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International Payment Solutions, Protected by Fraud and Data Management Technology

E-commerce merchants looking to expand in their existing regions or international waters will need to accept multiple currency credit card transactions from their respective markets to satisfy their customers’ currency choices.

As such, globally expanding merchants will require international payment solutions that can offer multi-currency presentment to the merchants’ customers, and multi- currency settlement to offset any foreign exchange loss incurred by the merchants.

Like-for-like multi-currency solutions are relatively rare in the industry, with many merchants signing up for payment services that require the more expensive, and technically cumbersome, dynamic currency conversion to get to their desired ‘end’ settlement currency.

Merchants should be also mindful that the free movement of goods and capital in the context of a global economy continues to encourage competition in business, and affords global merchants the ability to set up in countries with the lowest prices and advantageous tax rates.

International payment solutions, therefore, will need to fit with the merchant’s corporate strategy and provide the type of sophisticated, integrated payment processing solutions needed to aid in their global expansion.

In addition, as merchants grow their business, they will need to further manage online payment fraud and mitigate their chargeback risk through fraud control technologies.

Internet Fraud

Online fraud continues to be a growing and costly experience for all online merchants.

While merchant fraud losses have dropped in relation to sales, fraudsters are snatching up more money than ever, according to CyberSource’s eighth annual Online Fraud Report.

The dollar value of fraud losses will continue to rise and fraudsters will continue to walk away with more money because online sales are growing at more than 20 percent per year, noted the study.

While this is based on U.S. domestic merchant data, the same trends can be seen across the globe and the threat of fraud remains ever-present.

This is largely due to the fact that fraudsters are far more sophisticated and understand the card processing systems better than most merchants. And existing fraud detection methods are proving to be outdated and easily manipulated by clever criminals.

Identity theft is the single largest threat to non face-to-face transaction processing, but phishing, skimming, spoofing, SpyWare, Server hacking, counterfeiters, Key Stroke Loggers and the use of black market card and billing address lists are all prevalent methods used by criminals today for illegal gain.

Current Fraud Trends

Fraud detection tools are those used to identify the probability of risk associated with an online transaction. "They do not guarantee that a fraud will not occur and certainly will never prevent a chargeback initiated by the consumer," said Andrea Wilson, CEO of First Atlantic Commerce.

But while consumer behavior cannot be predicted or prevented by fraud detection tools, the right mix of fraud management technology can reduce the likelihood of fraudulent activities.

The most popular tools used to gauge online fraud today are different for merchants processing over $25 million per annum in sales, according to Wilson.

"The larger North American merchants use more risk-specific scoring models, negative and positive lists and sophisticated data sharing tools," she said. "They also spend considerably greater efforts on chargeback management."

In the United Kingdom and Europe however, the fraud tool trends are different. Merchants spend considerably more time manually reviewing transactions and use CVV2, AVS and the Card Association 3-D Secure payer authentication services (Verified by Visa (VBV) and MasterCard SecureCode (MSC)) as primary automated fraud services.

A significant difference between European and North American merchants can also be seen in the use of IP geolocation services. 59 percent of North American merchants employ IP geolocation, whereas only 23 percent of European merchants use the services, according to the CyberSource survey.

Fraudulent Transaction Chargebacks

80 percent of all e-commerce chargebacks are from unauthorized transaction Reason Codes commonly referred to as the "I didn’t do it" chargebacks.

In 2006, merchants reported that it takes an average of 1.8 hours to handle one chargeback (including time consumed on research, documentation and representment). On average, 53 percent of fraud-coded chargebacks are represented, and merchants reported that they win 42 percent (on average) of chargebacks they dispute, according to CyberSource.

Having an efficient representment process, therefore, greatly enhances the merchant’s chances of winning a fraud-coded chargeback.

"Given the time involved, the administration efforts, fines and penalty fees, it is my experience that merchants are finding it makes more economic sense to encourage consumers to contact them directly to receive a credit then process a chargeback," noted Wilson.

Of course, implementing VBV and MSC also reduces fraud-coded chargebacks by guaranteeing liability shift back to the issuer for qualifying Reason Codes.

Fraud Detection Technology

Payer authentication systems provide issuing banks with the ability to authenticate cardholders during an online purchase, which reduces the likelihood of fraudulent use of payment cards and improves transaction performance. This ultimately benefits merchants, consumers and bank acquirers--not just financially, but in terms of service levels, building loyalty and encouraging repeat orders.

It is a known fact that the Card Association 3-D Secure payer authentication services (VBV and MSC processes that enable issuing banks to verify that the actual cardholder is the person executing an Internet purchase) provide for instant fraud reduction.

Yet, according to Cybersource’s U.K. Online Fraud Report (2007), only 49 percent of retailers are using 3-D Secure services, which transfer liability for certain chargebacks to the issuing bank rather than to the merchant.

The same study indicated that online retailers continue to rely on the same basic tools to manage fraud with more than 70 percent using Address Verification (AVS) and Card Verification Number (CVN) as their primary means of fraud screening.

Using AVS and CVN (which includes CVV2 for Visa and CVC2 for MasterCard) is an important tool for evaluating transactions.

AVS is a popular North American based service whereby the card-issuing bank matches the street and zip/postal code information entered by the consumer to the information on the bank’s systems.

It is a useful technology--not only for North America-based merchants, but also for global merchants that do business in North America, as they can employ AVS to provide them with data to help mitigate U.S. and Canadian cardholder fraud. Merchants can also monitor these customers should they want to block them from processing going forward.

But AVS and CVN must be complemented by other fraud and risk monitoring technologies to effectively mitigate fraud and chargebacks for merchant online businesses.

3-D Secure is currently the single most important fraud-screening tool that should be implemented by merchants. Available in the consumer’s local language of the bank issuer, it enables merchants to implement VBV and MSC in Asian markets with full language support.

Note that while VBV liability shift has always been guaranteed for "attempted" transaction authentication--even if the cardholder is not enrolled in VBV with their bank issuer, MSC did not cover the "attempts" liability shift. But in November 2006, MasterCard International announced a global inter-regional merchant liability shift program change, which covers all international SecureCode transactions under the merchant "attempts" liability shift.

All merchants then benefit from worldwide chargeback liability shift on disputed payment transactions if they are enrolled in VBV and MSC and have made an attempt to authenticate the cardholder prior to payment authorization.

Geolocation is also a very good addition to all merchants’ fraud and risk evaluation portfolios. Used to identify the geographic origin of an order based on the IP address of the customer’s browser, geolocation data provide specific information about the IP address associated with the originating browser transaction request such as the country, city, region, zip code and domain name.

Not only can it assist merchants in ascertaining the geographic location of their customers and thus likelihood of fraud risk (as certain countries are more notorious for fraud than others), it allows the merchants to use the information for marketing purposes or advertising relevant product information according to that geographic region.

Choosing an International Payment Solutions Provider

Merchants must choose wisely when looking to work with a payment solutions provider. Experience in the international market, reliable payment gateway services, payer authentication offerings and other fraud and data management tools are paramount.

Depending on their needs, merchants should also look for other value-adds from their payment processing providers including personal service, ease of integration and trouble-free access to settlement funds.

Merchants should give careful consideration to the corporate framework of any payment solution. For example, many "international payment solutions" are dependent on the "aggregator" model, whereby businesses do not have the ability to actually control their settlement funds from the time those monies are processed and captured.

Aggregator solutions are also typically very expensive and subject to portfolio risk issues such as excessive chargeback penalty fees and suspension of services by either Visa or MasterCard.

Solutions that provide for direct merchant accounts with major banking institutions, however, are the ones that will likely provide greater expansion flexibility and control. And merchants who gain approval for credit card processing settlement accounts often go on to enjoy much larger relationships with their overseas banks, most of which provide a comprehensive portfolio of other banking services.

Single integration with a payment gateway for multiple bank access is also key and not often found in the industry. It makes sense for large merchants to send their Internet payment transactions via one "gateway" with settlement accounts across various banks and jurisdictions so that if there are, for example, ISP issues to a given bank and/or jurisdiction, the "volume" can temporarily and easily be shifted to another acquirer on the same payment gateway switch.

Choosing a payment provider that offers multi-currency solutions in emerging regions is also a critical decision factor. Merchants looking to expand in Pan Asian markets will require like-for-like multi-currency processing and settlement, and thus, must ensure that currencies such as Hong Kong Dollars, Yen and Singapore Dollars are available.

Merchants should keep all of this in mind when exploring their options as they will likely look to multiple banks in multiple jurisdictions across the globe as they grow their business--both for redundancy purposes and corporate strategy planning.