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Fraud vs Customer Centricity - II

In my earlier post, I discussed the need to manage fraud separate from managing defaults while charging the Customer's card.

Generally, the strategy to charge the Customers' card can be based on two parameters. One is to utilise the various features provided by payment gateways intelligently and the second would be the modelling of the Order Management process itself to minimise exposure.

I will cover the first part in this post.

For credit cards, payment gateways normally support three main types of verifications. Address Verification Service (AVS), Authentication and Authorisation. In AVS, the merchant gets the functionality of verifying all the details of the card including the short address corresponding to the Card. While this does not necessarily cover the retailer against fraud, it reduces the risk as a result of additional cross verification.  Authentication is a much more rigorous check since the customer has to log his/her credentials online which would not only verify, but also reduce the risk of fraud to a larger extent. Authorisation is the final feature where the amount gets blocked on the card and thereby reduces the chances of the credit card maxing out when the merchant tries to bill the customer the order amount.

Based on my experience and some extended discussions with my colleague Bharat Rajagopalan, I would suggest that retailers would benefit by starting with a simplified matrix. I do believe that using Order Channel and Product Type as the two main variables to come up with a 2x2 matrix should cover 80-90% of the normal transactions in a multi-channel scenario (restricted to credit cards).

The order channel is generally considered important since it tends to directly impact the fraud perception and payment validation options. For example, taking a Credit Card at a call centre would expose the merchant to a higher risk (and hence a higher potential fraud perception) since it would be treated as a 'Card not present' transaction whereas taking a Credit Card at the store would be much lower risk especially if it is a 'Chip & Pin' transaction. With regards to payment validation option, one cannot do payment card authentication in a call centre which can done on a web site.

The product type tends to influence the order lifecycle process to a large extent and hence becomes a key parameter to consider.

The matrix below would make the explanations easier to understand.

Fig 1: Credit Card Charging Matrix

Order Channel

Product Type

Website

Call Centre

Store

Standard Products

(In Stock, <3 days to ship)

Authenticate & Authorise upfront

Settle on Shipment

Authorise upfront

Settle on Shipment

Authorise upfront

Settle on Shipment

Backorder/Pre Order Products

(Standard Products not in stock, > 1 week to ship)

Authenticate upfront

Authorise on release to warehouse

Settle on Shipment

AVS upfront

Authorise on release to warehouse

Settle on Shipment

Chip/pin upfront

Authorise on release to warehouse

Settle on Shipment

Special Order Products

(Made to Order, variable time to ship)

Deposit upfront

Authenticate (if different tender)

Authorise and

Settle pre-Shipment

Deposit upfront

AVS (if different tender)

Authorise and

Settle pre- Shipment

Deposit upfront

Chip/Pin (if different tender)

Authorise and

Settle pre- Shipment

 

In case of standard products, the retailer could follow the standard procedure of Authorising the card up front during Order Capture and settling the card on Shipment.

In case of backorder products, the retailer could use the Address Verification Service provided by most gateways to validate the card during Order Capture and then authorise the card in their Order Management System just before releasing the Order to the warehouse for fulfilment. The assumption I make here is that the Order is released to the warehouse only when the product is received in the warehouse. In case the Order needs to be sent to the warehouse upfront, I would recommend that it be treated similar to a special order product.

The AVS and the authorisation pre-shipment should cover the retailer's risk while reducing the amount of time the amount is blocked on the customer's card.

In case of special order products, quite a few merchants tend to take a deposit up front. This helps in getting an extra buy-in from the customer as also covers the merchant's higher risk through a partial up- front payment. A strategy of Authenticating or AVS similar to the Backorder products could be followed for these items. The difference would be in terms of Authorising and Settling (ie charging the customer's card) these products (not necessarily the entire order) pre-shipment. This could be based on an assumed lead time (in case of a standard long-lead time product) or a feedback mechanism (in case of high value products) where the warehouse could inform the OMS before shipping the product.

This matrix could be used as a thumb rule to lay out the process to balance the exposure to risk of Credit Card defaults (as against fraud) and the need for customer delight in terms of charging as late in the life-cycle as possible.

The final cog in the wheel is tweaking the internal Order Lifecycle processes itself to be robust. This is something I will discuss in my final post on this subject.

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