If you’re an online merchant, you may be all too familiar with this drill.
A shopper finds you online, finds a product to buy, fills their cart and hits the checkout button.
Maybe the card has expired. Or maybe it’s maxed out the credit limit. If it’s a debit card, bank account or prepaid card, maybe there aren’t enough funds available for the purchase. Maybe the issuer has flagged something suspicious — or at least unusual — about the transaction.
Regardless, there is no sale.
In an interview with Karen Webster, Jim Magats, senior vice president of omni payments at PayPal, said merchants are now keenly dialed into the fact that better authorization rates can have a positive ripple effect across commerce platforms.
COVID and Conversions
The rise of card-not-present (CNP) transactions in the age of the coronavirus, said Magats, can be likened to India’s demonetization efforts that began in 2016 to rid the country of cash. This time, however, the global pandemic has put the physical world on lockdown and moved commerce onto a mobile phone — as Magats put it, “all on the same day.”
That has of course been a boon to PayPal, which has seen sharp growth and a host of new consumers, along with older individuals who may be returning to the fold after some time away and are leveraging PayPal to order home delivery of goods such as groceries. The company said that for the first quarter, it added 10 million net new accounts, and in April saw 7.4 million net new adds, up over 140 percent from January and February.
“We have a really strong addition of our net new users that are 50-plus,” said Magats.
Against that backdrop of so many new users, all showing up online to do business, authorization rates must be top of mind for a merchant, since it could add 200 basis points or more to their online conversions.
“[A merchant] goes through the trouble of getting a customer onto their sites. They get them through to pick something and go to the shopping cart to check out. Then the payment gets declined,” Magats said.
Adding insult to injury, perhaps, he noted that if a consumer’s funding instrument is declined for whatever reason, she may tend not to use it again for the next three to four months (and issuers are getting more restrictive). That translates to a high correlation between the ability to check out using that payment method and the incentive to continue to use it for all purchases.
The Auth Rate Hat Trick
Welcome, then, to a world that has dramatically shifted to digital, where the key tenets of payments, according to Magats, boil down to scalability, cost and approval rates. Increasing each of those by even a percentage point or two can yield dramatic revenue growth.
“Think of it this way,” Magats said, where for every 100 transactions, two more get approved. For a merchant or issuer of size, that translates to millions of incremental transactions (and tens or even hundreds of millions of dollars in sales) that are approved.
That incremental value can be realized by a simple tactic like having a “contingency” funding source to authorize the transaction — where backups to a declined card are chosen automatically to increase the probability that a transaction goes through. Beyond the declines that happen because of “stale” funding instruments, Magats said that PayPal’s artificial intelligence (AI) and machine learning (ML) tools can within three tries predict which are likely to do so, right down to card numbers and expiration dates.
“We’ve gotten really good in the case of saying, ‘Your card is about to expire.’ We can then message you, ‘Hey, do you want to add this card back?’ And so we can almost predict what that is,” he said.
Data and Issuers
Yet, he cautioned, there’s no silver bullet, but rather “a series of lead bullets where you have to throw all of them across an ecosystem” in order to address authorization rates on a more holistic basis. Magats pointed to PayPal’s issuer partnerships and role as a two-sided network in fine-tuning its risk management capabilities, which can help to better inform issuers’ decisions to approve or deny a transaction. He said that PayPal, over the course of its 20 years serving consumers and merchants online, has seen most online shoppers – and merchants.
“Right now, with COVID, what is interesting is that there is a surge of new users on our platform, including someone who perhaps hasn’t shopped online before,” said Magats.
That shopper and his transactions may look fraudulent to an issuer, but with PayPal’s data, it could be determined that the individual shopper bought from eBay years ago, or maybe had used PayPal. A signal can then be sent to the issuer that this is a good transaction (or alternatively, where people might be buying PPE masks in China, that this is a “good” merchant and a legitimate purchase by a consumer).
Auth Rates and Tokenization
Another tool in the armament that PayPal is leveraging to increase authorization rates includes tokenization — by now well-known as a method of replacing card data with unique identifiers.
“We’ve seen, on average, up to 50-plus basis points of improvement of approval rates by using a token over a non-token transaction,” said Magats, who added that PayPal has hundreds of millions of cards on file, which it sends to networks like Visa and Mastercard in order to receive a tokenized PAN that sits within PayPal’s vaults. Done in mass quantities, it is a process where cards are loaded to the vault all at once instead of one-by-one, which is known as bulk tokenization. That process helps protect PANS across all types of transactions — mobile payments, mobile devices, in-store settings or online, browser-based and secure remote commerce. But as Magats said, it will take time to gain critical mass.
“As more issuers come on board, [tokenization] will become more effective, but there’s still a coverage gap in terms of certain card types, even within certain issuers or certain geographies,” he noted.
Tokenization, “contingency” payment methods and advanced payment methods are but some of the arrows in the quiver that PayPal is using to improve “auth rates.”
PayPal, he told Webster, has set its sights on becoming a “method of acceptance.”
Other initiatives include what Magats likened to a “VIP” transaction, where if a longtime PayPal user sees a decline, “We want to be able to say to you, ‘We’re going to approve that transaction, and we’ll figure it out thereafter,’” he said. It’s akin to running up a tab that ultimately gets settled. PayPal essentially “stands in” if there is a problem outside of their network, such as connectivity issues with payment partners. In that case, PayPal will risk-score a transaction for, say, $50, approve it and then go over the details with the customer.
“So we’re continuing to make those macro changes and improvements,” he told Webster. “The focus for us now is to take those capabilities and embed them into Braintree and what we consider our own branded solutions. It’s something we are making great progress toward.”
As he noted, better online experiences and authorization rates — and more payment choices — “continue to resonate with our customers and around the globe.”