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May 29, 2003
How To

Credit Card Processing for Subscription Sites: Paymentech's Michael Clark Reveals Invaluable Tips

SUMMARY: Subscription Web sites are really unhappy with their card processing results right now. Up to 25% or more of transactions are being declined. Are you losing money this way?

Paymentech's Michael Clark advises clients such as AOL and Amazon on how to improve their processing. In this exclusive Sherpa interview he reveals tips on handling chargebacks, expiration dates, and stats on average decline rates. Useful stuff.
"Auto-renew is so fraught with danger right now," a top online subscription seller (who declined to be named) told us.

"There are so boundaries, small and large, visible and invisible, that complicate a very simple agreed upon contract between the consumer and the subscription merchant."

In fact as we learned at the Subscription Summit earlier this month, the number one business complaint all subscription Web site share is concerns about credit card processing.

Sites are losing up to 25% of expected revenues due to problems processing charges. The problems are not on the consumer side; consumers for the most part seem happy with the convenience of auto-renew offers.

However, the banks and credit card companies are less enthused. Plus, their intricate (and sometimes archaic) systems and rules are not helping matters much.

We contacted Michael Clark, Group Manager of National Accounts for Paymentech who process billions of 'card not present' and reoccurring billing transactions for clients such as AOL and major utilities each year.

He has some good news and bad news. First of all, yeah, it is true lots (and lots) of money is being lost due to transaction problems when consumers upgrade cards, switch cards, get new expire dates, etc. However. there are some solutions.

First a key data point for you: According to Clark he expects card not present transactions to have an average 89.5% approval rate. If you are targeting an unusually credit-strapped demographic (such as young or poor people) your decline rate will be higher.

#1. Run your file against the Account Updater Program

Banks are constantly marketing account upgrades to consumers, trying to get people to move up from gold to platinum etc. Unfortunately every time a consumer "moves up" their old card number does not follow them. Your auto-renew will be declined.

Over the past couple of years, the three biggies (Visa, Mastercard and Amex) have begun offering account updates to transaction processing companies. It is a bit like using NCOA to clean your postal mail list.

You simply ask your processing company to run your file of active autorenew accounts against the Account Updater Program the day before you plan to run charges.

It will update all the card numbers that have changed due to customers upgrading cards, such as switching from a green to gold Amex. Plus, you will also new data on expiration dates and new numbers for any accounts that have changed numbers due to M&As (for example when FirstUSA buys all the accounts of another bank issuing cards).

However, it is internal from bank to bank. Which means if the customer switched bank cards entirely, that data will not be updated. It also means if that customer's bank decided not to participate in the program and feed regular update info, you are left in the dark.

100% of Amex accounts, about 50% of Visa accounts, and a "much smaller" portion of Mastercard accounts are now covered by the program. Clark expects these numbers to rise over the next year.

The cost to update your list depends on which processor you are using (there is no charge currently for Paymentech clients).

#2. Should you risk expiration date-related declines?

Contrary to many online publishers' assumptions, your risk is minimal when it comes to charging cards with past expiration dates.

Yes, your charge may be declined, but it will not hurt your fees or account status with your processing company. "There's no penalty for declines, "says Clark. "Merchants get confused between declines and chargebacks [for which there may be a penalty.]"

Does faking a new expiration date work? Yes and no.

For Visa and Mastercard cards, the individual card-issuing institution makes its own decision about whether expiration dates matter. Some banks do not care if the date is blank. Some require that the date be absolutely correct.

Unfortunately there are 14,000 different institutions issuing Visa cards alone. Each with their own rules.

Clark's advice is to process expired cards along with the rest of your batch and be glad when some banks accept it. Remember, the rejections can not hurt you.

Then keep a file of all rejected accounts and be prepared to market to those folks to restart with a new card.

#3. The dreaded chargeback

"In general there is a .41% chargeback rate in this industry," Clark told us, referring to the card not present world. "From the reoccurring billing standpoint I don't have the stats to confidently make a statement."

"However, subscription companies with annual memberships or trial periods based on negative options are going to have a much higher chargeback rate because consumers forget about annuals or take advantage of trials. Then they see the charge on their statement and claim they never authorized it."

If you are charging for a month-to-month service, your risk can be fairly high because a consumer can get chargebacks for 180 days of service. That is six months of back-payments; money you thought you made and then it is gone.

As Clark says flatly, "How can you fight a chargeback? It is very difficult. Generally speaking the merchant will lose." Here are four specific tips for you:

o If you can show you are using strong fraud prevention
screening, it may help your case a little. However, if you
accept charges from customers outside the US, many fraud
screens will decline them automatically. You have to
weigh the balance.

o Contrary to popular opinion, sending new online subscribers
a package via the postal mail will not give you any
additional chargeback protection, beyond possibly lowering
your chargeback timeline to 90-days for the first payment
alone because you could say it is for a product instead of a

However Clark says, "Even if you can prove you sent it and
they signed for it, how does it prove they authorized a
reoccurring payment?"

o Yeah! Visa launched a new regulation in Oct 2002 to stop
consumers who try to defraud companies by systematically
requesting chargebacks. Now if a consumer says, "I don't
know this company, this is an unauthorized transaction,"
Visa-issuing banks are required to close down that
particular account.

Clark says, "Mr Consumer, we are more than happy to take
the charge off your card since you say you didn't use this
card to transact with the Playboy Channel. But, obviously
this card is compromised."

o Arrgh! Visa's also launched a new "authenticated by Visa"
service for e-retailers that allows merchants to collect
extra authentication data from consumers shopping online.
The Company promises to protect merchants using the
program against all fraud-related chargeback claims.

The big drawback: they will not allow subscription sellers
to use the program. Not even for the first term of

"We are fighting that," notes Clark in a frustrated tone.

#4. eChecks and debit cards

Many subscription sellers have begun to wonder if they could solve card problems by asking for alternate forms of payment.

The good news is that both echecks (where a consumer gives you their checking account number) and debit cards (where a consumer gives you their ATM card number) work for reoccurring billing.

The plusses are substantial:

- Bank accounts are much, much longer lived than credit card accounts, so you do not have to worry about people switching.

- You save on interchange fees for echecks. You are not paying for the credit card transaction because it is not a card. Instead of paying 1.8-2.5% plus ten cents to process each transaction, you are paying perhaps 15 cents flat fee to process it.

- You may soon save on interchange fees for debit cards as well. Currently, these are treated as regular credit cards because Visa and Mastercard underwrite them. However, WalMart won a class action suit against Visa to be able to reduce the interchange fees on card not present debit card transactions.

On the other hand, there are two big downsides:

- Consumers are far more nervous about giving out their bank account info than their credit card info. You have to be an extremely trusted brand, and give them a great reason to do so.

- There's no way to pre-validate charges. Until you run a charge against consumer's account, you will not know if they have the funds available or not. If they do not, all you lost was the 15 cents it cost you to try the transaction, plus the giant cost to your relationship with that consumer when they get socked with a possible $20 bank penalty or more for the failure.

If someday bank account pre-validation is possible, then life is a much easier place.

In the meantime, our suggestion is that you may want to spreadsheet your costs to determine whether you should begin promoting Amex transactions more heavily than other cards.

There is a higher cost to each transaction, but on the other hand you do not have to battle thousands of issuing bank's varying regulations, and people are far less likely to switch accounts because only Amex issues Amex.

Promoting Discover Card use may be a smart idea for the same reason. Clark has promised us a follow-up interview in a few weeks to discuss Amex and Discover in more detail.

Note: Credit cards are a highly confusing field. If we have made any mistakes in the report above, they are our fault and not Clark's or Paymentech's. We will continue to research and bring you further details as things unfold. Thanks.
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