When there are dubious transactions on a credit card, payment gateways can flag where there might be an issue and put a hold on payments.
For your business, the payment gateway will vet and validate the payment before processing it.
So for example, it will check that the card is a genuine card and that it has not been reported stolen or cloned. It will check that there are no “red flags” such as the order being placed from a country with no link to the owner of the card.
You can set “rules” of what types of payments you will accept. And, with these “rules”, you can be more certain that only genuine orders come through to your website.
Payment gateways are also important when it comes to refunds. They handle the transfer of money back from your bank account to the buyer’s card when there needs to be a refund. These refund transfers are called chargebacks.
Again, this system is designed to protect shoppers and businesses. It keeps bank details separate from each party and manages the transfer of money securely.
But when you run an online store, there’s another side to chargebacks that is more of an issue. And that’s online shoppers who exploit this system.
The exploitation goes like this. The credit card company always guarantees the transaction to protect the shopper from fraudulent sites.
And If the online shopper cancels or queries the payment, they’ll refund the customer. But, the assumption is you are the wrong party, so they pursue YOU for payment. The default position is the shopper is right, and you have to prove otherwise. Even if you have done nothing wrong.
Because, with this set-up, unscrupulous buyers can order products from you, have them delivered and then challenge the payment, and get a refund.
So, in effect, they get the product for free. You’ve paid for it.
Now, a lot of the payment gateways work to prevent this sort of activity. They can recognise credit cards that exhibit this sort of behaviour and put warnings on them, so that your payment gateway won’t accept orders from these risky credit card owners. But, if someone gets a new credit card, they can repeat the behaviour again, until the new card gets flagged.
While the vast majority of online payments go though with no issues, it is accepted that a certain percentage of transactions will have some of the issues like chargebacks and fraud that we outlined above. This can vary by category, and typically may only be around 1% to 2% of total sales. But we do know of cases, where it has been as high as 10% of online transactions.
Financial management of payment issues
So, part of the role of finance as one of the functions of e-Commerce is to manage all of these issues. To manage refunds for example. Or to respond to transaction queries and fraudulent transactions.
This means when you take payments directly, you need someone with the appropriate level of financial understanding and authority to make these decisions. It’s important to have the right controls in place to ensure everything is above board.
You want to make sure that the person who gives out refunds checks that the refund is for a valid reason before applying it, for example. Appropriate checks and processes need to be in place to make sure the payment system works smoothly.