February 2010 – Feature: Payment Processing: How Do You Choose the Right Partner?

You Can’t Do Direct Response Without a Payment By Jack Gordon Processing Company. And No, They Aren’t All Alike.

By Jack Gordon

Forgive us if you already know this, but if you want to transact business via a website or over the phone–if you’re a direct response marketer, in other words–you need a way for customers to pay for your goods. In addition to a merchant account that allows you to accept credit and debit cards, you need a portal through which to enter the card number, a way to determine that the card is valid and a way to have the money transferred to your account after the sale.

That’s where a payment processing company comes into the picture. Payment processing is “obscure and not talked about much,” but it is a critical element in DR marketing, says Hal Altman, co-founder and president of Motivational Fulfillment and Logistics, a Chino, Calif., fulfillment house. “If you picture DR marketing as a wheel, payment processing is one of the spokes,” he says. “If you can’t process the money, you can’t get paid for what you’re selling.”

Because he handles fulfillment for many marketers, Altman deals with a number of payment processing companies–maybe 20 of them, he says. They are not all created equal. He warns it is a grave mistake to treat processing as a commodity, assuming that everyone in the business does the same thing in the same way, with the only criterion for choosing a partner being their rates and fees.

For instance, Altman says, not all processing companies handle all four major credit cards–Visa, Master Card, American Express and Discover. Some won’t allow debit cards to be used in continuity programs. Some are simpler than others to begin doing business with, due to the varying complexity of their APIs, or Application Program Interfaces, the software that connects their technology to a call center or a website.

“We judge a payment service on how easy it is to set up business with them, how quickly we can process files with them and how easy it is to settle up at the end of the day,” Altman says. “I can’t process orders until I get authorizations back. Some small [processing] operators don’t have the technical sophistication. It doesn’t work out.”

For instance, he says, if you expect to do high-volume transactions, perhaps on the scale of 10,000 orders a day, you need a partner who can handle that kind of volume. “If it takes the company five hours to process 500 orders, that’s not enough capacity.”

Selecting a payment processing partner is complicated by several peculiarities of the DR business, beginning with the fact that DR marketers conduct “card not present” transactions. That is, unlike brick-and-mortar merchants, they don’t watch the customer swipe a physical card and then walk away with the product in hand.

According to processing companies that specialize in card-not-present transactions, DR is indeed a peculiar animal. Credit card fraud is more likely when the card thief doesn’t have to appear in a store in person. Chargeback rates can be higher for several reasons. And “partners,” they say, is the right word to describe the relationship that ought to exist between a DR marketer and a payment processor.

DO THEY KNOW DR?
One such card-not-present specialist is Litle & Co. of Lowell, Mass. Chris Reinmuth, Litle’s direct response market leader, urges DR marketers to check out several services when shopping for a processing partner. “Get under the hood and see how they work.”

Compliance with the Payment Card Industry Data Security Standard (PCI DSS) is almost a given, since it is required of all companies that process, store or transmit credit card information, but verify anyway that the processor is PCI-compliant, Reinmuth advises. Then ask questions based on the current and anticipated needs of your business: What kind of volume can it accommodate? How does it handle international transactions? Can it deal in foreign currencies? How will it report information to you, and what type of information will you receive? How does it handle chargebacks?

Above all, he says, voicing the number-one criteria recommended by every expert interviewed for this story, “look for a processor that really understands the DR market. Leaders in direct response will tell you that [processing] is not a commodity play.”

The importance of choosing a processor with DR experience cannot be overstated, says Michael Phelan, president of TransFirst ePayment Services of Hauppauge, N.Y. “Too often, a new DR marketer will go to a local bank and be referred to a service provider who just doesn’t get the DR industry,” he says.

Investigate not just the processor’s experience but its commitment to the DR space, Phelan adds. Some “major players in this space,” under pressure from their sponsor banks, “are getting away from DRTV because it’s seen as a higher-risk business.”

While you’re at it, check out the financial stability of the processing company and its sponsor bank. The processor certainly will check out yours, Phelan says, because if it accepts your business it essentially underwrites your risk–and becomes an unsecured creditor if your business fails.

DO THEY KNOW YOU?
While you’re asking questions, “the processor should be asking you questions, trying to understand your particular business,” says Jim Raftice, chief operating officer of PowerPay of Portland, Maine. DR marketers new to the game are sometimes reluctant to share business information because “you hear in this industry that processors are people you need to be wary of. Since we underwrite the merchant’s risk, our risk monitoring system protects us. But it protects the merchant’s risk, too. If they trust us to the point where we can help them, that’s good.”

Trust leads to communication, Raftice says, and communication with the processor has many benefits. For instance, a DR marketer “can call our risk department to say, ‘Hey, our call center went down for a day, so there will be a spike in chargebacks.’ If we know that will happen, we don’t have to put the account in reserve (i.e., hold back money while the processor tries to determine what’s wrong).”

That points to a key advantage of processing companies that understand the DR industry. As Trent Voight, CEO of Carrollton, Texas-based JetPay, puts it, “We have risk managers who understand it, too.”

To a risk manager at an average processing company, many DR accounts look bizarre and frightening. As a rather extreme example, take e-commerce vendor Woot.com. “Woot sells one thing a day,” Voight says, “and it might be a $20 item or a $3,000 item. An ordinary risk manager would look at that account, see ‘card not present,’ and his head would pop off,” Voight says. “He’d hold back all the money and wait to figure it out later.”

It is critical for such a merchant that the processor’s risk managers should recognize and understand the account, Voight says. “You need someone who can say, ‘No, that’s Woot, that’s fine.’”

This circles back to the issue of communication. Customer service should be a critical criterion in a DR marketer’s selection of a payment processor, says Rosanne Day, managing director of PacNet Services of Vancouver, British Columbia, which specializes in international card-not-present processing. By service, she says, “I mean things as simple as: Can you get someone on the phone to help you with a problem?”

When processing problems arise, they typically are time-sensitive, Day says: Credit cards are being denied for mysterious reasons; you have a potentially fraudulent transaction; a settlement has gone missing. When these things happen, you will want to reach someone at the processing company pronto. “But we hear from marketers that the quality of service varies widely among processing companies,” she says.

WILL THEY HELP YOU?
Day and other processing experts mention a number of topics to dig into when selecting a processing partner, depending on your current needs and future plans: What kinds of fraud-screening tools can the processor offer? Can it handle all of the marketing channels you use–website, call center, direct mail? Does it offer a virtual terminal for call-center agents to use? Does it do batch processing? Does if offer a hosted payments page to take the burden of PCI compliance off of you when you sell via the web? Does it use its own technology platform to communicate with credit-card issuers or go through a third-party “gateway”? What can it do to help you reduce chargebacks?

The answer to that last question ought to be, “plenty,” these experts say. “A processor should not just tell you, ‘You have a chargeback problem, you need to fix it,’” says Litle’s Reinmuth, voicing a common theme. “We look at our customer’s website, shipping information, box labels–everything. If you have chargeback problems, we can help.”

Does that sound like the kind of useful information you get from your current payment processor? If not, you might want to shop around.

Jack Gordon is a freelance writer for Electronic Retailer.