The Payment Funnel
2. Managing risk
Managing risk is another important consideration. It would be nice if the world didn’t have fraudulent people using stolen credit cards and account numbers. If a credit card or its information has been stolen and not reported, the payment may be processed as if it were legitimate.
If the card is stolen, the cardholder will eventually discover an unexpected charge on their account and ask their bank for a chargeback. Credit cards tend to favor the customer in most disputes. If that’s the case, your business would eat the cost of the transaction and pay a chargeback fee to the bank.
While these situations cannot be eliminated entirely, there are some ways you can prevent them from happening in the first place using rules-based logic and machine learning.
Rules-based fraud detection uses simple logic. If ‘x’ happens, then do ‘y.’ This form of logic will block all transactions from a specific country, IP address or anything above a certain dollar amount. It can’t detect changes in fraud attempts in real time, so it’s always trying to play catch up. New rules are manually created to detect and prevent fraud rather than attacking it head-on.
Machine learning can adapt on the fly, using transaction data to train its algorithms to learn the behaviors of legitimate transactions so it can identify fraudulent ones.
Using both of these approaches is the best solution to managing your risk. Rules-based logic will establish the ground rules, and machine learning will adapt to the changing environment as fraudsters learn new tricks to get around your systems.
3. Improving transaction acceptance
The last step in the funnel is improving the acceptance of credit cards. When a customer makes a purchase, a payment request is sent to the bank. The approval of the request depends, of course, on the customer’s balance or credit limit. However, other factors can affect the success of a transaction, including the formatting of the data used in the transaction and even a glitch in the transmission of the data or longer than expected pause in the payment process.
You can reduce some of the declines by making sure that you collect all the data during checkout in standardized formats. This includes the CVC, billing address and ZIP Code. The information the banks need, in the form they require, will improve the chances legitimate transactions will be accepted the first time.
A word about payment methods
In the U.S., we’re used to making payments using credit or debit cards or digital wallets such as Apple Pay. But in other countries, 40% of your potential customers use other payment methods. As you expand into other markets, think about the payment methods the people in the host country prefer. That’s not to say you need to offer every payment under the sun, as the following form are still the most common. But, if a customer segment overseas overwhelmingly prefers an alternate payment form, you may want to consider adding it to your cart.
The Big Five Payment Methods
- Credit cards are still extremely popular, partly because they allow customers to make purchases using their credit rather than drawing it straight out of their bank account, as a debit card does. This allows them to determine their own repayment schedule rather than having to have the money upfront to pay for a purchase. Customers often make larger purchases using a credit card than any other payment method.
- Digital wallets such as Apple Pay or Google Pay are also popular, allowing customers to pay electronically instead of constantly entering their credit card or bank information. PayPal is a similar payment option. When PayPal is selected, the customer is taken to a screen that allows them to enter their login and password and approve the transaction. When approved, they are returned to the online store.
- Bank transfers and debits move money directly from the customer’s bank to the shop’s account. This requires the customer to enter their bank account routing information instead of a credit card number. Some overseas payment methods, such as iDEAL or Giropay, work the same way. They are a hybrid between digital wallets and bank transfers.
- Buy now, pay later is a growing option. The customer uses this method to immediately get the product or service and pay for it over time in installments.
- Cash-based payment methods such as Boleto, which is popular in Brazil, allow customers to purchase items online without a bank account. When the customer makes a purchase, they receive a scannable voucher with a transaction reference number. They can take it to an ATM or other outlet and pay in cash. The number is matched to the purchase, and the funds are transferred to the retailer so they can ship the product.
A quick note about taxes
As a retailer selling online, you are responsible for sales taxes. These are calculated automatically by most shopping modules. You are responsible for paying state sales tax and the local sales tax. You do this as part of your regular tax filings with the Department of Revenue, just as you report in-store sales.
Some states collect taxes on products delivered to residents, even though the company does not have a presence there. Whether theses statutes are actually effective is open to interpretation, but you should be aware of them.
If you are selling internationally, taxes can be a bit more complex. Rules vary by continent and country. For instance, in Europe, a value-added (VAT) tax is charged; in Australia and Canada, a goods and services tax (GST) is applied. In Japan, there’s a consumption tax known as the JCT. As a seller, you don’t have to worry too much about these on your end. The customer is responsible for paying these.
Selling in-store and online
If you currently sell products or services in a traditional brick-and-mortar store, adding e-commerce can be an exciting undertaking. It may also require some additional thought as you figure out how to unify data across your online and in-store payments. Customers don’t want to consider an online and physical store separate. For instance, if they wish to return an item they purchased online, they want to be able to bring it to your store and not have to ship it back. They may also expect to use a coupon or discount interchangeably unless you expressly note that it is good for an in-store or online purchase.
Here are some things to consider when trying to figure out how your two stores may work together.
- Leverage existing infrastructure
You already have a payment system in place. If possible, you don’t want to operate two of them. Your existing bank and payment provider may already offer payment processing for online stores. As you build an e-commerce presence, make sure your web designer is aware of your existing payment infrastructure so that you can create a single process, including the ability to view customer data in one place, rather than having to run two systems.
- Support chip cards and mobile wallets
If you still use magnetic stripe card readers to process credit cards in your physical store, it’s time to move on to EMV chip cards. They are more secure and facilitate the integration of your existing store and your online store. You should also consider supporting mobile wallets in both places. They have become the standard payment method for many customers, and not offering this option may cost you customers.
- Leverage existing infrastructure
In case some of the terms used in this academy are still a bit unclear, we’ve put together a glossary with definitions.
This is the merchant’s bank or financial institution that processes the credit or debit card payment on your behalf and routes them through the card network at the issuing (customer) bank.
When funds are moved from one bank to another as a debit or a credit, it is referred to as a bank or credit transfer.
This is the person who makes a purchase from you using a credit or debit card.
This is the network that processes a transaction between the merchant and the card issuer, such as Visa, Mastercard, Discover and American Express.
Often referred to as a dispute, a chargeback occurs when a customer questions a payment with their card issuer. The burden of proof is on the merchant to prove that the person who made the purchase is the person who owns the card and authorized the transaction.
The merchant charges this fee when a payment is reversed in a dispute.
These allow customers to store their card or bank information in a digital app that serves as a wallet to make transactions. Apple Pay and Google Pay are examples.
Another term for “chargeback.”
This is a catch-all for the four parties involved in processing payments: the cardholder, merchant, acquirer and issuing bank.
A false or illegal transaction that typically occurs when a customer’s card or checking account information has been compromised and used without authorization.
This fee is paid to the issuing bank for processing a credit card payment.
This is the bank that issues credit and debit cards to consumers.
This is the percentage of transactions that are accepted or declined by the issuing bank.
The total of interchange and scheme fees is known collectively as network costs.
This software encrypts credit card information on the merchant’s server before sending it to the acquirer. The gateway and the enquirer are typically the same entity these days.
Payment methods for goods and services purchased include bank transfers, credit or debit cards, and digital wallets.
The processor sends payment information between the merchant, issuing bank and acquirer. These payment details come from the payment gateway.
PCI Data Security Standards (PCI DSS)
PCI DSS is the information security standard that applies to all entities involved in storing, processing, or transmitting cardholder data and/or sensitive authentication data.
These are the fees collected by the card network. A transaction may incur multiple scheme fees, including authorization and service fees.