Credit crunch for e-comm wannabes

By ELLEN MESSMER
Network World, 05/31/99

You think you're all set to sell products via the Web. Back-end systems are in order, Web developers are coding away, and marketing is ready to kick in. But have you asked your primary bank if it will process the flood of new credit card transactions?

Lots of businesses have asked, and the answer they've often received is: "No!"

It's the dirty little secret in electronic commerce today. Because the Internet is seen as riddled with fraud - experts cite everything from stolen credit cards to fly-by-night merchants - banks won't hand businesses the type of credit card bank accounts they need for e-commerce. But a host of upstarts - some with questionable operations - are stepping in to fill the gap in Internet merchant credit.

"The banks may reject merchants and not tell them the real reason why, which is that the banks are afraid of the Internet," says Gail Grant, CEO at GLG Consulting in Palo Alto, an expert in online card processing. She adds: "They don't want people to know they're afraid."

Neither Visa, MasterCard nor American Express wanted to talk about Internet credit card fraud last week. "I've been trying to get these fraud figures from them, too," says Steve Dieringer, head of the BancOne payments division called Emerging Markets for Card Acceptance.

Because online merchants sometimes take credit card numbers they get over the Internet and punch them into ICVerify terminals or point-of-sale devices, it's hard to track the fraud that actually comes from the Internet.But there is a strong sense that it's high.

Dieringer admits that until recently, BancOne was as guilty as any bank of not adequately meeting online merchants' demands for the equivalent of an Internet credit line. In March, though, BancOne struck a deal with Yahoo to take applications for online credit processing from Yahoo's e-commerce merchants, promising to approve them or not in 24 hours. About 300 have been accepted so far by BancOne.

But not all banks are as liberal as BancOne, leading merchants to seek processing alternatives. "Merchants have been turning to processors with an appetite for higher risk," Dieringer concedes.

One such tough operator is Electronic Transfer. "Visa tells us 50% of the calls with problems are from the Internet," says Curtis Cook, senior account representative at Electronic Transfer, the Spokane, Wash., firm that takes on Internet credit card processing along with other high-risk ventures. "And Visa says only 5% of all credit card processing comes from the Internet today."

Under the rules of the game, the credit card associations will shut down any merchant whose chargebacks from bad sales exceed 2 1/2%. "The local banks want the face-to-face credit card transactions that are safe," Cook notes, adding Internet merchant accounts have to be closely monitored. "Typically, you won't find the big banks wanting to do this."

Electronic Transfer, whose services come at a premium, tries to help would-be online merchants establish their own bank accounts at either Commerce Exchange Bank or Humboldt Bank.

"Washington Trust sends us customers for processing cards over the Internet, as does US Bank," Cook says.

"A lot of banks don't want the Internet credit card processing," agrees Deborah Rossi, senior vice president at Wells Fargo Bank, which seeks out this business and offers digital certificates for Web servers that prove merchants' identities. "We hear it all the time."

Dallas-based Paymentech is another gutsy alternative to queasy banks. Paymentech plays the role of the merchant bank for online companies, including America Online, Amazon.com and Land's End.

"The Internet still represents a higher-risk transaction," says Rodney Bell, Paymentech spokesman. But he adds that mail-order business 10 years ago suffered from this same perception. At that time, when local banks wouldn't, Paymentech jumped in to underwrite mail order and benefited.

Paymentech wants to do the same for online merchants, particularly mid-size to large businesses. Paymentech declines to discuss its fees, saying they vary according to customer.

It's possible you won't qualify for your own Internet line-of-credit account. Then what?

There's Internet Billing Company, Ltd., or iBill for short. In operation for three years supporting 'Net card processing, iBill has what it calls a "reseller service," through which it takes credit card purchases from a merchant's Web site and processes them through iBill's own merchant account.

Merchants that use iBill's credit card account have to sign a contract that names iBill as product reseller, and iBill has to respond to calls from online buyers about the products. The charge is 10% to 15% of sales, depending on the volume, says Keith Miller, iBill's executive vice president.

But this is "borderline legal" in terms of credit card rules, says consultant Grant. The credit card industry bases its discount fees on risk evaluations that are made according to many variables about merchants. Shoving credit card numbers through someone else's account "screws up the risk model; you can't tell what type of volume the merchant is really doing," she explains.

Miller admits that iBill probably violates some contractual agreements with the credit card associations because iBill does not ship the product. Starting in July, iBill will no longer offer this service for merchants whose products have to be packaged and shipped. But iBill will still do this type of processing for merchants with intangible wares, such as software downloads.

If merchants don't have their own bank accounts, ISP EarthLink Network actually "forces" them to get either individual credit lines or shared accounts from Card Services International, says Barry Friedman, EarthLink's director of product development.

"We guarantee the merchant a $10,000-per-month credit limit, unless he had a recent bankruptcy," he says. Another ISP, Concentric Networks, has a similar deal going with Payment Processing, Inc. for individual merchant accounts, and is considering the share-account approach.

Other problems still make credit card processing on the Internet an e-commerce headache. Although the state of Maine wasn't turned down for Internet credit card processing, the financial institution used by the state, Key Bank, won't let the state agencies transmit credit cards directly from the Web to the bank's card-processing net.

"It's apparently a security concern for them," says Richard Arbour, IS manager at Maine's Department of Conservation, which operates a Web site where the public can reserve campground space. Instead, Arbour's department has to take the credit card information via e-mail and manually process it through a point-of-sale device provided by the bank. "It's a nuisance," he says.