Risk Management

  Becoming A


Leverage Your Strengths
Customer Loyalty, And

For Increased Revenue,
Business Opportunity

by Julie Fergerson

   Recognizing market opportunities and how to capitalize on them is key for sustaining and growing market share, and particularly for companies in the highly competitive financial services arena. One business model that should be of particular interest to ISO's, banks and other financial institutions is the Commerce Service Provider (CSP). CSP's provide a portfolio of e-commerce services that help merchant customers to expand their business and protect them from the increased risk of fraud that accompanies this powerful new sales channel.
   Why should a financial services company become a CSP? There are several reasons, but the primary benefits are increased revenue, improved customer loyalty, and business opportunity.
   For many merchants, the online sales and distribution channel has evolved from novelty status to an essential and strategic component of the marketing mix. Driving this shift has been continued and dramatic growth in Internet use by both businesses and consumers as a commerce medium. As providers of transaction and financial services to these businesses, ISO's, banks, and other financial institutions are well positioned to capture the incremental e-commerce transaction volumes as well as help merchants reduce exposure to fraud.
   Recent market research suggests that e-commerce is still in the early stages of development, and offers tremendous business opportunity. Consider the following:

  • According to a new eMarketer report, the number of internet users worldwide will rise from 445.9 million in 2001 to 709.1 million in 2004.
  • The Commerce Department said total U.S. online retail sales for 2001 reached $32.6 billion, an increase of 19.3% from 2000. This number is expected to exceed $150 billion by 2004.
  • More than $700 million in online sales were lost to fraud in 2001, representing 1.14 percent of total annual online sales of $61.8 billion, according to a recent GartnerG2 research report. Online fraud losses for 2001 were 19 times as high, dollar for dollar, as fraud losses resulting from offline sales.

   The range of services offered by a CSP can be extremely broad or focused on specific components of the e-commerce value chain. There is no single formula for success. A broad CSP offering may include all infrastructure, software, and services needed by businesses to create and maintain commerce-enabled websites, where a focused solution may provide a subset of related services. Key components of a comprehensive CSP offering include:

  • Developing and/or hosting Internet websites for merchants;
  • Provisioning Internet merchant accounts;
  • Processing Internet payments in real time;
  • E-commerce risk management services - automated fraud screening and detection;
  • Integration of Internet transactions into offline applications or systems.

   The key to success as a CSP is to leverage your strengths, experience, and customer base. ISO's, banks, and financial institutions are in the business of managing, assisting, and aiding the flow of financial data to merchants and are well positioned to offer the provisioning of Internet merchant accounts, e-commerce payment processing, and risk management services. Controlling these processes are natural extensions of your current business model. In particular, your understanding of charge-backs and fraud issues make you particularly well-suited to provide the solution to this real and growing problem for merchants selling over the Internet.


   Merchants today often pay CSP's anywhere from $.10 to $.50 for authorizing and settling e-commerce payment transactions. Additional payment services, for example processing level 3 data (common for corporate purchase cards), credit charges, and tax calculations can add an additional $.10 - $.50. Simple fraud detection services range from $.05 to $.10 while advance fraud screening can add $.15 to $.25 per transaction. Authorization, settlement, and fraud detection for a single Internet order could generate $.40 - $1.00 in transaction revenue to the CSP.


   In today's economy, merchants often make buying decisions based on pricing alone. Providing a complete range of related services that meet the emerging needs of your customers is necessary to maintaining business relationships and loyalty. ISO's, banks, and other financial institutions are ideal choices to provide e-commerce solutions, although to date have let various third-party payment servicesencroach on their territory. When a merchant signs up with a third- party payment service, they often ignore the existing merchant banking relationship, opening a new Internet-specific account with another financial services entity.


   As a provider of merchant services, ISO's, banks, and other financial institutions are well positioned to extend their relationships with their customers and capture the lucrative revenue opportunity. It is estimated that less than 10% of online merchants offer real time transaction processing. There is still a large market for real-time payment services and protection from fraud as more and more businesses move quickly to leverage the power of this new channel to improve efficiency, revenue, and profits.