Cracking Down on Deadbeat Consumers
by Anna Bartholomey
Debt collection may be the least understood aspect of running any business. Rick Cohen, CEO of International Recovery Services, shared some insight with the Klixxx staff.
Have you ever had a charge you didn't authorize suddenly appear on your credit-card statement? If so, your next move was probably a call to the credit card company to explain the situation and get the charge removed. You most likely discovered that all you had to do was sign a form provided by the credit-card company. They investigated the situation, reversed the charge, and that was the last you heard about it. The episode may have angered you, and it was likely something of an inconvenience, but since the credit- card company took care of the problem and resolved the situation to your satisfaction, you undoubtedly didn't give it another thought.
In the situation described above, you successfully executed what is referred to as a "charge-back" against a merchant. Of course, in that situation, you were in the right, as your card was fraudulently used. This is why consumer protection laws exist. For an online retailer (e-tailer), however, e-commerce is fraught with risks: the most remarkable being not getting paid. In fact, even if the purchaser is authorized to use the card, merchants doing business online are only too aware that sometimes they still won't get paid. Transactions occurring in traditional, brick-and-mortar stores, require consumers to sign a charge slip, as well as have their card physically swiped, giving the merchant proof that the consumer was there and actually authorized the purchase.
CONSUMER POWER
On the Web, however, the merchant has no real idea if you are who you say you are, whether you're authorized to make a purchase with the credit card you're using, or whether you'll later deny having made the purchase or received the goods, even if it's verified that you are, in fact, authorized to use the card. It seems amazing that there are actually merchants willing to conduct business, in an environment where the cards are so obviously stacked against them, and the consumer has so much power.
While some charge-backs are inevitable, the hard truth is there are far too many on the Web, and the banks don't like it one bit!
A survey conducted by Gartner Group, revealed that online retailers are actually 12 times more likely to be defrauded than their traditional counterparts. Furthermore, online merchants are often required to pay all costs involved when they are defrauded, while credit-card companies usually absorb the cost of fraud for offline retailers. Internet merchants end up paying approximately four times more, in costs related to resolving and processing charge-backs. In addition, the discount rates they must pay are 66 percent higher than those paid by offline retailers, and it's not uncommon for online merchants to also be required to pay for Internet payment gateways and fraud detection, which can easily add an additional 50-cents per transaction.
CHARGE-BACK RISK
As an adult webmaster with your own site, you're a merchant who provides products and/or services via your Web site. In most instances, a company that delivers immediate fulfillment online. Of course, there are adult toy merchants and video stores on the Net, but most often adult sites provide access to online adult entertainment, a product considered immediate fulfillment. The merchant bank that issued your merchant account, the one that allows you to accept credit card payments online - has undoubtedly informed you of the stricter rules for your charge-backs. Basically, companies that deliver immediate fulfillment online, will be required to play by much tighter rules regarding the number of charge-backs their merchant accounts can process before they start incurring fines. Online companies can even lose their merchant accounts, altogether.
Charge-backs are usually measured as a percentage of volume. As an example, if $200,000 goes through your merchant account in one month, and $4,000 is charged back against your account, you have a 2% charge-back rate.
Web sites delivering immediate fulfillment online are considered to be "high risk," and are more likely to have relatively high charge-back rates, principally for the following reasons:
When there is no product, which must be physically delivered to the customer, and the person is able to obtain the goods or service in real time, it is much easier to commit fraud, because it's more difficult for merchants to do a thorough, real-time fraud check. Typically, in a procedure for immediate fulfillment goods, the merchants simply send the card number to the credit card network using standard processing systems. When they receive an authorization code back, indicating the card number is valid, and it's not on a stolen card list, they proceed to allow the consumer to make the purchase, delivering the purchased item immediately.
Merchants that deliver actual physical goods to a consumer's door have that short period of time between the placing of the order, and order shipment -sometimes even a week- to investigate any order, which may appear suspicious.
It's quite common to see charge-backs due not to the fraudulent use of a credit card. This could occur when a consumer forgets about a product purchased online that was fulfilled immediately. Or, as is often the case where adult online entertainment is concerned, a person's significant other, usually a wife, sees the charges, and the husband initiates the charge-back to avoid a problem, telling his wife that of course the credit card company made a mistake- he hadn't made that charge.
Finally, because merchants often bill under a name other than the one they use on the Web, the name that appears on the credit card statement will not match the Web site name. Consumers get confused, believe they have been the victims of fraud, and initiate a charge-back.
Short of not allowing your customers to charge their purchases, you need not only to find ways to decrease your charge-back rate, but to collect legitimate debt from customers who made purchases using credit cards, as well.
Debt collection may be the least understood aspect of running any business, and this is especially true for the adult Internet merchant. Accustomed to losses as part of doing business, uncomfortable with pursuing deadbeat consumers-not to mention navigating governmental collection regulations, which vary from state to state-most adult internet merchants are, at best, lukewarm to the subject of debt collection.
We recently spoke with Rick Cohen, CEO of International Recovery Services, Inc., the oldest and most prominent collection agency involved in the recovery of adult entertainment debt. Rick, the grandson of mob legend Mickey Cohen, one of the founding fathers of Las Vegas, gave us his take on the importance of debt collections for the Internet merchant.
Q. On a scale of one-to-five, five being best utilization, how would you rank the adult industry in terms of how effectively debt collection is utilized?
A. I'd like to say three, but honestly, it's closer to two.
Q. What does this mean?
A. There are very few adult merchants with a debt collection game plan. This is evident from the information requested for access to these sites. I am amazed at the number of sites that don't even bother asking for a phone number.
Q. Why isn't this type of information requested?
A. Most Internet merchants haven't the slightest clue as to what information is necessary for following up, when the transaction goes bad. You see consumers ripping off one merchant, then moving on to the next. There is no follow-up, because the information isn't there.
Q. What is your criticism of the Internet merchant?
A. Adult Internet merchants like to boast that they are at the cutting edge in new- age technology and payment transactions on the web, yet they don't even have the basic consumer application down.
Q. How does that affect debt collections?
A. In bill collections, we like to say 'you don't know unless you ask.' From experience, we know that consumers will mostly provide good social security numbers-which help in the recovery of a bad debt-if requested. Regulations require that every consumer be notified in writing when they are sent to collections, but the most effective means to collect any debt is to make that call, otherwise a billing service would do the trick for these merchants.
Q. What changes have you observed in the adult industry?
A. The Internet is emerging as the dominant force in adult entertainment. Some may recall it wasn't so long ago that phone sex reigned supreme. The Internet merchant doesn't have the luxury of A.N.I.
Tracking and I.P. addresses are not all that helpful. This is why the more information requested on site, the better.
Q. What's the bottom line?
A. We can collect up to fifty percent of bad debt when provided good information. That's half the money that the average merchant expects to lose. Even when the information is not what it ought to be, we make every effort to collect legitimate debt.
Q. How big do you think the industry will get?
A. How much information can be put into a computer? Really, the sky's the limit.
Q. What would your grandfather, Mickey Cohen, have to say about all of this?
A. Shoot straight-with people, that is.
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