ETA Expert Insights: How Merchants Accept Electronic Payments

Jennifer Maddux, Intuit; Member of the ETA Risk, Fraud & Security Committee

Not so long ago, merchant card acceptance was straightforward. Businesses would swipe a card via a terminal or key it in via that same terminal. Most businesses had payment terminals linked to a merchant acquirer who also served as their primary financial institution. In this straightforward relationship, managing risk was also straightforward. The bank had direct insight into the merchant’s account balance, knew the merchant’s vendors, and was often physically located near the merchant. All of this made it easy to monitor the merchant’s activity and flag anything unusual.

While many businesses still operate this way, small and medium-sized businesses (SMBs) have far more options than ever before. Card acceptance is now a baseline requirement rather than a luxury or a convenience. Merchants today often have more than one acquiring relationship and accept payments through a wide range of different channels. This shift has changed how risk management works in the merchant acquiring space.

The ETA Risk, Fraud & Security Committee has created a series of short articles on how the merchant-consumer relationship in the United States has evolved and re-shaped how merchant acquirers think about risk. This first article in the series will address how merchants accept payments.

Merchant Payment Acceptance Channels

Merchants today can accept payments on any one of the following channels:

• Brick and Mortar: Face-to-face payment transactions are not going away. A 2016 survey of more than 200 merchants across different verticals by CardNotPresent.com found that 54% of respondents accepted payments in a physical, brick and mortar location at the time, compared to 46% five years prior to the survey (2011). The terminals we are all familiar with increasingly offer EMV options, integrated PIN pads, contactless payments, and sophisticated point-of-sale systems that tie in to inventory, as well as the cutting-edge devices that use a PIN on glass technology.
• Mobile: Mobile Point of Sale (mPOS) solutions are a fast and convenient way for businesses to accept payments from their customers right away. They are often used by merchants without a retail location (such as food trucks, pop-up stores, and on-the-go service providers). On the consumer side, mobile apps offer an easy way to book services, order products, and pay. Mobile – including mobile browser and in-app purchases – is the fastest growing payment acceptance channel. Five years before the CNP merchant survey, 25% of merchants surveyed accepted payments through a mobile channel (see chart below). In 2016, 65% accepted it – a 160% increase in just five years. And the acceptance rate is likely higher still today. However, the mobile channel can introduce a source of risk by making it harder to determine the business location of a mobile vendor such as a dog groomer or cart vendor.
• E-commerce: As our time becomes ever so much more precious, consumer demand has driven businesses to offer them options to pay online – whether through a simple retail transaction on a website, booking a service in advance, or even ordering your groceries to be delivered weekly. The options are seemingly endless, ranging from an independent website with a shopping cart for purchasing product/services to online marketplaces. And eCommerce is the fastest growing payment channel, currently accounting for nearly 10% of all retail sales in the United States (up from just 4% in 2010), according to data from the U.S. Department of Commerce.
• Mail Order Telephone Order (MOTO): Let’s not forget our telephone merchants, who offer the ability to order product/services via telephone. Many MOTO retailers allow their customers to use their phone’s keypad to enter credit card details and other information. MOTO is the least frequently accepted payment channel according to the survey by CardNotPresent referenced earlier and in the chart below, but has still seen an increase from 44% of merchants accepting it five years prior to the survey to 50% accepting it at the time of the survey (2016).
• Omnichannel: A small business that opens its doors today would likely utilize a mix of these acceptance methods, and perhaps a few more. For example, paybylink would generally start as an inbound/outbound call, but then the call center agent sends a payment link via text or email. Then there are the integrated wallets where a consumer can choose to pay using the wallet credentials at the terminal or online checkout, like the Amazon buttons. The data suggests that merchants are increasingly accepting electronic payments – whether it’s card payments at the point of sale (Brick & Mortar below), mobile, eCommerce, or even MOTO, every category has seen an increase.

Source: 2016 Omnichannel Payments Survey, CardNotPresent.com and Vesta Corporation.

What does all of this mean for Acquiring Risk? Underwriting and Risk workflows must take a much more comprehensive view of a merchant. Whether you automate merchant reviews or do them manually, you need to determine the actual location of the business. Deeper reviews are needed to narrow down the specific products/services being offered. Thanks to social media and online reviews, we are also able to monitor the pulse of customer feedback to see if there are risks for fraud or non-delivery. Vendors can be employed to screen and monitor websites for transaction laundering and for product offerings that fall into prohibited or restricted categories. There is more information out there that can help with underwriting and monitoring, but the sheer volume of it can often require sophisticated tools and more careful analysis than before.

Even as we read this, the technology is evolving. But for the small business owner community, the main goal is to make payments as easy and fast as possible in order to get funded quickly and sell their product or service. Payments companies must aim to address this concern while continuing to manage risk and resolve issues seamlessly in the background.