebacks

Chargebacks represent one of the worst ways a transaction can go awry. They are typically indicative of unscrupulous customers (fraud), dubious products, poor customer service or an inadequate payment processor. Because Visa and MasterCard are concerned about these issues, they have imposed rules limiting a merchant’s percentage of allowed chargebacks to one percent (1 percent). When a merchant exceeds this threshold, they begin receiving fines. If the problem continues, the fines become hefty and the merchant can actually lose the right to process credit cards. While we will treat fraud as a separate matter, it is valuable to discuss some of the other cases. In all of these remaining scenarios, payment processors can play a decisive role in keeping the merchant out of trouble.

Selling a dubious product? Well, you are not the first to make millions of dollars on the Internet selling hair growth tonic! Simply put, working with the proper payment processor can keep you in business. You may not like what the processor requires, but good processors are generally skilled at striking equilibrium between optimal sales and acceptable chargeback levels. The same goes for merchants selling good products with poor customer service.

Processors can usually reduce frightening chargeback levels by suggesting changes in refund policies and other customer service processes. The merchant may not like the medicine, but it sure beats going out of business. Given these facts, choosing the right payment processor, can make the difference between life and death. If you have chargeback issues, choose a payment processor experienced in such matters or add on a third party, chargeback specialist such as Vindicia or Verifi. Always be truthful with your processor regarding your products and customer service policies.

11. Protect Against Fraud

According to CyberSource, a leading payment gateway company, on average merchants lost approximately 1.4 percent of revenues to fraud in 2008. The good news is that this is an average, and a lot of merchants employ tactics that lower fraud rates to less than 0.2 percent. Some merchants, like sellers of electronic goods, are more susceptible to fraud. Others, like women’s clothing catalogs, experience very little fraud. Regardless of your situation, there are two levels of fraud control tools at your disposal: intrinsic and external. Intrinsic methods include schemes provided by the card associations like Address Verification Service (AVS) and the Credit Card Security Code (CVV2, CVC, CID, etc.), as well as PIN based solutions like Verified by Visa and SecureCode™ by MasterCard.

Other intrinsic methods might include fraud scoring based on order characteristics (value usually being one parameter). Merchants can also externalize their fraud detection function to companies like CyberSource, 41st Parameter, and Accertify. These companies utilize a variety of methods to combat fraud including sophisticated risk scoring, heuristics, and negative files.

If you are not certain how fraud is impacting your company, chargeback rates are a good indicator. CB rates between 0 and 0.4 percent usually represent minimal fraud activity, and are best handled with intrinsic methods. CB rates between 0.04 percent and 0.7 percent may indicated moderate fraud and may dealt with using intrinsic methods, external solutions or a combination of both. A CB rate above 0.7 percent should be considered high, and the merchant would be flirting closely with the card associations’ 1 percent limit. In this case merchants should use all available methods to abate the high fraud rate. In every case, merchants should work closely with their processor to minimize fraud risk in particular and chargebacks in general.