If conversion is among the most important things to a merchant, and a frictionless experience is the most important thing to a consumer, the twain do not meet as well as they should.
Consider the fact that decline rates are at eye-popping levels. Here’s one example: According to the Aite Group, one global Fortune 500 company estimated that bank decline rates stand between 20 percent and 30 percent, and to shave even 1 percent off that tally “would save this firm as much as $100 million in annual revenues.”
Legacy systems — the formerly tried-and-true ways of doing business — tied to eCommerce aren’t cutting it anymore. Aite said the fraud controls at both merchants and issuers that do not leverage the rich consumer data at hand can result in eCommerce decline rates as high as 20 percent. Conversion is paramount then, and can get a boost when merchants offer a relatively wider range of payment methods and currencies to customers, while seeking to stanch decline rates.
To do that, with each method brought on board, merchants must tailor their fraud efforts and how they approach the customer experience in general. At present, merchants manage payment costs as a key performance indicator (KPI), stated Aite. They should consider factors beyond cost, though, even if it means offering payment options that prove expensive, at least initially.
Time for a new model, a new way of thinking? After all, saving a sale can be worth an awful lot to a business.
Auth Shopping In A New Marketplace, Defined
In the latest Topic TBD, ModoPayments (Modo) Founder and CEO Bruce Parker told Karen Webster that the decline tsunami is a solvable problem: “We need something in our sourcing of payment services that we don’t really have today, which is more of a marketplace kind of activity or idea,” he said.
That’s because, once in a while, a given provider of card processing is not going to offer the authorizations that are desired and needed. The next processor down the street, though? Well, maybe they can offer the authorization — so guess who’s going to get the merchant’s business?
“If we have a provider [that] cannot help us right now, but there’s another one [that] can, well, we’re just going to use the other one,” he said. “That’s the thing that I think is missing now. How we get connected to payment services is a little bit too much about integration, and it is a little bit too complicated.”
When it comes to shopping for the next provider, welcome to the concept of “auth shopping,” to coin a phrase. It’s a process that is not necessarily as fluid and efficient as one might think. As it turns out, the nuts and bolts of connectivity are sticky and keep stakeholders tethered to inefficient processes.
The connection itself is no easy task, Parker noted. As an example, for a card processor, there are the activities of connecting to back-end systems and application program interfaces (APIs), and tying everything to a merchant’s systems.
“All of this is not something that people look forward to,” he said. “That’s plumbing.” Once the pipes are there, people tend to not mess with them. “The reason that it is hard today is that we really have not thought about building multiple connections,” though some of the more tech-nimble merchants and newer eCommerce players have indeed been busy adopting sophisticated payment systems. Parker named Walmart and Airbnb among them — and auth shopping is part of their new processes.
Auth shopping rendered through those players is as simple as knowing there is an authorization that needs to be done, “and how do I inform my payments stack so that I can get the best outcome?” Parker said. That outcome, of course, is one that looks for an authorization rather than a decline, appropriately adjusted for risk.
Things have reached a point where declines have gotten so bad, so quickly, that stakeholders must mull what they can do — strategically — about the problem that is now front and center, Parker explained. As it turns out, the problem is tied, in part, to technology.
A Twitchy Neural Network
The reason the declines are accelerating, Parker noted, is because the technological tools that the issuers use when it comes to authorization have been around for a long time, but are no longer as efficient as they were at one time.
“Most issuers are using a form of neural networks as a foundation of how they determine whether or not to authorize a card from a fraud perspective,” said Parker. The neural networks are made up of computer systems based on the construct of the human nervous system, and are getting a little twitchy.
All too often, cardholders with good funds backing them up see their cards declined. That’s because the neural network sees something it doesn’t like. When the decline comes back to the merchant, they get a generic descriptor. They see the decline, which says something like “do not honor,” said Parker, who noted that “when you’re talking to the call center and the person running the platform, they cannot tell you why” the card was declined.
To put it another way, the reasons are non-deterministic. “This is the original, foundational black box,” he said, “and it is good, but not good enough in the moment. And that is why we are seeing declines absolutely rocketing up.”
Modo has had conversations with merchants that have billions of transactions in annual volume, where decline rates are an upward of 30 percent. The percentage of those transactions that are tied to fraud, theft or lost cards — someone who leaves their card in the back of an Uber, for example — stands at about 2 percent to 3 percent.
Parker said the choices are to wait it out and determine that 15, 20 or 30 percent declines are fine for now, and hope they will get better, or retrain the system. One solution might lie with taking the same card data and merchant identity (ID) that had been presented to processor A and declined, and take it to processor B with a different merchant ID so that the transaction will go through.
Auth shopping, he told Webster, is an effective way to deal with the vagaries of neural networks, which he likened to a dog that has been kicked while its abuser wears a certain pair of shoes. If the dog sees the shoes, it gets scared. However, wear a different pair of shoes and all is well.
The shoes in this analogy extend to eCommerce in the form of merchant IDs, said Parker. The neural networks get a little afraid and react much like guard dogs. That reaction blocks the consumer from the payoff of transaction, after choosing an item, typing in the card data and hitting submit. The cardholder phones the bank, the bank has missed out on its own revenues “and everyone is unhappy in this scenario,” Parker explained.
Switch out the merchant ID (the shoes, in other words), and get past the dog (the neural network). The transaction goes through and everybody is happy.
Beyond Auth Shopping
Beyond auth shopping, with an eye on solving the plumbing problem, said Parker, “payment services shopping, [alternative payment method (APM)] shopping … let’s just go shopping for a whole bunch of things.”
It could be the great unbundling of payment services. The marketplace ideal, where auth shopping and payment services shopping promote a frictionless experience for the customer and validate the technology investment for providers, Parker told Webster, “is almost like sunlight — it is the best disinfectant and is the best way to get that behavior, the best outcomes … if we can democratize access to payment services. If we make it not about integrations, not about connections, not about data formats, then it becomes about, ‘Hey, I really want to try this brand-new checkout.’ And there are several out there, and they are amazing.”
For the merchants then, connectivity and interoperability are fostered through a single point of access in the marketplace model. Without worrying about plumbing, the merchants can focus on providing a range of payment options to consumers — spanning, say, Google Pay, Samsung Pay, Apple Pay, Venmo and any other number of checkout solutions. It’s the marketplace that enables innovations and efficiencies between buyers and suppliers, and ultimately benefits consumers.
“When you take plumbing out of the equation, everyone can go shopping. Merchants can go shopping for payment services, consumers can go shopping [for] the things they want from those merchants and more business gets done. It’s ‘more better,’” he said, perhaps coining another phrase.