7 Payment Challenges and Solutions for Online Businesses

April 26, 2023 | Expertise

Handling payments is a fundamental need for any business. The ability to process transactions efficiently, securely and reliably is therefore a crucial success factor. However, merchants face a number of challenges when handling payments, depending on their business model, vertical and customer base. This article takes a look at the most significant ones, as well as ways to tackle them.

1. How can international merchants address the needs of a global customer base and handle cross-border payments?

Catering to regional customer preferences is a significant factor in reducing cart abandonment, and plays an important role in markets where a significant share of the population are unbanked and thus excluded from using traditional payment methods. However, this requires a payment solution that allows merchants to offer different local payment options. To meet this requirement, global merchants need to work with multiple PSPs, as local payment methods are typically only offered by local providers. An additional advantage of using local PSPs is that these tend to have higher authorization rates and lower processing fees for local transactions, which we’ll cover later on.

However, integrating multiple PSPs (a “multi-acquirer setup”) can be a significant challenge. Each PSP uses its own proprietary API (application programming interface) and will also deliver reconciliation data and settlement statements in their own data format that need to be translated into a common format for comparison and import into other systems. This means significant overheads for each new PSP a merchant integrates if done in-house - time that can typically be better spent focussing on the merchant’s core business instead.

Solution: Leverage Local Payment Providers

The major challenge of a multi-acquirer setup is the need to interface with a wide range of different APIs, each with their own idiosyncrasies. Instead of integrating each PSP individually, the best approach in this scenario is to use a payment orchestration platform as an intermediary. Payment orchestration platforms (POP) like IXOPAY offer a single API that is independent of the PSPs used to process transactions, eliminating the need to interface with the providers’ API directly. Instead, transactions across all PSPs are handled using the API provided by the platform.

Integrating a new PSP or adding a new payment method is significantly simplified using this approach, as the API remains the same for each. Furthermore, IXOPAY also provides a single consolidated overview of transactions across all providers, as well as a single data format for settlement and reconciliation data. This makes exporting data to external systems much easier. In short, payment orchestration solutions unify a patchwork of providers under a single umbrella, and are well-suited to large merchants operating in numerous markets.

2. How can global merchants navigate the broad range of regulations and compliance requirements?

Legislation and compliance requirements differ from region to region. For example, merchants handling European customer data need to comply with GDPR (General Data Protection Regulation) and PSD2-mandated SCA (Strong Customer Authentication). Merchants also need to follow local anti-money laundering regulations and check that businesses and consumers are not on any sanctions list. Not only does this mean that international merchants face the challenge of complying with various disparate regulations, they also need to keep up with any changes to them.

As well as facing the challenge of legal compliance, merchants also need to comply with the requirements of the major credit card schemes (Mastercard, Visa etc.). These have stringent requirements in place governing the storage of credit card details and require annual audits for companies storing this data themselves. Known as PCI DSS, fulfilling these compliance requirements can be expensive, with costs easily running into the hundreds of thousands of euros or dollars over time.

Solution: Local Expertise and Secure PCI Vaulting

Local PSPs will understand local regulations and conform to them, so once again, integrating local payment providers can be an advantage. Merchants can benefit from the accumulated experience of domain experts who will be well-acquainted with local requirements.

Merchants can bypass many of the costs associated with PCI DSS compliance by using a secure vault hosted by a third party to store payment details. Instead of storing credit card data locally, and thus being subject to the most stringent compliance requirements, using a third party solution typically only requires merchants to complete a self-assessment questionnaire rather than annual audits. This results in significantly lower costs.

IXOPAY offers a secure vault for just this purpose. Payment details for card on file or recurring transactions are stored in the IXOPAY vault and referenced by a merchant-specific token. This token does not contain any sensitive data, and can be stored by merchants while still complying with PCI DSS requirements.

Furthermore, merchants eliminate the costs involved in setting up and maintaining the secure infrastructure required to store this sensitive data. An additional benefit is also reduced legal exposure, as the burden of liability is shifted to the payment platform.

There is however another risk associated with storing payment details at a PSP, as it makes the merchant more dependent on the provider and leads to vendor lock-in. The alternative approach is to use a payment orchestration provider and store the payment details there instead. The same data can then be used to process transactions using any PSP integrated via the POP, reducing the dependence on a single provider and making it much easier to switch providers if necessary.

3. What are the main security challenges in digital payment?

Security is fundamental to online payment processing. Ensuring that customer data and payment details are safe is paramount. A failure to protect this information can have significant repercussions, harming consumer trust and goodwill. Protecting credit card details from falling into the wrong hands is thus a high priority for merchants, who are a clear target for malicious actors. PCI DSS is the major credit card schemes’ solution to ensuring the safety of online credit card transactions, and stipulate how credit card details must be stored. 

Two factor authentication (2FA) is another method used to combat fraudulent transactions and is mandatory in many regions, such as the EU. This includes 3DS2 (3 Domain Secure), a method used for credit or debit card purchases. Unlike its predecessor, 3DS, 3DS2 is more consumer-friendly and uses far more data points to evaluate the risk associated with a transaction, meaning that only the riskiest transactions now require additional verification.

But security is not only about protecting information, it is also about safeguarding the merchant’s ability to do business. In the case of e-commerce, that means the ability to process transactions. Having fallback options in place mitigates the risk of a merchant’s PSP being unavailable or going out of business, allowing transactions to be routed to an alternative PSP. However, this requires additional PSPs to be integrated by the merchant. As with any multi-acquirer setup, this brings its own set of challenges.

Solution: Secure Storage, Smart Routing and Fallback Options

Using a third-party to store sensitive credit card data not only reduces the costs associated with PCI DSS compliance, but also reduces the security burden placed on merchants. Setting up a secure environment is expensive, and if there is a security breach at the merchant, it is the merchant who shoulders the responsibility for the consequences. A third party specializing in securely storing this information will have the experience and expertise required to set up a state-of-the-art secure storage facility.

PSPs will offer 3DS and 2FA if required by the market they operate in. Merchants just need to make use of these features, which requires a PSP who offers these features and understands local regulations.

Another risk merchants face is the risk of a PSP being unavailable or going out of business. Having a fallback option in place to deal with these eventualities is a good risk management strategy, but requires integrating multiple PSPs and a system that allows for the immediate rerouting of payments as needed. Payment orchestration solutions not only makes it easy to integrate additional PSPs, it also makes it easy to route transactions to any connected PSP. If one PSP is down, routing transactions through an alternative provider can be automated using smart routing rules and automatic fallback options.

4. How can merchants minimize transaction fees and maximize authorization rates?

The fees charged for processing transactions depend on the PSP used to process the transaction and the terms of the contract. Each PSP will charge different rates, and the higher the merchant’s transaction volume, the lower these rates typically are. Fees are also typically lower when using a local provider to process the transaction, i.e. using a PSP in France to process transactions using a French consumer’s credit card.

While there are many PSPs who can process transactions in a large number of countries, these do not necessarily offer the best rates. Conversely, working with local providers can help reduce fees, but the trade-off is the need to integrate multiple providers all using different APIs and data formats, as mentioned above.

Furthermore, merchants who have integrated multiple PSPs to take advantage of lower costs and the higher authorization rates from local providers still require the ability to route payments to the appropriate PSP. One option is to simply route all transactions in a certain country or using a specific payment method to the same provider each time. 

Another approach is to use dynamic or smart routing and determine the PSP on a transaction-by-transaction basis. This could be based on the location of the consumer, the payment method or even the type of credit card. Saving a few cents per transaction quickly adds up when you have hundreds of thousands or millions of transactions per month. However, implementing dynamic routing is not an easy task without infrastructure designed with flexibility in mind.

Solution: Choose the Best Provider Per Transaction with Smart Routing

Routing payments through the PSP offering the best processing fees or highest authorization rates needs to be dynamic and take the transaction data into account. A payment orchestration platform like IXOPAY allows merchants to define rulesets that route transactions depending on the transaction data, such as the location of the customer.

Smart transaction routing can also help increase your approval rates, either by routing riskier transactions through more risk-affine PSPs, or by retrying transactions that received a soft decline through an alternative provider. You can also easily set up A/B testing, routing some transactions through one PSP and other transactions through another to optimize your routing strategy based on the results.

Another advantage of payment orchestration is the ability to easily integrate new PSPs and route transactions to them with a few clicks. This can put merchants in a strong negotiating position with PSPs, as switching to an alternative provider with lower fees is quick and easy. This is not the case when integrating PSPs directly using their proprietary API, as the overheads involved in adding a new PSP can be significant. But with a platform like IXOPAY, all PSPs are integrated using the same API, and setting up alternative transaction routings takes just a few clicks using a drag and drop interface.

5. How can merchants reduce cart abandonment and deliver a great checkout experience?

Cart abandonment is a real problem for online merchants, i.e. when a consumer adds products to their cart, but then does not complete the checkout process. There can be many reasons for why this happens, but most can be summed up as “poor user experience”.

Solution: UX Best Practices for an optimized payment journey

A good user experience is one where pricing is transparent, the consumer’s preferred payment methods are available, the checkout process is easy to complete and failure rates are low. This makes for a successful conclusion to the payment journey.

Offering consumers their preferred payment options - especially regional ones - helps improve the shopping experience. We already covered how using a POP makes it easy to integrate country-specific or regional payment methods like SEPA above. Increasing authorization rates using local providers is another means of delivering a good customer experience, as no one likes it when their payment is refused.

Requiring a customer to set up an account can also discourage them from completing a purchase, whereas making this step optional puts the consumer in control. Consumers have no incentive to create an account for one-off purchases and resent having to manage yet another password just to complete the transaction. Conversely, being able to store payment instruments and reuse them again at a later date streamlines the checkout process for repeat customers. It makes sense to offer consumers the best of both worlds - guest checkout or the option to create an account - and let them decide.

In general, applying good design principles to your webshop goes a long way to improving the customer experience and reducing card abandonments. Some good strategies include:

  • Make prices visible in store, not only at checkout.
  • Include taxes in your prices in markets where this is the norm. Do not add the taxes at checkout, as this will come as a nasty surprise to consumers who are used to prices already including tax. They are far less likely to complete a payment that costs more than expected.
  • Be transparent about any shipping costs for the same reason.
  • Where possible, integrate the payment authorization directly rather than opening an additional window.
  • Offer payment methods tailored to the expectation of the consumer, e.g. SEPA in Europe and WeChat Pay in China.
  • Restrict the data collected at checkout to the data you need to complete the transaction and make any mailing lists opt-in. This will also ensure you are GDPR-compliant.
  • Do not require users to create an account, make this optional. 
  • Offer users the option of saving payment details for reuse.
  • Provide meaningful error messages when a transaction fails, and suggest remedies.

6. How can high-risk merchants deal with the unique challenges in their market?

Merchants operating in high-risk industries face unique challenges. PSPs may be wary of working with them and may terminate their contract at short notice, particularly if their transactions have high decline rates. This necessitates a multi-acquirer setup with fallback options so that payments can be routed through another PSP if the preferred PSP becomes unavailable. In a similar vein, these transactions are often more likely to face authorization problems, so offering alternatives for consumers and being able to retry a transaction at a later time or via another PSP is important.

Another common requirement that lends itself to a multi-acquirer setup includes accepting alternative payment methods such as cryptocurrencies, which are not supported by many PSPs. Merchants in some industries may also require the ability to pay out earnings or winnings to customers, which again requires a PSP that specifically offers payout options.

Solution: Spread the Risk

Using a payment orchestration platform that unifies multiple PSPs and payment methods under a single umbrella drastically reduces overheads and makes it easy to switch out PSPs and payment methods as required. This gives merchants operating in high risk industries a fallback option allowing them to keep payments flowing. If one PSP is no longer willing to process payments, the merchant can simply switch to another PSP instead. Smart routing also allows merchants to implement load balancing - sending a share of the transaction volume to different PSPs. If transactions sent to one PSP exceed the chargeback ratio or number of chargebacks threshold, this has no effect on the transactions processed by the other PSPs.

Accepting alternative payment methods like cryptocurrencies requires a payment provider that supports it. The more alternatives a merchant can offer, the more likely it is that one of those methods will be successful, but the more providers that need to be integrated. Once again, a POP is well-suited to meeting this challenge while keeping implementation overheads low.

7. How can merchants ensure their business is equipped to deal with changing market conditions?

The world of online payments has changed radically over the past decades. The rise of alternative payment methods (APMs) and models like Buy Now Pay Later (BNPL) and open banking mean that it is no longer simply enough to accept credit card payments. Consumer expectations have shifted, and this trend is set to continue into the future.

This means that a flexible payment infrastructure has become a valuable asset, allowing merchants to adapt to changing market conditions as they arise. However, implementing a flexible payment system is not an easy task and requires one that is designed to be flexible and extensible from the ground up.

The payments industry itself can also be a volatile market, as demonstrated by the short average lifespan of PSPs, regular acquisitions and mergers and the strong shift to e-commerce as a result of the Covid-19 pandemic. Merchants need a strategy in place to mitigate the risk of their PSP going out of business or being acquired by a new owner with a different merchant strategy.

Solution: A Flexible Payment Platform

Reacting to trends is much easier when using a POP with a single API for all PSPs. The time-to-market for launching payment options is significantly shorter when these options can be integrated using the existing infrastructure and methods, without long lead and development times. Being a first-mover can be a significant business advantage.

Having fallback options in place in the event of a worst case scenario is an important risk management strategy. Conversely, relying on a sole payments provider can have catastrophic consequences if that provider goes out of business or is acquired by a new owner that decides to terminate its business relationship with some merchants. The importance of having a backup plan in place was highlighted by the demise of Wirecard, with many merchants losing their payment provider overnight and with no fallback option in place. Lessons have been learned, and many merchants are now specifically requesting payment orchestration in their RFPs.

A payment orchestration platform protects merchants from these seismic changes and insulates them from the fallout, which can cast a long shadow. The repercussions from the Wirecard scandal are still being felt today, several years later.

Conclusion: The Right Solution Depends on the Merchant

The world of payments is complex, and every merchant has different needs depending on their size, markets and vertical. What works well for a cottage industry will not meet the needs of international merchants active in multiple markets.

Small businesses starting out with online payments can typically make do with a single PSP that is easy to integrate into a website or provides its own storefront. The main requirement here is simply to accept online payment using the most common payment methods.

The larger a business becomes and the more global it is, the more nuanced its needs become. A single PSP is unlikely to be able to tick every box. Integrating multiple PSPs directly opens up a whole can of worms however - dealing with multiple different APIs and data formats, as well as routing payments to the appropriate PSP. The more complex the needs, the bigger the benefits of using a best-of-breed payment orchestration platform. These platforms have been designed from the ground up to be flexible and meet the needs of complex payment setups involving multiple PSPs and payment methods.

Choosing the right option for a business will deliver the best results. Being able to make the right choice means first understanding the challenges your business faces and understanding that these challenges can change over time as business grows and markets change. We are under no illusion that a powerful payment orchestration platform like IXOPAY is for everyone. Not every business requires multiple PSPs and payment methods; not every business operates in multiple markets. Payment solutions are varied and cater to many different business cases. We do however believe that making an informed decision is beneficial to everyone.

Do you recognize yourself in these challenges?

If you need a global payments solution that allows you to offer regional payment methods across the globe and process payments at scale, get in touch with us. Our team can help your business meet the challenges of online payments is an ever-changing digital world.

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About IXOPAY

IXOPAY is a best-of-breed payment orchestration platform offering flexible and independent global payment processing options. Fully PCI-DSS Level 1 certified and highly scalable, IXOPAY caters to the needs of enterprise merchants and white label clients, including payment service providers (PSPs), acquirers and independent sales organizations (ISOs). Built upon modern, easily extendable architecture, IXOPAY provides smart transaction routing with cascading, state-of-the-art risk and fraud management, fully automated reconciliation and settlements processing, comprehensive reporting and access to hundreds of acquirers, payment service providers and alternative payment methods.

IXOPAY is trusted by national and international enterprises and has offices in Austria and the USA. The company has grown from 2 to around 160 employees by delivering innovative products and solutions.

For more information, visit: https://www.ixopay.com

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