The Lowdown On...Payment Processing Systems Feb 1, 2001 12:00 PM
, Leslie Goff
JobZone
Search and post jobs for the Multichannel Merchant. Including jobs for brand & agency marketers, e-commerce, catalog marketers, ops & fulfillment, direct marketing and more.
Just as it was coming up to the 1999 holiday season, housewares
marketer Cooking.com made a critical decision to bring its outsourced
online payment processing system inhouse. It was a bold move for the
fledgling company, which debuted with a Website in September 1998 and
launched a print catalog operation in December 1999.
Cooking.com had been using an application service provider (ASP) for
online payment processing and authorization during its first year of
business. The ASP model, which enables companies to outsource
applications via the Internet, had supplied the site with real-time
credit-card authorization and processing and order confirmation without
requiring the marketer to invest heavily in IT resources.
But in gearing up for the ’99 holiday season, Santa Monica,
CA-based Cooking.com was concerned about security, reliability, and
speed, says Jae Yim, director of site development. Transaction volume
had reached a threshold—Cooking.com won’t reveal
numbers—that rendered the ASP model less than satisfactory, Yim
says. Because orders had to travel over the public Internet to be
processed and approved, the real-time credit-card approval and order
completion was subject to delays of up to 30 seconds, not to mention
occasional downtime—just the kind of thing that practically begs
shoppers to shop elsewhere. “Think of a brick-and-mortar where
the cash registers didn’t work,” Yim says.
“It’s really critical that people can purchase from the
site, because other sites are just a click away.”
So Cooking.com chose to purchase server-based payment processing and
authorization software from Austin, TX-based ClearCommerce. According
to ClearCommerce’s vice president of emerging technologies, Julie
Ferguson, the flat fee for the software is $75,000. In comparison, an
ASP typically charges nominal one-time set-up fees and monthly charges
as well as a per-transaction processing fee of $0.20-$1.00. Cooking.com
also set up a private direct link to credit-card processer First Data
Merchant Service via a frame relay line, a type of continuous,
dedicated connection.
The evaluation process behind Cooking.com’s decision
underscores the salient points in selecting an online payment
processing solution. The decision is simultaneously straightforward and
complex.
On the one hand, the basic options are clear-cut: You can outsource,
buy, or build your payment processing application. On the other hand,
arriving at your decision requires extensive thinking about present and
future volume, average order size, market segment, site performance,
reliability, scalability, security, and IT environment.
A matter of time
One key factor that distinguishes e-commerce from other
card-not-present transaction environments is the sense of immediate
gratification that users derive from shopping online. “Shopping
online is almost like walking out of a store with the
product—customers want to leave the Website knowing that the
product is in stock and their payment has been accepted and the order
is being shipped,” explains Larry Bouchard, group manager of
product management for Dallas-based Paymentech, which hosts a variety
of transaction processing services for direct merchants.
In that light, deciding whether to implement a real-time payment
processing and authorization solution or one that offers users the
appearance of real-time is critical. Just more than 60% of online
merchants use real-time payment processing and authorization systems,
says Avivah Litan, vice president of the payment services group for
Gartner Research in Washington. Merchants can offer the appearance of
real-time order processing by sending an e-mail confirmation of order
receipt and a second confirmation that the order has been processed and
shipped. Ideally, customers won’t be aware that the payment
wasn’t authorized and processed in real-time—unless you
have to contact them because their credit card wasn’t
approved.
Real-time processing was a key requirement when Cooking.com migrated
to the ClearCommerce solution, Yim says. The site had provided it from
the beginning and didn’t want to alter customer expectations with
the new solution. Also, in the event of problems with customers’
cards, “we didn’t think it would be a good idea to call
people back—especially if they wanted the order the next
day,” Yim says. “From a customer service perspective,
it’s not a pleasant phone call, and there’s the fear of
alienating the customer. From a process perspective, that would also be
a lot more work for our customer service reps.”
But opting for non-real-time processing and authorization
doesn’t necessarily translate into poorer customer service, notes
Dave Dierolf, vice president of information technology at consumer
electronics cataloger Crutchfield. The Charlottesville, VA-based
marketer promotes same-day shipment of orders received by 6 p.m.
Eastern time, and its use of offline authorization and processing of
credit-card payments hasn’t impeded that service goal, he says.
While Crutchfield’s call center order-takers receive credit-card
authorization for phone orders before the end of the call, online
orders are manually entered into the company’s homegrown order
processing system and then authorized via one of three private, direct
links to First Data. “Our credit-card processing system
preexisted the Net, and it has served us best to run Internet orders
through the same way,” Dierolf says. “Our philosophy is
that we are one company, so regardless of whether the customer is
mailing in the order, calling, or placing it online, we have an
integrated strategy.”
Dierolf estimates that the time lapse between receipt of online
orders and order entry is no more than five minutes. About one-third of
the approximately $200 million company’s orders come in via its
Website; of those orders, 30%-40% flow through without intervention,
Dierolf says. But given the nature of ordering stereo
components—users often select items that aren’t going to
function well together—online orders generally need at least some
scrutiny by a customer service rep anyway.
While Cooking.com relies on real-time authorization and processing,
and Crutchfield uses a non-real-time system, a third option exists. You
could implement real-time card authorization but process payments in
batches. “For many companies,” says Andrew Ari Clibanoff,
an analyst with New York-based Jupiter Research, “it’s
beneficial to batch payments for a better discount rate.”
Ferreting out fraud
Besides the sense of immediate gratification, another major
distinguishing factor of online card-not-present transactions is the
increased need for fraud detection. Fraudsters are constantly
uncovering new ways to use the Net to conduct deceptive transactions.
And the perpetrators can bombard a site with multiple fraudulent orders
more quickly than they can by calling an 800-number.
“There’s the potential to be hit very rapidly
online,” Dierolf says. “If someone has stolen a credit card
and calls us on the phone 50 times, he’ll eventually talk to the
same operator. But on the Web, he may submit 50 orders and not be
noticed.”
Merchants can get around that by programming in system alerts when a
certain number of orders are placed on the same card in a given day.
But the possibility underscores the need for payment processing and
authorization systems to offer an extra degree of fraud detection as
well as to work with a merchant’s existing fraud detection
methods, from the basics such as address verification systems to
customized algorithms that invoke red flags on suspect orders. (For
more on preventing online fraud, see “Ask the Experts,”
December 2000 issue.)
“The software solutions on the market are extremely
sophisticated, but merchants want tighter integration with their
current business operations,” Clibanoff adds. “That’s
where a disconnect is happening, and over time a lot of vendors will
work with merchants to identify how to integrate their technologies
with current business operations.”
Clibanoff’s research indicates that when traffic at an
e-commerce site exceeds 100,000 unique visitors, and when average order
sizes are $150 and up, fraud rates increase. “The
merchant’s goal should be to implement a fraud system that pays
for itself, and to do that on a budget of less than 1% of sales,”
he says.
Most payment processing vendors offer some degree of fraud
detection, but they may not be robust enough for your liking. With both
its ASP and ClearCommerce, Cooking.com devised a number of its own
fraud-detection techniques to integrate into its payment processing
system. Clearly, the fraud-detection capabilities of your various
payment processing options will factor in heavily when it comes time to
make a decision.
Hiding the seams
While the Internet is a different beast that requires some
rethinking of any existing payment processing and authorization
solutions, your online payment processing shouldn’t stand
noticeably apart from your offline solution. From the perspective of
both your external customers and your internal business departments, it
should be seamlessly integrated with your existing systems, says
ClearCommerce’s Ferguson.
Technically, that requires selecting a system with flexible
application programming interfaces (APIs) that will make it easy to
integrate with existing settlement and reporting systems, the
storefront and the shopping cart, and the order processing and
fulfillment systems.
Ferguson suggests that if your site’s current or anticipated
volume exceeds 1,000 transactions a month, you should consider an
inhouse solution. (Then again, Ferguson works for a company that sells
inhouse solutions.) But Clibanoff notes that if a marketer is already
outsourcing payment processing for phone and mail orders, it may want
to extend its outsourced solution to the Web initially and bring it
inhouse over time. That can be a challenge, even when the decision has
clear-cut drivers. For Cooking.com, the migration to an inhouse
solution was part of a complete site overhaul, including a migration
from Microsoft Site Server to a homegrown storefront and shopping cart
and to Windows 2000 for its Web and database servers. The company,
which has built up a 3 million-name house file, ran into difficulties
when, approaching deadline, it discovered that the class of frame relay
line it had purchased from its telecommunications vendor was not
compatible with Windows 2000.
Rather than start over with a new frame relay line—which
typically takes six to eight weeks to install—Cooking.com opted
to set up the ClearCommerce software on a Sun Solaris server. That
introduced a new operating system into its environment—Solaris is
a flavor of Unix —which in turn has required additional IT
resources.
“We didn’t have a Unix guru on staff,” Yim says.
“A couple of us knew enough Unix to get around it, but we
didn’t have any Solaris expertise. ClearCommerce sent some of its
people to help us implement it, but we’ve had to outsource staff
who know Oracle and Unix. That’s been our biggest problem.”
It seems, then, that even bringing payment processing inhouse requires
outside help.
New York-based Leslie Goff writes for publications such as The New
York Times and Computerworld.
