this is inspired by a neighboring thread about credit card info theft as well as by my personal interest in the problem (or maybe lack of the problem - not sure as to the SD of the matter) of credit card chargebacks.
Ok, so suppose Orinoco LTD decides to go into the online retailing business, but they only accept mailed money orders and money transfers using systems that don’t allow reversal of payment regardless of fraud allegations. So no more worries about chargebacks and no more paying the credit card companies transaction fees that will end up being spent on writing off credit card fraud of other types.
How much of a saving would that be for Orinoco on typical classes of transactions?
(To be clear, the thread title is inspired by the assumption that of course Orinoco will pass the savings on to the customer. No doubts about that )
I would guess whatever savings will be eaten up by the greater handling overhead and the loss of sales to people, used to instant gratification of credit card purchases online, unwilling to wait for the mail to arrive. (Edit: not to mention, the loss of sales to people worried about being defrauded without recourse!) Furthermore, I’d guess that their costs would actually end up being higher total. Which is why most online businesses accept credit cards.
The exception would be if Orinoco is remarkably small scale. Even then, they’ll probably make more money if they accept Paypal.
While we’re not a payment processor, our experience might be relevant. My company makes most of its money through downloadable software. There’s no physical product, so it’s nearly impossible for us to win disputes, but nonetheless fraud is so miniscule as to be practically insignificant. Even if 100% fraud free, the staff required to open and manually process paper payments would far, far outweigh our fraud losses. The costs of handling physical mail are very significant, far more so than I would guess credit card chargebacks to be.
Even if you had an elaborate (and expensive) system to scan and track payments, check for fake money orders, and enter orders with minimal human interaction, the costs would be staggering. Think of all the equipment you’d need, the people to maintain that equipment, and handling all of the exceptions and support needed to maintain such a system (people to manually handle text that doesn’t scan, customer service inquiries sent with items intended for the companies people are buying from, customer service contacts from the field about where their order is and why their money order hasn’t credited, facilities for all of this stuff, warehouses to handle and sort all of this mail, etc).
Other methods of electronic payment (e.g. wire transfers) are also not inexpensive. I would guess that if money orders were going to save big companies money, Amazon and the like would already be doing this. Not to mention that customers have to pay for money orders and mailing, but they don’t pay any such fees for credit cards. It’s all just more overhead.
Credit card fees range anywhere from 0.5% to 5.0% per transaction depending on the bank you use, how long you’ve been in business, the level of protection you purchase and your history of chargebacks.
So as a very rough guess, simply take the transactions of a merchant and subtract off 5% and assume that money would be passed on to the customer. That would be the maximum the customer would save.
As I said, that’s just a very rough guess, as prices have all sorts of things built into the cost.
The bottom line is that online retailers (and almost every brick and mortar store) accept credit card payments because the loss due to chargebacks are outweighed by the increased business the retailer receives because it provides a service that attracts more customers.
For example:
Online retailer #1: No credit cards. Takes three weeks to process. Price for your item: $43.11
Online retailer #2: Takes credit cards. Your item will be there this week. Price: $44.73
could you please clarify what the merchant gets for that maximum fee of 5%? I always thought that chargebacks are borne by the merchant. So does it work out to first paying 5% on every transaction to card processor and then writing off whatever chargebacks (aka fraud) as a cost of doing business? If so, why does the card processor even care about setting your transaction fee based on frequency of chargebacks?
Or is the 5% fee paid for a service that insures the merchant against chargebacks?
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