How Connected Payments Reduce Merchant Risk

Any electronic payment comes with inherent risk: the customer might be using a fraudulent card, forgotten they’ve overspent their credit limit, or end up firing up a chargeback in an instance of friendly fraud. This is why merchants—albeit not all of them—install fraud management software to detect and siphon off fraudulent or risky transactions. Those detection systems, however, can be overzealous, or too unsophisticated to deliver a system that is properly balanced between risk and reward.

When every step of the payment process is connected, however, merchants have the best shot at a perfectly-optimized payment system.

Connected Payments are Sophisticated Payments

The simplest way to set up and execute a payment system is to contract with a full-service Payment Services Provider (PSP). These companies provide SDKs and APIs and take on pretty much every step of acquiring cardholder data, processing transactions, and moving money through the payment ecosystem. While they also provide risk management and fraud detection capabilities, those features are, in fact, based more around protecting their own business rather than the businesses of their customers: this is why horror stories of startups being unceremoniously booted from a full-service PSP are easy to find.

Due to the inherent risk of committing their whole payments infrastructure to a single third party, merchants are increasingly moving toward a connected payments system. They run an orchestration, or decisioning engine within their own infrastructure that sorts transactions, applies third-party fraud detection and risk management tools to identify the sales they do and don’t want to submit for processing, and submits the details to one of a range of PSPs.

By placing a logical layer between the purchase request of the buyer and the submission of the transaction to the payments ecosystem, merchants give themselves flexibility, as well as the confidence that their business can withstand any technical difficulties with any given payment provider.

Merchants Face Many Risks

Taking digital payments comes with a range of risks, including

• Fraudulent credit card use: a thief steals a card, or maybe a teenager uses their parent’s without permission, creating a sale that should not have happened. Beyond the cost of having to unwind the transaction, and the reputational hit that can happen by allowing the deal through, there is the high possibility of a chargeback—where the legitimate cardholder initiates a reversal through the card network rather than the merchant’s refund process
• Excessive chargebacks: card networks are very clear that going above a certain percentage of deals sent back through the chargeback process will lead to the merchant paying high fees and fines, and, eventually, being banned from taking payments anymore. The responsibility for limiting chargebacks rests entirely with the merchant.
• False declines: the flip-side of letting deals through that shouldn’t is not being able to close all the transactions that should. Especially when working with full-service PSPs, a simple fraud detection system doesn’t have a holistic view of the customer’s financial record and spending habits. Of the 10% of all transactions that are declined, over 70% are believed to be legitimate.

Any of these risks can be devastating to a merchant. Losing legitimate transactions artificially stunts the business’ growth, while letting through illegitimate transactions can increase the cost of doing business or even prevent the business from operating at all.

Connected Payment Systems Do More Than Solve Problems

Creating a connected payment system solves many of the problems listed above, but does so much more. 

• Add extra third-party services to help them do better business. These might include, for instance, offering non-standard payment types like Buy Now Pay Later (BNPL) or diverting out-of-country currency conversion to a partner so that they can participate in the fees rather than leaving it all to the involved banks.
• Conditionally submit some soft declines to a second processor where it seems likely the deal could close; or create a queue of those transactions that could be re-presented on another day; or kick off a different process on-screen for the customer that, rather than just showing an error and a request for a different payment instrument, actively encourages them to try again, possibly even with a preferred payment method.
• Actively arbitrage processor rates, ensuring that each transaction is submitted to the PSP that has the best chance of closing the deal, at the lowest possible rate. There is a shocking amount of optimization that can be effected on processing fees, and a connected payments system can be a powerful tool to improve profitability.

Reducing Risk with Connected Payments 

The gift the keeps on giving. By capturing transactions and making more sophisticated decisions on whether and with whom to process them, merchants can enter into a phase of continuous improvement with their payment system.

They can increase their success rate, reduce their processing costs, and minimize the impact of fraud and chargebacks, all at the same time.

The first step is to ensure that sensitive information from customers is safely and securely collected and stored, according to the requirements of the PCI-DSS regulations. While some larger merchants may opt to build out their own internal system to be PCI-compliant, many (if not most) will find the cost and resource requirements of maintaining a secure environment unappealing, which is why many today are opting to contract with a third party programmable payment vault, such as the one offered by Basis Theory.

The third party can securely manage cardholder data in motion and at rest, providing a token to the merchant that can be reused with substantially any PSP, and take on the responsibility for data security, reducing the cost of compliance, and virtually eliminating the risk of hacks or data breaches,