All companies look set to benefit hugely from the deals. My advice for merchants however, would be to approach the opportunity with an element of caution, since the deals may come with heightened chargeback risk.
Visa will now be positioned as “a clear and equal payment option” on the PayPal platform which will no longer encourage users to link a bank account via Automated Clearing House (ACH) (or FPS in the UK; SWIFT in Europe). This break from company policy will mean higher transaction costs for PayPal but a huge new user base for Visa and its tokenization services. PayPal will also assist issuers in identifying customers who choose to move the existing ACH payment flows to their Visa cards.
In return, PayPal will receive ‘certain economic benefits’ while gaining access to the Visa Digital Enablement Program, meaning its digital wallet will be accepted at all retail locations equipped for Visa contactless transactions.
PayPal has since struck another huge deal with Mastercard and will be able to process payments through the company’s in-store mobile-tap tools. Mastercard will also feature prominently in the PayPal wallet and can be set as a default payment method. The partnership will additionally enable in-store purchases via the PayPal wallet at contact-free terminals.
This dichotomy has certainly shaken up the payments industry. Visa and Mastercard stand to profit from the fees they will collect from the rise in transaction volume, and while PayPal may incur higher transaction costs, additional incentives and increased brick-and-mortar transactions should help to offset this. Consumers will also benefit from a greater choice of payment methods across all channels, leading to a smoother checkout processes and higher conversion rates for merchants.
There are some concerns for merchants, however. I was a merchant myself and would have relished moves by the payment companies to boost conversion, but higher transactions volumes are also likely to lead to higher levels of chargeback fraud.
The rise in chargebacks – 7% transaction growth vs. 20% increase in chargebacks, according to JPMorgan Chase – suggests that despite efforts to promote ACH linked accounts, the addition of Visa and Mastercard to wallet solutions like PayPal, may actually result in an increase in card-generated transactions, under the protection veil of “PayPal," thus increasing friendly fraud. In some cases, customers may lose the right to file chargebacks linked to their PayPal account, following changes to PayPal’s terms of service earlier this year. Transactions made through crowdfunding platforms and online gaming sites are no longer eligible for chargebacks.
However, the risks for merchants can be minimized with steps as simple as maintaining detailed records of all transactions so unjustified disputes can be effectively challenged. As conversion rises though, it can be difficult to keep track: technology can help scale chargeback risk management, as can better availability of customer service operatives to assist customers before refund claims escalate to chargebacks.
The best defences require a dynamic risk management solution that identifies the true source of each chargeback, whether merchant error, criminal fraud or friendly fraud. These solutions will mitigate chargeback costs and leave the merchant free to benefit safely from increased transaction volumes.
Monica Eaton-Cardone is co-founder of Global Risk Technologies and Chargebacks911.
