With billing being one of the most dynamic factors in the online ecosystem, it behooves merchants to stay abreast of the latest trends. To help out with this process, XBIZ recently asked several of the top players in adult-friendly billing about the trends and near term of online payment processing.
Harmik Gharapetian, Epoch’s vice president of sales and marketing, told XBIZ that the two biggest news stories in billing today are that online fraud is increasing as the U.S. switches to EMV chip cards, and the fallout from Visa Inc.’s purchase of Visa Europe for $23.3 billion in June of this year.
Companies need to be mindful of whom they are doing business with and how they are driving traffic to their websites. —Karen Campbell, Orbitalpay
“Before the sale, Visa Inc. and Visa Europe worked closely together but they were separate companies,” Gharapetian explains. “They each had unique rules and programs, and generally speaking, Visa Europe’s chargeback and fraud programs were more lenient than those of Visa Inc.”
“Following the purchase, Visa announced a comprehensive update to its chargeback and fraud monitoring programs designed to bring the global rules into alignment,” Gharapetian added. “Under the new rules, all merchants and processors are now held to standards that are more closely aligned to what Visa Inc. has used for the last several years.”
OrbitalPay Vice President Karen Campbell warns of the need for vigilance in keeping chargebacks at bay, and notes that an increasingly important factor moving forward will be decreasing fraudulent transactions.
“When a merchant gets hit with excessive chargebacks, the blame is always placed on a ‘bad affiliate’ or ‘bad traffic,’” Campbell says. “Companies need to be mindful of whom they are doing business with and how they are driving traffic to their websites.”
Despite these challenges, Campbell is optimistic about the future of the industry, and predicts that 2017 is going to be a great year for OrbitalPay and its parent company Global Electronic Technology.
“As we have for many years now,” Campbell concludes, “we are working tirelessly to continue delivering the best services and support to our existing customers and we look forward to the opportunity of adding new companies to our premier client list.”
Inovio’s Conal Cunningham told XBIZ that the most significant thing the company has recently seen is that the new Visa rule changes are bringing businesses back to the U.S. for processing from offshore.
“Visa recently updated their fraud and chargeback thresholds to be the same worldwide, whereas the E.U. region previously had more favorable thresholds,” Cunningham explains. “With the newly diminished benefits of offshore processing combined with the ability of U.S. banks to better maximize U.S. customer traffic, many people are getting better results and making more revenue by moving back onshore.”
Cunningham notes that merchants are starting to take advantage of card-brand-based tools for fighting fraud and improving customer retention.
“The major card brands have services available through their acquiring banks that provide a fraud score on a transaction, which can be used by merchants to decide whether or not to take a transaction,” Cunningham says. “The card brands also have services available to update card-on-file information, which enables subscription or other recurring-based merchants to increase revenue on renewals or up-sales.”
“Not all services are available to all merchants,” Cunningham adds, “so operators will need to do due diligence to find out what is available to them.”
According to Jonathan Corona, vice president of compliance for Mobius Payment Solutions, chargeback regulations are not only becoming more stringent, the rules are now being enforced closer to the letter, rather than the spirit, of the text.
“In order to help keep your merchant account open and in good standing, Mobius Payment offers a comprehensive suite of bespoke reports and services available to each of our merchants,” Corona explains. “These reports and services we offer are designed to help clients prevent chargebacks before they happen, enabling the merchant to keep more of their money while keeping the chargeback count and ratio down.”
“In addition to these reports and services, we offer connectivity and integration with more than 100 different shopping carts, enabling our merchants to customize their customer’s shopping experience and make checking out and rendering payment a breeze,” Corona adds. “We love to help our merchants stay ahead of the curve and we look forward to seeing more smiling faces in the year to come.”
Payze CEO Doug Wicks agrees that 2016 unleashed big changes for the E.U. billing community with chargeback ratios having to match the lower percentages of the U.S. market.
“This alone has triggered changes in how the mid-sized and larger clients control their direct MID’s as well as third party processing accounts,” Wicks explains. “Of course, this will continue as a major theme in 2017.”
Wicks also points to the new required chip cards that are replacing the magnetic stripe cards in the U.S. as driving brick and mortar clients with POS machines to update hardware and software as a trend that will continue through next year.
“With these changes we have also seen a direct correlation with growing fraud percentages for the online present transactions,” Wicks says. “This is, simply, a result of the chip cards being tougher to compromise, which forces the hackers into the online card not present arena.”
“Finally, government regulation and central banking has, and will continue, to put pressure on handling funds and how funds are transferred because of money laundering and terrorists activities,” Wicks adds. “This means that it will continue to be difficult for the high risk arena to secure good business banking accounts that allow for affiliate payouts.”
Epoch’s Gharapetian echoes the rise in online fraud due to the shift to EMV cards in the U.S.
“EMV technology makes it more difficult to create a counterfeit card that can be used effectively at a point of sale. Whereas a criminal could use stolen data to replicate a traditional magstripe card, it is now almost impossible to do the same with an EMV card,” Gharapetian says, noting, “Criminals have reacted by shifting their focus to online fraud, where EMV technology does not offer extra protection.”
Gharapetian cites an article in CNP Report that finds the fraud rate on card-not-present transactions in the U.S. has risen 137 percent, and says that as a result, e-commerce companies around the world have increased their focus on risk management solutions.
“It is more important than ever to work with a processor that can effectively manage risk in these challenging times,” Gharapetian told XBIZ. “Fortunately for Epoch’s clients, our risk management systems are among the most sophisticated and effective in the world. We have continually developed them over the last 20 years, and we remain ready to adapt with the ever-changing fraud challenges.”
For example, after Epoch implemented its in-house machine learning technology eight years ago, it did not rest on its laurels, rather it continued to improve, and today its machine learning tools are precisely blocking fraudulent attacks that would have been undetectable by any system in the world just a few years ago.
Gharapetian says that this type of innovation has made Epoch the go-to solution for merchants that want sophistication, security, and stability.
“The good news is that Epoch’s clients are doing well,” Gharapetian reveals. “The success of our systems continue to expand their global sales.”
Globalization is also playing a part beyond the EU.
“With today’s rising interest in the global market,” B2B Sales Manager for Webbilling.com Eva Zankel explains, “localized payment methods are on the rise, and will play an important role in the success of conversions and monetization for many businesses in Europe, and in different emerging countries.”
CCBill’s Gary Jackson tells XBIZ that among today’s billing trends, the main theme is convergence.
“As we see with the success of Apple Pay and Android Pay, the ability for the consumer to buy from any screen, from any device, anywhere, whether it be in a store, or digitally online, or from any media device becomes a priority in today’s fast economy. While we tend to focus on ourselves and the merchants, this new reality really does his turns the tables back to looking at the consumer,” Jackson, CCBill’s managing vice president of sales, explains. “Understanding that the consumer must be the focus of the website, and not only for content consumption, but must include the checkout, the approval process, their content access, fulfillment — all the way to the end of the buyer relationship.”
Jackson says that as opposed to the late 1990’s and early 2000 and the creation of the third-party payment processor, to the later accountant-driven popularity of solo merchant accounts, the needs of the market today are now bringing us back to a hybrid-version of these past processing models.
“Economic, technological, cultural and governmental changes have changed the consumer and purchase landscape so quickly, plus the business opportunities are new and on the rise again that businesses are returning to finding ways to leveraging resources and finding providers that converge service solutions allowing the business owner to focus on what they do best,” Jackson says. “They want basic control, but to leverage expertise and easy to add on options.”
Jackson cites the findings of a recent global study of payment options, which reveals that the providers that offer a global range of solutions, integrated within a full service platform, and expanding software add-ons, were divining the future.
“Serving any consumer, adjusting to regulations, managing fraud, expanding product lines — all under one focus — the consumer making the purchase,” Jackson says. “Convergence.”
Jackson also notes that another significant trend is the use of algorithms and payments expertise to maximize both sales and customer retention.
“As the online market continues to saturate, and there are more options and products and services offered to the same consumer base, the ability to retain more and maximize sales becomes an intangible process,” Jackson explains. “That’s another reason you see the move back to a next-gen, all-in-one platform payment solution with backend processing expertise to deal with banking, fraud and risk.”
“Bigger players with long history and expertise in payments are implementing expanded processing algorithms, payment trending, and predictive processes to maximize the capture of the revenue,” Jackson adds, to essentially, remove as many barriers to the sales possible — whether visible to the consumer or not.”
This focus on statistics and technology is driving top tier billers forward.
Vendo Managing Director Thierry Arrondo says that billing today is all about risk, and that the new Visa rules are changing everything. As an example, he told XBIZ about an embarrassing thing that happened to him in Amsterdam recently, revealing a personal insight on the risks of excessive card scrubbing and the impact it has on consumers.
“I’d just finished a dinner with a new partner at a nice restaurant [where] we were getting to know each other and after the third or fourth course the waiter brought the check,” Arrondo reveals. “We split the bill, and his card worked. Mine didn’t.”
Arrondo checked his balance on his bank’s mobile app, which revealed a substantial amount, none of which was helping him. He then chose to use his Amex because it always goes through.
“It’s probably happened to you, too: A risk system prevents you from making a purchase,” Arrondo says. “You go from enjoying yourself into rapid problem-solving mode. Not fun.”
One of the biggest complaints Arrondo says he hears from new partners is that their old billers were “scrubbing too hard,” stopping good transactions and preventing sales, just as when his card wasn’t accepted at the restaurant. It is a challenge complicated by the Visa rule changes and a biller’s ability to know which transactions to accept and which to block, building upon their early approach of looking for patterns in data.
“People who work on billing would look at their data and come up with ideas to identify risks, [such as] ‘It looks like people in Country X chargeback a lot,’” Arrondo says. “Programmers would query databases to find patterns [revealing] ‘Yes, it’s true that people in Country X chargeback more than average.’ They then write algorithms to identify those transactions and block them.”
Arrondo told XBIZ that billers also have risk analysts who manually review transactions looking for suspicious signs —for example, identifying an IP used to make 10 transactions with different cards in a short period of time. They could then check to see those users had opened the email with the login data.
“The goal is this: Find the smallest group with the highest percentage of bad guys,” Arrondo explains. “That sentence may not make sense the first time you read it but it’s important to understanding risk.”
Arrondo illustrates the complexities with an example of ISIS leaders hiding in hospitals.
“They’re bad guys (depending on your politics), but people in hospitals are not (regardless of your politics). So they mix themselves in with the good people and are harder to take action against,” Arrondo says. “3,000 people in a hospital. 10 of them are ISIS leaders. Are you going to blow up the hospital? Uh, no.”
Making another medical reference, Arrondo points to one of the partners at Vendo who comes from a long line of innovative doctors.
“His great grandfather invented a dye that surgeons use to identify cancerous cells during an operation. Before this dye, doctors would start cutting and they would cut out too much healthy tissue... just to be sure they had removed all of the cancer. This approach killed a lot of people on the operating table,” Arrondo says. “When they applied dye, the cancer cells would change color. The doctor could then make sure that he cut out only the cancer, leaving as much healthy tissue as possible.”
“That’s what risk is trying to do. Only cut out the cancer,” Arrondo adds. “The challenge our industry is facing now is that they are cutting too deep, and it could kill their business. They are cutting out good transactions called ‘False Positives.’”
He notes that a false positive is identifying a good transaction as risky and either blocking it or refunding, saying “you want to do that as little as possible.”
“That’s me in Amsterdam not being able to buy with my regular card and switching to Amex (not an option for our industry),” Arrondo says. “That’s the surgeon before the dye. That’s the old school biller that is doing risk like he always has in a world that has changed completely.”
Arrondo also relates the story of a friend that died of cancer a few years ago. Her doctor said we don’t understand cancer, and that once we do, we’ll be able to write a description on a single sheet of paper.
“We have lots of treatments for risk. Lots of different approaches. But we don’t really understand it well enough to write the solution on one sheet of paper. Or do we?” Arrondo says. “Perhaps we do have a way of managing it that is as inexplicable and difficult to understand as the thing itself.”
Arrondo uses the example of a large insurance company that recently spent tens of millions of dollars, hundreds of thousands of man hours and not a small amount of computing power to find a better way of evaluating risk and setting prices for their customers.
“They developed a machine learning technique that produced 20 percent better results than the next best approach. But they didn’t use it. They went with the second best solution,” Arrondo reveals. “Why? Because they wanted to be able to understand their model, and they couldn’t understand what the machine was doing. It used a kind of alien intelligence that the humans couldn’t figure out, so in a time honored tradition that would have made the Luddites proud, the humans destroyed the machine they feared, and in the process they turned their backs on a 20 percent increase that would have made them the market leader.”
The big question is “How does artificial intelligence become intelligent, and how do machines learn?”
“Just like a child. It senses its environment and tries to get what it wants. A baby wants food. It cries. It gets food. It learns that crying brings food,” Arrondo explains. “An AI is told what to want by its creators, or ‘parents.’ You could think of this as instilling values in a child such as the Golden Rule, “Do unto others as you would have them do unto you.’ That kind of thing.”
“For our risk AI we tell it we want to maximize revenue within certain constraints. It needs to produce low numbers of reversals (refunds, chargebacks, stolen card alerts, etc.) and high throughput of good transactions,” Arrondo adds. “It learns by trying different approaches. When it finds one that works it does more of it.”
Arrondo says that for more than 10 years, Vendo has been responsible for converting traffic to MindGeek sites from more than 100 countries.
“We built the best risk systems because we had to,” Arrondo says. “We went into countries that other billers blocked. Where everyone else failed, Vendo could still process transactions.”
The AI Vendo built to handle risk is actually simpler than the one it developed to deal with pricing, and only needs to identify whether there will be a chargeback or not.
“It’s a yes/no question. It’s binary,” Arrondo says. “The pricing AI, by contrast, needs to find the right price along a range of prices. For a monthly membership that could be any price between $20 and $60. Binary is much easier.”
“We want a system that is constantly learning, and random forest looks at the results of millions of different decision trees to be more flexible in dealing with the changing reality of risk,”
Arrondo reveals. “Having millions of decision trees that are built by the machine enables the AI to identify patterns that no human can spot. This is the state of the art of our risk AI today.”
Arrondo says it is very costly to build a system that goes beyond human intelligence, because of three upfront costs: You have to have gather large amounts of relevant data; you have to build teams that can work with it; and you have to create tools and access tremendous amounts of computing power.
“All of those costs can be understood upfront, before starting the project. However, there is a fourth cost that is hidden,” Arrondo says. “It is the cost of ignorance, of giving up control.”
Arrondo cites the example of the huge number of calculations our brains do when we’re driving a car and looking at oncoming traffic to decide whether or not to enter the lane.
“We measure the speed of oncoming cars, we estimate our car’s ability to accelerate, etc. We do all of this unconsciously. A self driving car also does millions of calculations before deciding to enter traffic,” Arrondo says. “We can’t explain the information we are processing fully... and neither can the AI driving the self-driving car.”
“At Vendo we don’t understand how our AI makes each decision. We can’t understand it because no one can. We design it, we feed it data and we measure results. What happens inside the servers where the AI lives is a black box, literally and figuratively,” Arrondo adds. “It’s nerve wracking. We would much rather work with a system that we can understand fully. Every other biller does. However, those systems produce inferior results. In today’s world with tighter risk restrictions we cannot afford the comfort of old ways.”
It’s a complex playing field, but one that can be mastered with the help of adult’s top billing companies.