E-Commerce Merchants Take on More Risk in Search of More Sales

With the economy still shaky, some established online merchants are branching into new product lines in search of incremental revenue, and that can create problems if the merchants don't work closely with their acquirers, Bob Nadeau, group executive at Chase Paymentech Solutions LLC, tells Digital Transactions News. In a wide-ranging interview about the increasing importance of communication between acquirers and their merchant clients, Nadeau says a number of e-commerce merchants with well-known, mainstream product lines are seeking higher profits by introducing new merchandise generally regarded as carrying higher risk. The most popular such products tend to be health-related items such as Acai berries, colon cleansers, and teeth whiteners. While Nadeau says he doesn't have numbers on the trend, he says it started within the last two years as more and more established merchants felt the recession's bite. “A lot of merchants are trying to increase revenues with products and services they have no experience with,” he says. “They're not understanding the risk associated with that.” Chargeback rates on such products tend to be higher than what these merchants are accustomed to, he says, largely because the products are typically sold with a so-called negative option, in which the product continues to be shipped to customers as long as they don't give instructions to stop sending it. “This turns into a huge chargeback,” he says, when customers complain they didn't ask for continuing monthly shipments. “Three months of transactions turns into three chargebacks,” Nadeau says. Dallas-based Chase Paymentech, which processes more e-commerce transactions than any other acquirer, doesn't automatically turn away such business, Nadeau says, but does try to work with merchants to make sure they understand the new customer-service problems and fraud tools they will have to deal with. Such communication can be complicated by a number of factors. One is turnover in the online merchant's business. “You've got lots of brand-new folks who are new to the business,” Nadeau notes. He adds that because of such turnover the manager making the decision to launch the new product line may not be the one who negotiated the original contract with the acquirer. With some acquirers, he says, processing contracts prohibit merchants from making big changes to their business models, something the new manager may be ignorant of. Nadeau says that because of this trend toward riskier transactions among established merchants, acquirers must work harder to help merchants understand how to manage the risk. “Some of them get into adult content or multilevel marketing, which is not necessarily bad but it takes research and planning to be ready for the customer-service issues,” he says. To help address the added risk, Chase Paymentech announced this week it will integrate anti-fraud technology from Kount Inc., a Boise, Idaho-based company, into its real-time processing system. The move follows a referral agreement the two companies announced nearly a year and a half ago (Digital Transactions News, Nov. 13, 2008). Kount offers a dynamic-scoring system that lets merchants improve the differentiation of good orders from bad and cuts down on the time spent on manual review of suspect orders.