Already, some 6.8% of total retail trade revenue is generated over the internet. Most online turnover is reported in association with home electronics, clothing and shoes. In addition to the trade in physical goods, the services sector is also flourishing. From airline tickets to music downloads and films – it’s all being ordered over the internet.
The Swiss still prefer to pay for their purchases on receipt of invoice, in spite of the wide range of alternative payment methods (such as credit cards, cash in advance, PayPal or debit cards). According to the VSV study, 84% of purchasers order their goods in this way. A glance across the border shows a similar picture. Purchasing on account is the preferred form of payment in Germany and Austria too.
Purchasing on account is a necessity for traders
The reasons for the Swiss preference for purchasing on account over other payment methods are complex. PayPal has gained ground in Switzerland over the past few years but the increase in charges produced by lodging a credit card as a form of payment is a disadvantage. On the other hand, the Swiss tend to use credit cards rather cautiously, either for security reasons or for the simple fact that, for example, younger people do not tend to have credit cards. Mobile payment methods, however, will become more significant in future. There are many providers offering a variety of systems already on the market or still in the development stage. Which systems will eventually prevail is as yet unclear.
Purchasing on account offers many advantages for consumers. For example, they do not need to hand over any information about their credit cards and thus minimize their security risk. They can also check the goods before paying for them, and pay flexibly because the opportunity to pay by instalments is often available. Lastly, purchasing on account creates confidence, helps reinforce customer loyalty and ensures a higher conversion rate.
Purchasing on account therefore exerts a major influence on the revenue and success of online traders. According to a study carried out by IBI Research, close to 80% of purchasers stop their purchase if they are unable to order the goods on account. If online traders want to achieve higher earnings and make their mark on the market, they absolutely must offer payment on receipt of invoice. The same conclusion is also confirmed by Patrick Kessler, President of the VSV, “The rate of discontinuation for purchases drops significantly once an online store operator offers the option of purchasing on account. As a result, this generates higher turnover and prevents the loss of customers to the competition”. So what does this mean for retailers, and what risks are generated as a consequence?
Online trading is anonymous; the seller does not know the buyer and it is impossible to verify identities in person. An online transaction also takes place in real time, which means that the trader has to decide within a split second whether it can grant the facility of purchasing on account to the customer. Essentially, payment is unsecured because the goods are dispatched before the invoice is settled. We should therefore not underestimate the risk of payment default. In order to guard themselves against this risk, most online shops automatically check the identity of the customer with a business information agency during the ordering process and use a credit assessment to weigh up whether this customer can pay upon receipt of invoice. If the risks are assessed as being too high, the customer will be offered alternative payment methods, such as payment in advance or by credit card. We recommend that online traders should check all transactions and use a scoring system to suggest the method of payment. This can reduce the risk of payment default to below 0.5%.
Attempted fraud has already been detected by 70% of all traders.
Protection from the mail-box trick
As well as the risk of payment default, we also need to keep an eye on the risk of fraud. The extent of the risk varies depending on the specific sector, the value of the goods and the tradability of the article concerned. According to a study carried out by the Händlerbund (a German-based online trade association) in 2013, almost 70% of online traders had already been the victim of attempted fraud. Fundamentally, we differentiate here between identity falsification and identity theft. Recently, press reports on the “mail-box trick” have appeared: purchasers labelled their mail-boxes with different pseudonyms and ordered goods online but did not pay for them. A variety of solutions are being investigated to prevent such fraudulent behavior. In addition to checking the identity and address with a business information agency, tools are also available to analyze the end user’s device; these can establish unambiguously whether fraudulent transactions have already been carried out using that device in the past. Transaction analysis offers another effective form of protection against fraud.
In this, the nature of the basket of goods, the ordering and delivery address, and the customer and payment method details are all compared with each other and set against well-known fraud patterns. This allows attempted fraud to be recognized at an early stage and stopped in its tracks.
Despite innovative developments in the mobile sector and an increase in the volumes of online trade, purchasing on account continues to be the most popular and convenient means of payment. The associated risks in the area of fraud and payment default can now be significantly contained.
