More Changes in the Processing Arena: 2

Stephen Yagielowicz

July 10, 2003, was a busy day in the ongoing saga of Internet Payment Service Providers and their struggle to stay within the good graces of VISA/Master Card - a day punctuated by the demise of one processor, and major changes at another. When I wrote the first part of this series, little did I realize that this chaotic day was not over yet…

While the closing of Yambo and the changes at AC Pay were doubtlessly unneeded stumbling stones to the Webmasters using these services, they affected relatively few of us in ‘the big picture’ scheme of things. Sadly, the same may not be able to be said of the changes announced later that day by Epoch…

Epoch’s Rand Pate issued the following follow-up to an earlier conference call with their major clients:

“Today EPOCH / Paycom conducted a conference call with a large number of our clients to discuss the latest changes in the Visa rules. The topics of discussion were Risk Management, Chargeback Reasons and Occurrences and Future Parameters and Conditions for processing with and through EPOCH / Paycom. While we would have preferred to include all of our clients in this conference call, it was simply impossible as the available ports to dial in are extremely limited.

The conference call concluded just over an hour ago and we have already received many inquires from clients that have been given inaccurate and/or incomplete data. We are, therefore, providing this statement and outline of the new Risk Management Policies and billing parameters, which we will be implementing over the next several weeks, in our ongoing effort to keep our clients and others in our industry accurately informed. As always, we reserve the right to alter and/or amend, in our sole and absolute discretion, any policy, process or activity for any client at anytime subject to the terms of our agreements.

EPOCH / Paycom’s Ability To Be Compliant: Our entire team is confident that the new ratios as mandated by Visa are attainable by all of our Sponsored Merchants. Please remember that MasterCard chargeback ratios have been 1% for a long period of time and we are compliant with those ratios. Other factors, discussed below, will contribute to our success in this effort. It is also important to note that any changes we may implement are only as a result of the Visa ratios being lowered by 60%. We are and have been fully compliant with Visa ratios.

The New Ratios: The new chargeback ratios that affect Sponsored Merchants are as follows: 1% overall Chargebacks to Interchange Transactions. This rule is effective October 1, 2003. All ratios are measured on a monthly basis on each Master Code (contract) and are based upon the number of chargebacks and transactions, not the dollar amount. These ratios are applicable to every IPSP’s and to every Sponsored Merchant processing in Visa USA. (Visa International is expected to adopt these guidelines as well, in a short period of time.)

Penalties For Failure To Comply: There are severe economic penalties for violation of the ratios. The penalties are $100 per chargeback for up to a 6-month period. Failure to become compliant will result in the termination by Visa of your ability to accept Visa. This means that your url’s, as well as your corporate name and the name of the responsible party as listed on your Visa Registration, will be placed on the Terminated Merchant File (“TMF”). Visa is very serious about this process and has sophisticated systems to track urls to prevent the content from being sold in the future to Visa cardholders. It has been proven several times that you can run, but you cannot hide from Visa.

A New Risk To Our Business
EPOCH/Paycom and our clients are, in many respects, “in business together.” While we have a Client/Processor relationship and agreement, our interests are aligned in many respects; we depend on each other. We also recognize, however, that many of our clients have back-up processing relationships with other IPSP’S with whom we compete, and we understand that that is a good and prudent business practice under most circumstances. However, we have learned within the last three days from our Acquiring Bank that Visa has developed a new program to more closely monitor and manage chargebacks at the Sponsored Merchant level, the result of which is that Sponsored Merchants using more than one IPSP present new risks to our business.

A brief explanation to frame this issue: until this new rule, Visa monitored and controlled chargebacks at the Sponsored Merchant level strictly through the IPSP’s. That is, the Acquiring Bank and Visa would look at the Sponsored Merchants in an IPSP’s portfolio and if a Sponsored Merchant had a chargeback ratio in that portfolio that exceeded the Visa threshold levels, the Acquiring Bank would notify the IPSP in writing and require it to produce a written plan as to how and when the Sponsored Merchant would become compliant in that portfolio. The IPSP would then be given ninety days to bring the Sponsored Merchant into compliance. On the few occasions when that has occurred with Epoch/Paycom, we have contacted the Sponsored Merchant and discussed Risk Management issues and worked with them to reduce their chargebacks to be within guidelines, usually within the next month. It’s our understanding that our Acquiring Bank follows the same procedure with all IPSP’s in its large portfolio.

We understand from our Acquiring Bank that Visa has begun a new program under which it will no longer look at the Sponsored Merchants only through the IPSP’s. Sponsored Merchants that Visa identifies as being in violation of the Sponsored Merchant thresholds at any IPSP will be broken out of all IPSP’s with whom that Sponsored Merchant may do business for purposes of monitoring chargebacks. Thus, a Sponsored Merchant could be in compliance with threshold levels at two IPSP’s, but out of compliance at a third. Under the new Visa program, that Sponsored Merchant will be broken out and put on a “break out” list and in a Fine and/or Monitoring program for six months and will be subject to termination at the end of that period if the ratios are not brought into line. We are awaiting additional information from our Acquiring Bank about the fine liability for compliant IPSP’s who happen to have that non-compliant Sponsored Merchant in its portfolio, but we are told that the fines are going to be leveled against the Sponsored Merchant through the IPSP. If the Sponsored Merchant is terminated, that means it will be terminated at all IPSP’s, not just the IPSP where it was out of compliance. This will effectively mean the Sponsored Merchant will be out of business, including recurring billing. This means that the IPSP is at risk because of how other IPSP’s may conduct their business.

Because of this additional risk, we have to make some hard judgments about what clients we will continue to accept. Part of that judgment has to be based on whether we believe that our competitors can place our business at risk for the reasons discussed above. This is particularly true when we, along with our Sponsored Merchants are facing a new, drastically lower 1% chargeback ratio threshold on October 1st. Our Acquiring Bank has informed us that Visa has placed on the “break out” list at least two of the largest programs in our industry because these Sponsored Merchant are out of compliance with Sponsored Merchant thresholds at IBill. Under the circumstances and for the reasons we discussed above, we believe that it is not prudent for Epoch/Paycom to continue to accept clients’ processing where those clients also process at IBill.

THEREFORE, effective immediately, Epoch/Paycom will no longer process for clients or any registered URL that also processes new joins at IBill.

Failure to comply with this condition will result in immediate termination of processing, suspension of payments, increases in reserve requirements and other action as we may deem necessary or appropriate to protect our business and that of our compliant clients. We will work with our clients to make any transition as smooth as possible.

Changes To Billing Parameter and Rules
Over the next 7-10 days we will be making some changes to the Purchase Forms and backend processes.

Primary Sales: The following changes are effective July 24, 2003 for Primary Sales: Free Trials will no longer be allowed on primary sales. Preview Trials will no longer be allowed on primary sales. The use of the words “Free”, “No Cost”, “No Charge”, “Gift” and the like will not be allowed on any page of any site that has a “Join” link to any EPOCH / Paycom form.

Ezclick Sales – Approval Plus and Purchase Plus: The following changes are effective August 12, 2003 for Ezclick Sales: Free Trials will no longer be allowed on Ezclick sales. Preview Trials will no longer be allowed on Ezclick sales. Ezclick sales will be limited to $1.00 paid trials. Trial Day Limit: 3 – 7 Conversion Amount: less than $20.00 Only one pre-check is allowed. EZClick sales are subject to review and revocation at any time by company code or Master Code.

Partnership Programs are encouraged. Pay Per Sign Up Programs are discouraged as they lead to significantly higher incidences of fraud, which results in higher chargebacks.

We hope that this document has been informative and will clarify our positions and policies. As always, please feel free to contact your Account Representative or any of us if you have questions, comments or thoughts. This is an ongoing process and the target continues to move. EPOCH / Paycom will continue to do our best to ensure our mutual, long-term success.”

A Few Thoughts
While anything that tends to change the playing field and disturb the status quo can be seen as a detriment to the industry, some changes are mere ripples, easy enough to ride out. Others, however, are as serious as a heart attack - and Epoch’s decision to take an “us or them” stance regarding IBill and those merchants who (wisely) ‘cascaded’ signups through the both of them doubtless has many Webmasters scrambling - and I’m not just talking about a few ‘mom and pop’ operations, either, but the biggest names in the biz, including those well-known sponsors that many of us rely upon…

I have to say that I can’t blame Epoch for doing what it needs to in order to protect their own interests (and the interests of Webmasters), but I’m really curious to see IBill’s response to all of this, and personally wonder if this serious kick in the nuts will spell the end of their long-term viability in the processing arena.

Once again, and this is a purely personal opinion from someone who has never used Epoch, BUT HAS processed through IBill; if the question today came down to choosing one over the other, I would reverse my previous choice, forsaking what I know, in the hopes that the unknown will be better. Doubtless many other decision makers will feel the same way, and Epoch will gain while IBill loses.

This series started out with the question “Who will be next?” - and while I still can’t answer, I have a few more ideas about who it might be, and it’s NOT Epoch. In fact, at this point, I would be as bold as to say that in this unpredictable climate, Epoch has the most favorable long-term outlook. But only time will tell. Heck, in the time that it took me to write this, the playing field might have changed again… Stay Flexible! ~ Stephen