Results: PayPal as a primary payment providerIt’s now been just over 6 months since I made PayPal the primary payment method on my ecommerce sites in an effort to reduce losses to fraud (see Will 53% of customers switch to PayPal and Betting on Igor). It takes a long time to see the effects of something like this, since chargebacks tend to occur weeks or months after the fraudulent transaction takes place. That was part of the problem — by the time someone realizes their credit card was used by someone else, the service has already been rendered, so the loss is not just the original payment but also the costs of the service sold. I’ve now been able to take a closer look at the long term effects of sending all new customers to PayPal rather than accepting credit cards directly. There are a few metrics that were easy to compare: sales volume and number of chargebacks received. Unfortunately, my initial analysis didn’t hold up to the long term: conversion rate did drop slightly when the option to pay by credit card directly was taken away. Sales in the 4th quarter of the year were lower than the 2nd and 3rd even though December is usually the strongest month. The drop was not drastic, however, at about 7%. Even then, every month of 2007 had significantly higher sales volume than 2006, so I’m in good shape aside from the fraud issues. In terms of raw number of chargebacks, the switch was successful. In the first six months of the year, I received 94 chargebacks with fraud-related reason codes, while only 34 came in the six months following the switch over. There were more than 5,000 payments during that period, so the chargeback rate fell quite drastically and is now below 1% as it should be. In reality, the analysis is more complex, as PayPal uses a number of different ways to handle fraud in their system before chargebacks occur. The fraud rate did not actually drop significantly, it just changed in nature. There were over 100 transaction investigations conducted by PayPal in 2007, and 70 unauthorized payment claims. This is when a payment is held and the balance removed from the receiver’s account until PayPal completes a review of the transaction. These are a new source of work for me, as I have to deal with several per week. The funds aren’t available until I respond to the investigation through my account with information about the order associated with the payment and any communication with the payer. If things check out, the payment is released to me, and if PayPal believes there’s a risk issue or the payment is unauthorized, it’s reversed to the sender’s account. It would seem from this that those who perpetrate payment fraud, using both stolen credit cards and PayPal accounts, are not at all intimidated by being sent to PayPal for payment, and are just as willing to test their cards there as directly on a smaller site like my own. The benefit to me, though, is that these investigations PayPal launches most often begin within hours of the payments arriving. With this, I can put a hold on the order until the investigation is completed. If the payment is reversed, I don’t pay any chargeback fee, and I even regain the payment fees on the original transaction. Compared to chargebacks, where even if I somehow had yet to provide service, I lose the processing fees, a chargeback fee, and have my chargeback ratio increase, the investigations are worth the extra work. I also have the added benefit of once again qualifying for the 2.2% merchant rate at PayPal for processing $10,000-$100,000 per month every month. I was just under that limit when it was increased before making it the primary payment provider. Because I’m losing the full cost of providing service to fraudulent orders less often, profits have actually increased despite the slight drop in sales volume. In the end, sending new customers to PayPal for payment was the right decision for my situation.
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February 18th, 2008
Great writeup and analysis Dan. I think that deciding not to use credit cards was a bold move. I do also think making the switch to PayPal depends on the situation- obviously. With your service it is a consumable product, so you are out of luck on many fronts with fraudulent charges. With Clever Tools, since it is a service, we don’t really loose out on providing the service. I also think it may be a mistake for us since we will be dealing with many small businesses. But, it is something to think about. Chargebacks suck and really can suck the life out of your company if you are not careful.
Didn’t you at one time employ some sort of Maxmind security measures? A large hosting company I used to work for, used to have tons of issues with fraud. This especially sucked when it cam to domain name because, like you having to buy traffic, they had to buy the domain. Well, they wrote a custom script off Maxmind and it eliminated so much fraud via credit cards.
February 18th, 2008
The credit card transactions were going through all kinds of fraud scrubbing, including MaxMind’s minFraud. They also went through Authnet’s “Fraud Detection Suite” and CDG Commerce’s “Fraud Defense System” before a final run through my own code — checking against past bad accounts on all kinds of factors. There are too many transactions that don’t show any “signs” of being unauthorized… a good credit card ordering advertising for an established website from an IP address matching the billing address… there’s not much to pick up on with any scoring methodology.
As far as services like CleverTools, you’re right, it’s unlikely you’ll see a fraud problem like my advertising sites do and to serve businesses you need to take credit cards (and checks/purchase orders, often). W3Counter, for example, still takes credit cards and has never received a chargeback.
February 19th, 2008
Actually, Pay Pal has a way for customers to pay with a credit card without signing up for, or logging into their Pay Pal account.
Customers should have this option when taken to the first Pay Pal payments page. But, be sure and document that you have delivered your product to the customer, otherwise Pay Pal will charge you back if the customer complains.
February 19th, 2008
I have just launched my first ecommerce site so I will be watching this closely. We currently have google checkout installed but will probably use paypal too.
good post
February 19th, 2008
I used Paypal and Paypal Web Payments Pro about a year ago for 6 months as the only payment processing system. The web payments pro allowed us to give someone the option of checkout out with credit card but kept it all in Paypal so it could be managed in one place. Our fraud rate hovered around 1% and was a hassle because Paypal screwed us in almost every single issue. We couldn’t represent ourselves to the credit card and Paypal ignored and never presented the information. On almost each occasion we ended up being an insurer for Paypal so that they didn’t have to spend the time and energy to defend themselves… even when it was a confirmed address.
Since then, we moved to linkpoint and worked on the verification system. We now perform our own authorizations and force the customer to enter the correct Address, zip, cvv, expiration and check the card value. The customer cannot proceed if their billing information is invalid.
Since this seemingly simple change our rate has dropped to 0.1% and we are able to defend ourselves with the credit card companies such that we are generally happy with the outcome. Our problems with Paypal were never justified as we always had direct verification that the product arrived at the correct address with direct signatures.
In any case, my point is that going TO Paypal for the purpose of fraud reduction seems a little odd to me as my highest rates of fraud still occur with my Paypal customers and my lowest rates are with my credit card customers and corporate/education purchase order customers who we perform credit checks on. However, if it works for you that is great!
March 24th, 2008
I have been using PayPal for five years and have processed all online transactions with them for over a year now. It was interesting to hear your experience as I am on the fence with them right now. Aside from the terrible support I have received, one disadvantage for me is the lack of involvement with the chargeback process. Not being able to deal directly with the chargeback response process, I’m left feeling like PayPal is lackluster in defending legitimate charges.