PayWise Limited

Chargebacks are unavoidable once you accept credit card payments. Chargebacks are similar to refunds where a customer returns an item and the business refunds the purchase amount. However, there are major differences between the two.

The Banks – Judge and Jury

A business has the discretion to accept a return or not and the leeway to negotiate a cash refund or an exchange with the customer. Under a chargeback, the customer makes a claim against a purchase but the business does not have the final say. The banks decide if the purchase amount is returned to the cardholder. In the majority of instances, it is.  

Higher Claims. Higher Losses

Compared to refunds, chargeback claims are higher due to increasing fraudulent transactions associated with online transactions. The potential for higher claims leads to the potential for higher losses.

Account Restrictions

The typical chargeback rate per month is less than 1% of transaction volume. That is the number of chargeback transactions divided by the total transactions for a period. High chargebacks over consecutive periods could lead to restrictions on the merchant account or closure.

High Cost

Merchants pay a fee for each chargeback. The chargeback fee varies depending on the financial institution. In addition, the merchant may incur an additional administrative cost to provide supporting information to the bank to investigate the claim.

Longer Resolution

A refund may take minutes or a few days to settle. However, the chargeback process can take 6 weeks to 6 months.

The merchant is at a disadvantage when it comes to chargebacks. However, all is not lost. Merchants can limit chargebacks by following best practices and being proactive.

Getting an online merchant account from a local bank is like pulling teeth. In the other countries businesses can accept payments online quite easily. Services like PayPal make the process quick and seamless. Locally, it is faster and easier to get a merchant account from PayPal than from the local banks.

In my previous article, Credit Cards, the Bank and You, the philosophy behind the credit card system was explained. The key takeaway was that due to the high risk, local banks are disinclined to grant smaller businesses online merchant accounts. You may ask then is the risk not high for PayPal? Yes, but PayPal can better manage the risk.

Several local banks have launched ecommerce payment services. Scotiabank, Republic Bank, First Citizen Bank and First Caribbean International Bank all have platforms. However, they focus mainly on the big and well-established entities. Most of us may not agree with this policy but we have to accept the fact that the banks have a right to assess and deal with the risks as they see fit. Case closed.

So that leaves smaller businesses with the international payment providers like PayPal. However, in using PayPal there are several drawbacks are:

1. You can wait as long as 30 days to have access to your money. Meanwhile, you may have to fulfil the purchase before receiving the cash. This can result in a tight cashflow situation.
2. To gain access to your money you must link a US bank account or a VISA debit/credit card to your PayPal account. Without the former the latter is the only alternative. If so, a cash advance (over the counter or via ATM withdrawal) is the standard way of getting your money. This attracts high fees (in some cases $20 for debit cards or 3% of the amount for credit cards).

To deal with the drawbacks think about the following:

Firstly, eliminate the cash advance fees. JMMB Bank, formerly Intercommercial Bank, has a VISA Debit card that links to a bank account. So when PayPal credits your card the funds go directly to your bank account. From there you can withdraw or transfer the funds without the exorbitant fees.

Secondly, solve the cashflow timing issue. This is a common businesses problem and which is solved by a bank overdraft.  You take the money to fulfil the order from the overdraft account. Later, when the payment is received you credit the sum to the overdraft account.

Obtaining an overdraft account means being assessed and providing security. The process should not be as onerous as for an online merchant account and the security is dependent on the overdraft limit you want. The overdraft limit depends on the value of your monthly online sales or a lesser manageable amount. For example, let’s say your monthly online sales is $10,000 and the business can comfortably fulfil $3,000 worth of purchases from cash within the business. Then, you only need an overdraft limit of $7,000.

Alternatives to PayPal are Stripe and Payoneer. Unlike PayPal, these services allow access to funds within a shorter period; usually 2 days.

Banks are responsible for both the cardholder and the merchant in a credit card transaction. As a cardholder, your bank is responsible for paying the merchant for your credit card purchases. On the other hand, the merchant’s bank is responsible for your refund claims against the merchant, for credit card purchases.

By issuing a credit card, the issuing bank is liable for purchases made by the cardholder using the credit card. In other words, if a cardholder purchases an item today but is financially ruined tomorrow the bank has to honor the payment. That is, pay the purchase amount to the merchant. Later, the bank will seek to recover the sum paid. Recovery may include taking the cardholder to court.

In order to accept credit card payments a business has to be granted a merchant account by a bank. The bank in this instance is called the acquiring bank. The acquiring bank, is liable for any refund or chargeback claim against the merchant, related to credit card purchases.

For example, persons purchase tickets on a chartered flight to an exotic destination months in advance using their credit cards. Close to the departure date the travel agent disappears. The ticket holders file chargeback claims. The acquiring bank, has to refund all persons who purchased tickets using their credit cards. Afterwards, the bank will seek to recover the funds from the vanished business. Recovery may include taking the merchant to court. The bank may recover all, part or nothing at all.

To manage the risk the acquiring banks closely vet all merchants. For brick and mortar businesses the process is time consuming. For online businesses it is rigorous.

So why is this so? As reported by Forbes  “86 percent of chargebacks are fraudulent. The true cost of dealing with online fraud is growing”. According to a LexisNexis study, in 2014, the annual fraud cost among U.S. retailers was $32 billion, a rise of 38 percent from 2013.

Due to the scale of online fraud banks are exposed to a higher risk. The higher the risk the more collateral they require. The collateral, normally in the form of cash, is to cover chargebacks due to fraud and other reasons.

Assume the chargeback rate is 5%. That is, 5% of a merchant’s monthly sales are subject to chargeback claims by customers. If the business monthly sales is $100,000 then it refunds on average $5,000 per month. The acquiring bank will request at least $5,000 as security. When a chargeback claim is made the bank, if required, can make the payment from the collateral held.

The bank may request more security. Instead of $5,000, the bank may request cash collateral of $25,000. Hence, one may say the chargeback rate is 25%. Another way of looking at it is, the charge back rate is 5% but the additional $20,000 is a cushion for what the bank assesses as the risk associated with doing business with the merchant. In other words, the bank does not want to be out of pocket if claims exceed 5%.

In practice, once chargeback claims exceed the chargeback rate the bank will re-examine the business. This may result in a call for more collateral, restrictions on the account or cancellation of the merchant account.

Payment options for brick and mortar businesses are set in stone. Typically, they accept cash, LINX (debit and credit cards) and probably a manager’s cheque. Customers make payments in person over the counter.

On the other hand, if you are a newbie (a business that leverages social media and some semblance of ecommerce tactics) then you are potentially serving a wider and more dispersed market. However, you may not have the mean to effectively reach your customers. More than marketing is required to reach customers. You need effective mechanisms to complete the purchase process with customers you never see.

For this, you need to have all your ducks (or mechanisms) in a row. The internet gives you the means to interact with persons far and wide. Social media gives you the ability to selectively target persons with your messages. With courier services you deliver goods without leaving the store. Let’s explore the local mechanisms available to receive payments from remote customers.

Cash and Cheque

These requires contact between buyer and seller or at least the physical movement of cash or cheque from the buyer to the seller.

Bank Deposits

Sellers request buyers to deposit payments into their bank accounts. Some buyers will do it. Others will not stand in a long line and wait hours to reach the teller. On the other hand, some sellers don’t like the notion of giving their bank information to strangers. Others complain that payment reconciliation can be difficult.

Electronic Payment Mechanisms

The portable point-of-sale (LINX) machine is a good work around. Once you have the sales volume the benefits will outweigh the rental fee, transaction fee and the data cost. To receive a payment you or your representative must be in the presence of the customer. This may increase your cost of doing business.

Automated Clearing House (ACH)

Unlike LINX, this is location independent. The customer logs into her bank account online and transfers the payment to the business. It is not a universal feature available to all retail bank customers. Some banks may charge a fee for making interbank transfers. In other words, it is not a catch all option.

Bill Payment System

There are several services locally and the landscape is competitive. These services prefer clients with high payment volume potential.

Money Transfer Services

The cost of these services is high. This may result in an effective increase in the price (if the fee is passed onto the customer) or a cut in the mark-up (if the fee is absorbed by the seller).

Ecommerce Payment Systems

Locally, many see this as the holy grail of payments, if it ever reaches the masses. The costs is prohibitive and due to the high risk, banks are more interested in gilt-edged clients. Without this service many businesses are only wading in the ecommerce currents.

Alternative Payment Systems

The only local system of this kind is Paywise. Think of it like a bill payment system and Paypal. Cash is accepted from customers and the payments are processes electronically to your bank account. No hoops to get a merchant account. Wide customer reach. Automated notification and post to your website when payments are made. Easy reconciliation. Low cost. No long lines.

Brick and mortar businesses have several payment options. Similarly, newbies should provide customers with different payment options and let them decide which is right for them at the point of purchase.

Further to our previous article Cash is King, we take a closer look at the ATMs and point-of-sales (POS) usage. See the table below (Comparison of ATMs and POS Usage).

In 2010, the value of POS payments exceeded the value of cash withdrawals. However, by the end of 2014 our insatiable appetite for cash-in-hand had led to cash withdrawals surpassing POS payments.

Over the period, the ATM network and cash withdrawals grew by 19% and 49%, respectively. By comparison the POS network and POS payments grew by 44% and 16%, respectively.

Despite the bigger expansion of the POS network it was the ATM network that saw the higher demand.

Why the increasing need for cash? We shall explore that in a subsequent article.

Suffice it to say that in order to grow your business online it is advisable to give customers convenient options to pay with card or cash.

Cash is the preferred payment instrument for retail and personal transactions. Payment cards (credit and debit cards) and electronic payments (over the LINX system) run second. Other payment instruments like cheques are relatively insignificant as a widely used means of payment by the public.

The table below represents the value of point-of-sale (POS) transactions and ATM cash withdrawals from 2010 – 2014.

From the table, we assume that cash withdrawn from the ATMs are for transactional purposes. In other words, ATM cash withdrawals are the main means by which the society obtains cash for transactional purposes.

Surprisingly, the use of cash has grown while the use of electronic transactions as a means of payment has fallen. In 2010, electronic transactions accounted for 51% of the payments value as opposed to 44% in 2014. At the same time, the use of cash rose from 49% of payment value to 56%.

However, the above data represents a micro view of the real business-to-consumer or person-to-person payment picture. The cash withdrawn via ATMs does not represent the total cash used for transactional purposes. For example, cash withdrawn over-the-counter at financial institutions is not included in the above data.

Consequently, the use of cash is higher and the use of payment cards lower than the above data suggests.

There are several ways to receive payments. Payment options range from the traditional cash to modern day electronic payments. In this article we examine payment instruments and the payments systems available to local businesses.

PAYMENT INSTRUMENTS
The main payment instrument is cash. Non-cash payment instruments are debit cards, credit cards, cheques and bank drafts. Despite the high usage of non-cash payment instruments cash still remains the most widely accepted means of payment.

PAYMENT MECHANISMS
A payment mechanism is a financial system that supports the transfer of funds from payers to payees usually via financial institutions. There are paper-based mechanisms to handle checks and drafts, and paperless mechanisms to handle electronic transactions. Electronic funds transfer payment mechanisms are the back bone of ecommerce.

LOCAL PAYMENT MECHANISMS 
Paper Based Mechanisms
Traditional payment systems offered by banks to facilitate payments using cheques and bank drafts.

Electronic Payment Mechanisms
LINX – an electronic network that facilitates point-of-sale transactions using payment cards (debit and credit cards). Transactions are conducted via point-of-sale machines (fixed or mobile) at the merchant. Since a physical payment card must be presented to the merchant to conduct the payment such transactions are referred to as card present transaction.

Automated Clearing House (ACH)
ACH is an electronic transfer system that is commonly used as a payment system. Using ACH payers issue payment instructions electronically via their online bank accounts. ACH then moves the funds from the payer’s account to the payee’s account.

Bill Payment System
A system where a payer makes bill payments via a third party (network of agents) to the biller. Locally, TTEC customers pay their bills through the VIA Bill Payments service.

Money Transfer Services
A system where money is transferred from one place to another. Typically, cash is sent from one person to another. 

Ecommerce Payment Systems
These systems facilitate electronic payments for online transactions. Payments are made using credit cards. Local banks such as First Citizen Banks and Scotiabank offer ecommerce payment systems. A business has to obtain a merchant account to utilize the local ecommerce payment systems.

Foreign ecommerce payment systems include Paypal, Payoneer and 2Checkout. Paypal can be used by local businesses to accept payments online.

Alternative Payment Systems
These systems facilitate payments using a non-credit card alternative. Alternative payment methods include prepaid cards, debit cards, wallets and even cash. Alternative payment systems are increasingly being used for the payment of online transactions.

Paywise is a local alternative payment systems. The service accepts cash payments for online and offline transactions and transfers the payments to the merchants’ bank accounts.

  So we are in a recession. Workers are being laid off, people have less to spend and businesses are feeling the pinch. It will get worse.

However, a recession is not a bad time for all businesses. People still have to spend. It means that they will spend more on the basics and less expensive goods and services.

So there are still opportunities for persons who have or want to start a business.

In a recession, it becomes more important for your target customers to easily find you, instead of them searching for your business or worse, your competitor. This increases your chances of a sale and the opportunity to get more customers. Sounds simple right?

The challenge begins when you consider how to reach more people across the country with little or no money at all, and complete the sales process with no inconvenience to your customers. Some key questions to ask:

1. How do people learn about what you sell?
2. How do they visit your store or place of business?
3. How do they make a purchase?
4. How do they pay?
5. How is the product or service delivered?

It matters not if you sell from a physical store, online or door-to-door. To survive in a recession the above questions are nuts you need to crack.

www.paywise.co