CEO's Notebook

How Internet security complicates your merchant account

Margaret Cobbs, founder of Velma Handbags, in Redwood City, Calif., recently experienced her first brush with Internet fraud: someone in Romania tried to purchase eight handbags from using a stolen credit card. What could have been a $380 theft was thwarted by the fraud "police" at CCNow, a Delaware service that handles Internet credit-card payments.

Unfortunately, such protection carries a price. CCNow collects 9% of every sale that Velma Handbags makes online. "That kind of makes you ache," says Cobbs. But the alternative -- opening a merchant account to process credit-card orders on the Web -- was too expensive and risky for the first-time entrepreneur.

The specter of Internet fraud has made it tougher for a small E-merchant to navigate the byzantine maze of credit-card-processing fees charged by banks -- if it can get an E-merchant account at all. However, several new services -- including CCNow, iBill, PayPal, and Verza -- are offering a single merchant account that's shared by a group of clients.

At most of those E-merchant services, you pay no monthly fee -- only a commission ranging from 1.9% to 9% of sales. Some also charge a separate transaction fee ranging from 25¢ to 99¢ an order. All the Internet-payment services claim to reduce the incidence of fraudulent orders by employing sophisticated screening software and common sense. For instance, "don't take an order for 10 Rolexes," says Verza's Paul Kraaijvanger. But only PayPal offers a guarantee that sellers in good standing won't be held liable for the cost of fraudulent orders. And the services don't welcome every small business. CCNow, for one, maintains a long list of industries that it won't do business with.

Cobbs likes CCNow because its service is quick and easy to get started and it provides 24-hour service to her customers. But she faults what she calls the company's "weird payment schedule." There's often a two-week lag between the time that CCNow processes an order and the time that it deposits the money -- minus its commission -- into Cobbs's bank account. If a company earns more than $1,000 in any two-week period, CCNow holds the balance in reserve until the next pay period in case a buyer asks for a refund or disputes a sale.

Whether such services will turn out to be a fair alternative to banks or just a "bank" of last resort isn't clear. Pattie Sbardella, co-owner of Pattie's Patch, a fruit-and-vegetable market in Hampton, N.Y., thinks she's getting a good deal from Verza. She recalls how her bank refused to grant her an E-commerce account after deeming that her business was too risky. She tried using a merchant account from a bank she'd never heard of. Bad move. After suffering through high monthly fees, she gave up and turned to Verza. "I can give the Web site a chance without having all the overhead," says Sbardella.

Chargebacks: The Silent Killer

If you sell your products online, you're vulnerable to "chargebacks" -- disputed credit-card charges. Buyers usually win disputes. Visa and MasterCard have threatened fines and account termination for sellers whose chargebacks exceed either 1% of transactions or 2.5% of monthly sales. How can you thwart chargebacks? Here are some tips from the experts:

  • Ship only to credit-card billing addresses. California Computer Center's monthly chargebacks dropped from seven to three after it stopped shipping to third-party addresses. CEO Kaveh Jabeli believes the remaining chargebacks come not from scammers but from "frustrated" customers.
  • Beware of certain shipping destinations. Jabeli says that the Nigerian city of Lagos is "known for fraud."
  • Display strict return policies. Michael Lee, CEO of MSL Computers Inc., in College Point, N.Y., charges a 15% "restocking" fee for returns.
  • Take American Express. Merchants report that fighting chargebacks with Visa and MasterCard can be nightmarish, since it means massaging two banks: yours and the customer's. AmEx, by contrast, handles disputes directly. "AmEx opens a case and acts as a mediator," notes Jabeli.

-- S.G. and Ilan Mochari


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