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What are the Hidden Costs of e-commerce?

Does your e-commerce strategy really add up? While e-commerce is quickly becoming one of the most profitable channels for retailers there are a number of hidden costs that can easily damage your profitability unless contained. Thus to take advantage of the booming e-commerce market, merchants need to address what those hidden costs are and how they affect their business.

With minimal overheads, organisations can expand into new markets or secure new customers anywhere in the world. The introduction of the internet and more recently the widespread deployment of broadband means that with the right Customer Not Present (CNP) payment system in place a merchant can sell to almost anyone, anywhere in the world. Automation should play a key role in this, but interestingly many merchants still depend on manual CNP and reconciliation processes that are inefficient and slow. Merchants and analysts alike expect the next twelve to sixteen months to be a bumper period for online sales, particularly with the over 45 age group becoming more comfortable buying online. Deploying the correct payment system will be critical for merchants as the e-commerce market becomes even more competitive. In addition, to remain competitive in todays difficult economic times, it is vital to keep Operating Expenditure (OPEX) low and avoid tying up key resources on manual reconciliation. So what are the hidden costs and how do they affect merchants? A question CFOs need to ask themselves is Can my organisation really afford higher operating costs than our competition? The answer is clearly no. There are four key issues that can add hidden cost to an e-commerce merchant: Poor cart and sales conversion The cost of compliance Lack of CNP payment automation e.g. reporting, business intelligence etc System downtime

If internal finance departments can address these issues, their business will undoubtedly compete more successfully both domestically and in international markets. Cart and sales conversion improving revenue streams If your CNP system works perfectly it will be noted and customers will return, however if it fails chances are the customer will never return. Global online cart abandonment rates are estimated to be approximately 75%.1 This means that 75 out of 100 people adding at least one item to their shopping cart leave the website before completing checkout.

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So why is this happening? There are a number of reasons, but the ones specifically related to payments can be tied down to the following: the site might not allow the user to pay in the currency or method of payment they want to use; the final payment step might be awkward, frustrating the user; or the site might not offer the security protection the user requires. All these problems are common and should be resolved at the implementation stage of the e-commerce site, rather than when they cause damage to your organisations brand or when revenue streams are affected. Sales conversion too is a particularly big issue for merchants with a continuous authority business model, such as subscription payments, insurance renewals and monthly utility billing. A large proportion of their authorisation requests are typically declined by issuers (our experience leads us to believe that the decline rate is around 40% for these merchants). High authorisation declines lead to high back-office costs being incurred in the recovery of funds (e.g. attempting to call the customer to verify card details). Merchants need business intelligence on these declines to ensure that they can recover as many transactions as possible. Chase Paymentech delivers this intelligence, providing merchants with in-depth authorisation codes and clarifying specifically what declines can be re-tried. From our experience this functionality can allow merchants to successfully authorise an additional 35% of declines received. The mandatory 3D Secure flow process that merchants have to use on every Maestro transaction is another challenge that Chase Paymentech is addressing with an innovative solution. Recognising that it added another step in the checkout flow, many merchants were unhappy at the introduction of the process, seeing it as a barrier to cart conversion. Chase Paymentech resolved this by working with MasterCard on the development of a process enabling the customer to go through 3D Secure just once. All subsequent purchases miss this step because the initial stage registers them on the Maestro Advanced Registration Program (MARP) via Chase Paymentech. Another Chase Paymentech service that smoothes the checkout flow is Account Updater, which automatically keeps payment card details up-to-date. Account Updater provides merchants with the updated Visa and MasterCard cardholder account information when issuing banks make changes to the card data. This results in a seamless end customer experience for recurring payments as well as for merchants who retain card data on file. This system ensures that merchants reduce the number of expired cards on stored customer profiles and is a real value-add in the drive to improve cart conversion rates. Storing customer data also helps improve checkout conversion rates, especially if a merchant has a large loyal customer base. For many retailers, however, there is a downside to holding data in that the cost of putting in place a payment system that ensures PCI DSS compliance is often deemed prohibitive an issue partially resolved by tokenisation (see below). The cost of compliance the need for tokenisation After addressing poor customer experience in the checkout flow, security compliance is the next issue merchants must get to grips with from a hidden cost perspective. Non compliance with PCI DSS standards can result in financial penalties imposed by the card associations. Merchants recognise that extra security measures slow the checkout flow. However tokenisation helps with this. How? Rather than adding additional steps into the payment process that affect cart conversion figures (such as authentication checks, which require consumers to enter card information), tokenisation instead stores credit card details in the CNP providers system and generates a token. This makes data theft extremely difficult and can assist in your PCI DSS compliance. By deploying a tokenisation solution you avoid the need to store the customer card details on your own payments system. Chase Paymentech estimates that its tokenisation solution takes away 90% of the PCI DSS work, making it a cost effective solution for merchants looking to comply with PCI DSS yet concerned about the OPEX.

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CNP payment automation The next step in the journey to overcoming hidden costs is to address the efficiency of the actual CNP process. Does your business know how data from CNP sales is processed? Its a good place to start. For instance, by automating the process you can save time and money. However, most merchants still rely on manual CNP payment processing. In fact, market research, commissioned by Chase Paymentech in early 2010 found that 68% of financial directors have CNP systems requiring staff to process and reconcile CNP data manually, putting a huge strain on finance departments.2 Incredibly this figure rises to 92% if a merchant trades internationally. For many merchants (42%) the manual process included all the data relating to chargebacks, decline rates, fraud rates and when they will be funded. Only 25% of merchants had a completely automated reporting system.2

Merchants must avoid tying up resources on payment reconciliation or manual data processing. Chase Paymentech offers easy to use web-based reporting systems that leverage powerful data processing tools. This means that you release valuable resources from reconciling and reporting to focus on more strategic projects. By reducing the processing cost of each transaction you can significantly reduce your OPEX while improving revenue streams. The time involved in having to manually process and reconcile CNP data is staggering. The average number of man-days per month involved in CNP payment reconciliation is 2.14 (27.8 days a year). In fact the waste could be even greater. 21% of financial directors are unable to calculate how much time is spent by their company carrying out manual work associated with CNP payment reconciliation. One aspect that is universally recognised is the negative effect that additional manual processing has on the efficiency of a finance department especially for larger merchants. Apart from having a detrimental impact on cash flow it can become a major burden as CNP sales increase, particularly when a company is expanding internationally. These findings suggest that, even if such hidden costs are low initially, as sales grow the hidden costs spiral in parallel, eating directly into your profit margin.2 A lack of automation also has the potential to thwart international trading objectives whether they are to expand existing global strategies or enter overseas markets for the first time. The hidden cost of international e-commerce expansion is often the result of an inability to trade in multi-currencies or to efficiently handle CNP purchases across borders. Without these capabilities merchants fail to achieve the anticipated revenue from international markets. Chase Paymentech offers customers a single source solution for international payments, allowing you to trade in multiple countries. The single source platform provides the products, solutions and reporting tools you need to successfully trade in multiple markets and provides consistency of reporting (including 55 web-based reports offering fully integrated Delimited File Reporting (DLR)), reducing your back office costs.

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What are the implications of downtime? Reliability is key to a successful e-commerce business. An unreliable CNP system causes problems for a merchant on three fronts by: Eroding the customer opinion of the merchant Increasing OPEX spent managing frailties Reducing merchant revenue With so much at stake it is surprising that downtime is commonplace among e-commerce merchants. 59% of the merchants interviewed admitted to having CNP payment downtime, which on average costs merchants at least three full days of trading time each year.2 With downtime regarded as a significant threat it is notable that 36% of merchants could not even calculate how much downtime a month their CNP payment system experienced.2 This is surprising when in the same survey 81% of large merchants and 68% of merchants with daily CNP sales of over a thousand pounds stated that they regarded downtime as a significant issue for their organisation to overcome. According to research conducted by Dynamic Markets, one reason for downtime can be a poorly structured CNP system. Almost eight out of ten (79%) financial directors thought that their CNP payment capability had developed in a less than ideal way; this figure is even higher for those in large companies (94%).2 So why is this? Traditionally many merchants have grown their payment systems in an ad-hoc and piecemeal fashion, leading to difficulties in predicting or managing their CNP payments. 41% stated that their CNP capability started simply as a low-priority or additional function within the finance department but grew to become critical.2 For financial directors in companies that have grown through mergers and acquisitions, unsurprisingly 86% thought that their CNP process was fragmented and would benefit from CNP automation to help effectively process collected data.2 As well as putting a strain on a merchants financial personnel, downtime can have a direct impact on revenue streams, with key IT personnel being deployed from strategic projects to tackle the issue and customers likely to turn to more reliable competitors. In the UK planned outages are accepted practice for system upgrades and the figure in the Dynamic Markets research includes the downtime stemming from planned outages. Whether planned or not, however, any downtime equates to loss of trading time. Thats why Chase Paymentechs technology is such a huge business asset. Overcoming the hidden costs Fully understanding current and future system demands is another step in overcoming your hidden costs. Merchants should always work with a payment provider to audit and review any existing systems and then consider what users will require in the future. Below are two examples of the impact of downtime; one from a card issuer point of view and another from a merchant: Earlier this year online bank Egg had a problem with its payments process, whereby NatWest Visa Debit cards were flagged as not legitimate. This meant that for over two months Egg customers were unable to make payments to their Egg credit cards3 In the airline industry Ryanair undertook updates to its bookings system to cope with an increase in customer booking during busy periods. The update required a two-day website closure and caused problems with bookings. Although the new system offered critical scalability and booking management for its customers, the company suffered negative press and lost two days revenue during its busy summer months4

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Deploying a Hidden Cost Model to Deliver Merchant Benefits To address these needs, Chase Paymentech has created a specialised value add model that highlights where savings can be made in relation to hidden costs. For example the value add model can highlight how to: Lower complexities for the back office Reduce the time spent handling payments Increase consumer satisfaction and revenue levels The following three merchant examples and accompanying figures highlight how merchants can identify the hidden costs. They also show how these costs can be countered by working with Chase Paymentech and the potential increased revenue that could be achieved. We have taken a baseline figure for annual transactions and revenue as follows: Number of transactions processed in one year: 1,000,000 Value of transactions processed in one year: 25,000,000 The Chase Paymentech value add model can be readily adapted to reflect your transaction level. Heres how we achieve this Merchant A: This Merchant has a recurring business model whereby a continuous authority is in place to bill customers as and when required. Key issues are: 35% authorisation decline rate 0.30% chargeback rate As the table below shows, using the Chase Paymentech solution Merchant A achieved a Total Added Value of 130,926 via: +0.19% additional revenue while reducing operational costs by 39.95% Additional Revenue In Depth Auth Codes Dynamic Soft Descriptors Online Chargeback Management Automated Chargeback Reversal Logic Paymentech Online Delimited File Reports Account Updater Consistent Reliable Uptime PCI - Tokenisation Total 22,509 538 8,496 Decreased Costs 23,558 534 9,615 1,125 Total Added Value 46,067 1,072 9,615 9,621 8,000 7,500

8,000 7,500

11,250 5,600 -

32,051 150 -

43,301 5,750 -

48,393

82,533

130,926

Of particular benefit in the recurring merchant model are the following Chase Paymentech services: Account Updater: this provides merchants with updated Visa and MasterCard cardholder account information when issuing banks make changes to the card data. This is provided directly through Chase Paymentech In-depth Authorisation: a series of response codes allows the merchant to re-submit an authorisation request for specific declines keeping the customer at the checkout

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Merchant B This Merchant has concerns around PCI DSS compliance and operates an Account on File model. No major issues are highlighted outside of the PCI DSS costs incurred to store card details on file. As the table below shows, using the Chase Paymentech solution Merchant B achieved a Total Added Value of 152,764 via: +0.12% additional revenue while reducing operational costs by 48.58% Additional Revenue In Depth Auth Codes Dynamic Soft Descriptors Online Chargeback Management Automated Chargeback Reversal Logic Paymentech Online Delimited File Reports Account Updater Consistent Reliable Uptime PCI - Tokenisation Total 15 538 Decreased Costs 224 534 9,615 1,125 Total Added Value 239 1,072 9,615 9,621 8,000 7,500 9,093

8,496 -

8,000 7,500 6,731 524

2,363 19,600 -

20,124 87,500 152,764

87,500 121,753

31,011

Of particular benefit in the Account on File model for a merchant with PCI DSS concerns are the following Chase Paymentech services: PCI Tokenisation: the customers contact information, credit card or payment account information and a unique token number are electronically provided to Chase Paymentech so that merchants do not need to store the credit card details in their own systems Account Updater: in this case the merchant will see also an increased checkout conversion due to the fact that cardholders will not need to manually update their card details on file, as Chase Paymentech will update card data directly with Visa and MasterCard and keep up to date card data on the Chase Paymentech secure servers. New expiry dates as well as the last 4 digits of the new card will be communicated to the merchant through specific reports, while full pan numbers will always be sitting on the Chase Paymentech secure servers. Merchants will still be able to use the same tokens to request Chase Paymentech to bill their customers.

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Merchant C This Merchant is suffering from exceptive operational costs, such as high chargeback rates and reconciliation issues. Key issues are: 0.85% chargeback rate A high amount of time spent at the end of each day and month to reconcile their bank accounts against their reported activity As the table below shows, using the Chase Paymentech solution Merchant C achieved a Total Added Value of 184,206 via: +0.18% additional revenue while reducing operational costs by 40.40% Additional Revenue In Depth Auth Codes Dynamic Soft Descriptors Online Chargeback Management Automated Chargeback Reversal Logic Paymentech Online Delimited File Reports Account Updater Consistent Reliable Uptime PCI - Tokenisation Total 545 Decreased Costs 534 Total Added Value 1,079

27,244 3,188

27,244 27,260 12,000 9,000 -

24,072 -

12,000 9,000 524

19,600 -

20,124 87,500 184,206

87,500 139,989

44,217

Of particular benefit for a merchant with high operational costs are the following Chase Paymentech services: Online Chargeback Management: our technologies combat consumer-initiated chargebacks and fraud from authorisation through to billing Delimited File Reporting: provides either summary or detailed information on Chase Paymentechs activity on behalf of the merchant Paymentech Online: provides advanced web-based access to merchant transaction data, robust web-based reporting and an online chargeback management interface Each of the above three examples demonstrate the bottom line benefits for taking a closer look at the hidden costs of e-commerce and re-evaluating your CNP payment processing strategy. The next question is how do you choose the right partner to work with?

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Reducing hidden costs Ignoring the hidden costs of e-commerce means that you risk getting left behind as competitors lower their OPEX, improve the service they offer customers and move successfully into profitable international markets all at your expense. Chase Paymentech can help. We already work with some of the worlds largest e-commerce merchants to address the issues discussed in this report and are ideally placed to help you scale up to address new opportunities. Over 200,000 merchants already rely on the Chase Paymentech solution, which in 2009 processed over 50% of global Visa and MasterCard e-commerce transactions. With e-commerce growing globally and international markets offering profitable revenue streams, the question is not whether to address the hidden costs but how quickly? Choosing a partner What should you look for when choosing a CNP partner? You should consider whether they understand the challenges you face in your particular business sector and if they can offer consultation to optimise the effectiveness of your processing, locally and via international currencies. One of the key decisions you have to take is whether to deploy a single source solution for all your needs or to turn to multiple vendors. It is often the case that as merchants realise the potential of the e-commerce markets theyre operating in they sign up new bespoke payment acquirers, or PSPs, to fulfil a customer need or support a new vertical or region. This is an expensive strategy that can cause running costs to soar and add huge pressure on internal payment processes. By deploying a single solution you can avoid these pitfalls and have the confidence that your CNP system will support you in the future. Does your prospective partner have this single source solution capability? How Chase Paymentech can help Chase Paymentech fits the partner criteria at every level. Led by a team of former merchants we are a strong merchant advocate, regularly advising on best practices, policy and payment operations. We figure out how we can use our strong relationships with the card associations for dispute management, issue resolution and to influence card scheme rules and regulations. We help merchants manage risk through our services including fraud filters and managed billing for PCI DSS compliance. We understand how payments improve cart conversion and enable revenue growth. Thats why we ensure that we take care of the basics with our technology enabling us to meet your expectation of being paid on time, every time and without error its a basic requirement. We can then turn our focus on giving you the technology, analysis and cost-saving recommendations you need to successfully grow your e-commerce business. The flexible Chase Paymentech CNP payment offering can be set up to map to your individual business model, rather than the other way around as often happens when a solution is developed in a piecemeal fashion through multiple providers. Our offering can also provide you with a range of savings, from the ability to prevent and manage chargebacks through automation (reducing processing costs) to improving checkout conversions rates through the use of additional authorisation codes. You also receive peace of mind that downtime is a thing of the past.

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About Chase Paymentech Chase Paymentech is a global leader in payment processing and merchant acquiring and is a specialist in CNP transactions, capable of authorising transactions in more than 130 currencies. The companys proprietary platforms provide access to a wide variety of payment methods including credit and debit cards. In 2009, Chase Paymentech processed more than 18.0 billion transactions with a value exceeding $409.7 billion, including an estimated half of all global e-commerce Visa and MasterCard transactions. The company also provides a full set of solutions aimed at accelerating cash flow and managing transaction data. Chase Paymentechs unique combination of outstanding service, innovative solutions and financial strength offers solid benefits to companies both large and small. Chase Paymentech Europe Limited, trading as Chase Paymentech, is a subsidiary of JPMorgan Chase Bank, N.A. (JPMC) and is regulated by the Financial Regulator. More information can be found at www.chasepaymentech.co.uk

References:
1 2 3 4

Core Metrics (US), 2008 Dynamic Markets, CNP Payment Progress Declined?, April 2010 BBC, Database glitches affect payments to Egg, 27th January 2010 ComputerWorld UK, Ryanair systems upgrade vital, despite teething problems, July 2008

Disclaimer Some information used in this report has been obtained from third parties, including research providers, believed to be reliable but Chase Paymentech or its affiliates do not warrant its completeness or accuracy. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any Chase Paymentech products. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular products or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any products mentioned herein. Chase Paymentech Europe Limited, trading as Chase Paymentech is regulated by the Financial Regulator. Registered Office: Block K, East Point Business Park, Dublin 3, Ireland. Registered in Ireland. Registration No. 474128. Directors: Shane Fitzpatrick, Kevin Moran, Michael P. Duffy (US). 2010, Chase Paymentech Europe Limited. All rights reserved. This document and the information provided herein may not be copied, published, or used, in whole or in part, for any purpose other than expressly authorised by Chase Paymentech Europe Limited.