vindicia lp

Payment Ecosystem Myths – Part 1

Running a digital business is incredibly complicated. In addition to figuring out how to get people to pay for your product, you have to deal with the complexity of accepting their payments.

When a company starts out and is testing its market viability, it doesn’t make sense to build unnecessary infrastructure. Many companies choose the easiest solution to get started, such as PayPal or Authorize.net, and worry about scale issues once they encounter them.

The downside of this approach is that companies are in the unfortunate situation of having to learn the ins-and-outs of the online payments ecosystem while experiencing the pain associated with scale issues. The wrong payments choices can put a company in jeopardy once it starts to gain traction. We regularly encounter companies at just this point. While we’re happy to help, our goal is to get as much information around best practices to the online community as possible.

To that end, we hear several common misconceptions around accepting payments online and thought we could devote 2-3 blog posts to this issue.

It’s too difficult to be the Merchant of Record”. Being the merchant of record is more difficult than passing that responsibility on to another party. However, companies also give up many of the levers that will drive their future success, such as:

  • Customer Data – it is much harder to know who is actually purchasing your product, making it more difficult to understand what your customers want in the product or service offering. Also, depending on the agreement, companies may not be able to take their customer data with them when changing payment providers.
  • Metrics – without key data about purchases and billing, it is hard to determine when the customer purchasing experience is not working as smoothly as it could.
  • Billing Descriptor – this allows your customers to see your company and product on their credit card statement, limiting chargebacks and keeping your brand in front of good customers.
  • Marketing – companies may be limited in their ability to reach out to their good customers, both for promotions and for billing events.
  • Recourse – companies that are not merchant of record can be shut down at any time and for any reason by their payment provider. This is a dangerous way to run a business.

So what does it take to be merchant of record? Not as much as companies think… The biggest differences are the relationship with a payment processor and managing chargebacks to keep below the 1% (of transactions) limit imposed by the card networks.

“You can’t fight chargebacks on digital goods”. This myth has persisted for quite a while, despite the best attempts to eradicate it. This used to be the case, but many companies and groups (besides Vindicia), have fought this misconception with the card networks, payment processors and issuing banks. The truth of the matter is that chargebacks for digital goods face the same regulations as those on tangible goods. The biggest reason for this myth is showing proof of delivery. For digital goods merchants this takes the form of showing logins, engagement with the product, and purchase history – all are easily captured during the course of business and can be used as proof.

The exception to this rule is chargebacks on PayPal transactions. They are making progress and we are all working towards this goal, but they still don’t allow merchants to challenge chargebacks for digital goods.

Read about more payment myths in part 2 of this series.

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