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Accepting Online Payments: Chargeback Fraud, Cryptocurrencies and Other Issues

Daniel Moisyeyev
Daniel Moisyeyev

Credit cards have been the preferred way of making online payments for some time. This payment method took a while to become accepted and faced a lot of resistance from consumers  – just recently, giving up credit card details to an online store was considered "too dangerous". With time, payment gateways like Paypal and buyer protection measures provided by financial insititutions eroded this fear. Virtually every online store today proudly advertises that they accept VISA and Mastercard. In some cases, it is the only payment method offered.

Credit Card Payments – An Advantage For Purchasers
While purchasers were very resistant to utilise their credit cards for online payments, they were actually the party that mostly benefited from their widespread adoption. The system is designed with a heavy bias towards satisfying the needs of the purchaser.

The benefits offered include:

Reversibility of transactions. This is offered via fraud protection provided by the issuer (more on this and the abuse of this system later)

Convenience. Without doubt, credit cards are currently the most convenient way of making payments online

Buyer Protection. The alternatives available offer less protection for the purchaser, such as EFT or Direct Debit authorisations for regular payments

Fees. Merchants invariably end up picking up the tab for the fees imposed for credit card transactions.

Credit Card Payments – A Disadvantage For Merchants
Merchants end up with most of the expenses and shortfalls associated with processing credit card  payments.

Reversibility. There is a susceptibility to chargeback fraud, rollback of transactions completed using stolen credit cards and reversals completed by customers in error due to not recognising particular charges

Transaction Fees. Costs associated with processing credit card payments such as financial institution transaction fees and other fees associated with payment gateways

Other Costs. Costs associated with collecting credit card payments, such as SSL certificates and services provided by web development specialists

Delay. There is generally a delay in receiving funds if a payment gateway is used.

Chargeback Fraud is a Problem
The popularity of credit card transactions has lead to the situation that chargeback fraud is now serious problem.

There is currently a design flaw with the chargeback system. A purchaser can reverse a transaction without the financial institution completing a proper investigation as to whether the merchant is indeed at fault. This effectively means that the merchant can be stuck with a negative balance on their account for a good that has been dispatched or a service that has already been rendered.

This issue tends to plague B2C retailers, especially in situations where there is a high volume of transactions with small amounts. It is extremely cost-inefficient to investigate and dispute these small transactions, hence some dishonest purchasers get away in these situations. While it is more rare in the B2B environment, it still happens on occasion.

Is there a way to protect from charge-back fraud?

There are some actions merchants can take to protect themselves.
The first solution is to use a payment gateway that offers seller protection. Some payment gateways offer plans for merchants where eligible transactions get the benefit of full reimbursement of losses and fees if the buyer files a chargeback. These plans usually have conditions imposed on them, such as a requirement for goods to be tangible and a record of a valid courier docket. These types of plans generally do not apply to merchants providing services.

Another solution is to filter clients. This is generally easier with B2B sales, where purchases tend to be for higher amounts, number of transactions tend to be lower, and some degree of communication as well as implied trust with the client is present. If a merchant has the ability to micromanage clients, different levels of payments for different clients can be put in place (e.g. advance payments by EFT for large orders, credit card payments for small orders, 30 day account terms for approved clients etc).

Avoid accepting large single orders on credit cards if your business does not have some form of seller protection. Nothing is worse than finding that your payment gateway or bank account has a negative $5,500 balance after a fraudulent chargeback, and as a result your cash flow has been disrupted.

A situation where a stolen credit card was used to make a purchase is the most difficult situation to deal with, as there is no simple way to identify the party responsible for payment. For example, the purchaser details could be completely false and there would be nobody to pursue for recovery of funds after the transaction is reversed. While authorities may assist with the criminal component of the matter, it will still be likely the responsibility of the merchant to recover the amount owed.

Cryptocurrencies are fast becoming a hot topic and they deserve a special mention. While they may still be in their infant stage and undergoing a speculative frenzy at the moment, the concepts behind them have real potential to change the way payments are processed online. Some companies are already accepting popular (cryptocurrency) coins as payments. Accepting cryptocurrencies is actually not difficult, certainly much easier than setting up your own credit transaction facilities (what to do with your coins after you have accepted a payment is a whole other story that deserves a separate article). This technology needs to be approached with care if you wish to use them for their real intended purpose in a commercial environment.

The key issues that currently affect cryptocurrencies:
Irreversibility of Transactions . Perhaps the biggest issue that cryptocurrencies suffer from is the fact that once you have made your transaction, your coins are gone for good. Cryptocurrencies likely offer the worst protection for the purchaser out of any payment methods offered.

Loss of a Private Key. A loss of a private key to a cryptocurrency wallet can mean your balance is soon wiped out. Since there is no way to reverse transactions, this could be a major problem if a merchant loses control of a central wallet that accepts payments. Hacking issues that surround cryptocurrency wallets and exchanges are a much more serious matter with more severe consequences than unauthorised use of stolen credit card details due to the complete lack of protection offered by a central authority, as well as a total lack of reversal capability and major difficulties in tracing of malicious transactions.

Volatility. The speculative frenzy around cryptocurrencies has made them difficult to use for actual transactions. The prices are volatile and as such, a business would have to carry a risk of loss during the time between receiving payment from a purchaser and converting to real currency on a cryptocurrency exchange.

High Transaction Costs.   Crypto-currencies command higher transaction fees than what is offered by financial institutions. This is due to the high energy costs that are required to carry out the processes that underpin cryptocurrency transactions.

As of today, cryptocurrencies are not optimal for online payments besides some niche applications. Future developments in the field may, however, change this and a new payment method could come through that may offer more features and protection than what is currently offered.

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