Have Yourself A Digitial Little Christmas
E-retailers are tweaking back-end systems and adding fraud protection to prepare their payment systems for the holidays
By RICHARD KARPINSKI
Imagine the scene: A crowded store, deep in December, filled to the brim with holiday shoppers, cash in hand. What could possibly go wrong? What if suddenly the cash registers stopped working? And all your customers-and all those sales-walked out the door and straight to the competitor down the street?
A retailer's worst nightmare, right? Unfortunately, such a scenario is all too possible on the Internet. As InternetWeek continues to chronicle e-retailers' efforts to prepare for the expected boom of Christmas '99, e-commerce managers are paying more attention to payment processing than ever before.
And when it comes to extracting payment from customers, they take nothing for granted. This fall and into the winter, e-retailing sites will test and deploy the latest in payment platforms and services. This includes rolling out new fraud-detection tools, to keep the crooks out of their holiday coffers, and experimenting with a slew of new payment options, ranging from the latest versions of micro-cash to new forms of debit cards and e-wallets (see sidebars).
At stake is a holiday pot of gold that closes out what is likely to be remembered as the year e-retailing got real. Most e-retailers expect to quadruple or better their sales during the season, and some sites-like toy seller toysmart.com-do most of their business in the last few months of the year.
With all that at stake, no e-retailer can take its IT preparedness lightly. "What we need in our systems is the ability to handle enormous spikes in load, from idle to almost the speed of light in a matter of days," says John Puckett, toysmart.com's CIO. "Tremendous bandwidth, CPU power, every part of the infrastructure has to be prepared to handle that tsunami."
All signs are that Puckett is smart to prepare. Jupiter Communications forecasts online sales of $6 billion this November and December-up from $3.1 billion during the same period last year. It's just the start of the boom: Annual online sales should reach $78 billion by 2003.
Sites must focus on the "entire delivery chain if they want to avoid being crushed by rising Internet commerce activity," says Jupiter's David Schatsky.
That growth will tax sites, especially the transaction and payment-processing systems that rake in the money. Top e-commerce sites will process up to 60,000 transactions per day during the holiday season, according to Jupiter.
Another Jupiter statistic is especially gloomy for the payment area: A study a year ago found about 27 percent of transactions were abandoned right at check-out, in part due to the frustration many shoppers still experience filling out forms and finalizing a Web payment.
The bottom line is that for e-retailers wrestling mightily with holiday season supply chain, fulfillment, customer service and merchandising issues, all the ongoing improvement efforts might well go for naught if a site isn't fully ready to accept and process Web orders.
"Christmas puts a huge demand on payment capabilities. Customers want to be comfortable during and after a transaction, and the one thing merchants need to do above all is get paid," says Nancy Morrison, vice president of marketing for payment services pioneer CyberCash Inc.
"Merchants are paying a lot of attention to throughput, speeding things up, handling the volume, all the things the customer doesn't see but gets upset about very quickly if they fail."
"What merchants need to be careful to look for in handling the holiday spike is scalability and reliability," agrees William Donahoo, vice president of marketing for payment services outsourcer CyberSource. "Failure is not an option in payment services."
The trick to doing payment well, says Donahoo, is to make it all but disappear. Site visitors care about product selection, content and customer service first. When they hand you their credit card, they want the transaction handled quickly and painlessly. "But if you don't do payment well," Donahoo says, "you risk losing the investment you made in everything else."
Smart Payments
For toysmart.com, the pressure to handle payments more efficiently led to the company making a big investment on a new payment system this holiday season.
The new system replaces a partly manual batch process, a method that at times forced the toy store to e-mail a customer several days after an order if there was a problem with a credit card, or even something as simple as a mistyped address. The manual processes will be replaced by a new real-time processing system tightly integrated with the rest of the company's e-commerce infrastructure.
"We want to be able to scale, so we can't have payment as a manual process anymore," says CIO Puckett of the new payment system, which is set to go live in a few weeks. "We need to be able to tell customers online that they are authorized as soon as they close their shopping basket. When you're shopping for the holidays, it's often at the last minute, and you don't want anything to hold up your order.''
While the move to real-time credit authorization is far from unique, the e-retailer is counting on a tight integration of its payment and other e-commerce systems to set it apart from the competition. Toysmart.com teamed up with payment gateway vendor PayLinx and credit card processor Paymentech to build the new system.
"What we've done now is close the loop; start to finish, the whole process is handled electronically," says Puckett.
That includes tight links between the PayLinx server, a Microsoft Site Server e-commerce front end, Great Plains financial software and customer service systems, including an e-mail handling system from Silknet. All of those systems tie to an in-house, 126,000-square foot fulfillment warehouse.
That integrated system, including the new payment infrastructure, should seamlessly handle tens of thousands of holiday orders per day, says Puckett.
"The key is building head-room into the infrastructure,'' Puckett says. "But it's not just a technology decision. It's a business decision. Every contingency has a price tag that goes with it.''
As surprising as it sounds, many large sites are still processing payments manually; this is especially common among e-commerce sites that are linked to brick-and-mortar retailers. Hard numbers are difficult to find. But in focus groups, IBM has discovered that up to 60 to 70 percent of medium-to-large merchants still handle at least part of the payment process manually.
"We see a significant portion of e-merchants that, when it comes to payment processes, still have a mix of paper and rekeying of transactions into other systems [such as in-store credit card terminals]," says Jeff Sumner, IBM's manager of Internet payments.
Fighting Fraud
While toysmart.com is switching payment systems to improve automation, e-retailer Guess Inc. is improving its systems to cut down on fraud. Guess, which launched its e-commerce site last March, noticed that as many as 10 to 15 percent of its credit card transactions were fraudulent. The site's payment system, which they declined to name, was not effectively detecting credit card fraud.
"We started realizing, almost immediately from launch, that we were getting a lot of chargebacks from the bank. Fraud was completely out of control and basically cutting into our bottom line," says Jennifer Makkar, Guess Inc.'s e-commerce manager.
While banks and consumers are for the most part protected from Internet credit card fraud, merchants have no protection. "We had to eat all those transactions," says Makkar.
Guess turned to payment outsourcer CyberSource, mainly because of its first-rate fraud-detection services, says Makkar. Guess made the switch a month ago, and "we've already seen a significant decrease in fraudulent transactions," she says, adding that "payment is faster at checkout, and the site crashes less when going through an order."
The CyberSource service not only performs checks like address verification-which makes sure a buyer submits a valid credit card number and valid address-but it also provides a tool kit that lets Guess set its own fraud-detection parameters. For instance, the company could turn down any transaction it thinks is a risky sale, such as a user that submits a generic Hotmail or Yahoo e-mail address unrelated to their name.
CyberSource is also assembling a massive database on credit card fraud, which merchants can tap into in real time as part of the credit card verification process.
With those new weapons in hand, Guess already has been able to cut fraud from 15 percent down to under 7 percent, and is aiming to get under 1 percent for the holiday season, says Makkar. Guess hopes to quadruple its business this holiday season, and "we knew we could not survive without better fraud protection," Makkar says.
A Typical Experience
CyberSource's Donahoo says that Guess Inc.'s experience is typical these days in terms of what users expect from payment vendors. "Payment is the ante. That's what you have to have to play in the game, but it is by no means enough anymore," Donahoo says.
In addition to a growing array of fraud-detection services,
CyberSource is delivering tax calculation services, which help e-retailers deal with global payment issues; export control capabilities to ensure sensitive products like encryption software aren't sent illegally overseas; and smart messaging services, which let e-retailers automatically send and receive credit card authorization messages between the fulfillment house and the e-retailer's payment system the minute a shipment leaves the warehouse.
Coming to an understanding of how they want to deal with credit card fraud might be the most important payment-oriented decision most e-commerce sites can make this holiday season, says Brad Haigis, director of product management for Open Market, which includes a payment gateway in its Transact commerce server.
"The most important thing for merchants is to think about how much they care about fraud," says Haigis. "What is the risk profile they are willing to take on to take good care of their customers?"
For example, it might seem like a good move to reject any order that looks fishy, but in the process you might be rejecting a lot of good orders-and ticking off a lot of good customers who won't ever come back, says Haigis.
"You need the ability to properly screen bad orders but maximize good orders," agrees CyberSource's Donahoo.
E-commerce sites also have to determine "how much they care about processing a high volume of orders versus dealing with exceptions," says Haigis.
An exception, explains Haigis, is most typically some error, such as a user mistyping a credit card number or address, that forces the e-retailer to hold up an order and contact the customer before completing the sale.
"Do you want to take a bunch of orders quickly and deal with exceptions later, or do you want to work those through while the customer is online?" says Open Market's Haigis. While it takes more time and system smarts to deal with exceptions at checkout time, "you may not want to give people a chance to take away the money they want to give you" by going back to them to resolve problems later, says Haigis.
"You're basically giving them a chance to say, 'Yeah, last week that fluffy bear seemed like a great idea but now I'm not so sure,' " he says.
From better back-end processing and fraud-detection systems to customer innovations ranging from e-wallets to debit cards and virtual gift certificates, e-retailers are poised to have themselves a highly successful digital little Christmas.
