When Buy.com announced that its ability to accept credit cards — and therefore its viability as a business — was in doubt, the admission shed new light on some important but often overlooked partners for many e-tailers: credit card processors.
As Buy.com noted in a filing with the U.S. Securities and Exchange Commission (SEC), more than 90 percent of its income comes from credit card sales. If the company that handled Buy.com’s credit card transactions had followed through on its threat to stop doing so, Buy.com would in all likelihood have had to shut down completely, the e-tailer said.
In the end, with the help of its founder and soon-to-be-owner Scott Blum, Buy.com convinced its as-yet unidentified credit card processor to extend its contract. The bizarre turn of events was a reminder of just how much of an electronic lifeline a firm’s credit card processor is.
“This is not at all a typical thing,” Forrester Research analyst James Crawford told the E-Commerce Times, referring to the Buy.com situation playing out in public. “I think it highlights just how much trouble Buy.com was in.”
In fact, even though they expose themselves to some risk in every transaction, most credit card processing companies are willing to stand by their merchant customers until the bitter end.
“Most e-tailers that are going to shut down do it in an orderly way,” Crawford added. “They close their Web sites, stop taking orders, then fill whatever orders they already have. I think what we can read into this situation is that the credit card company thought Buy was likely to just shut down all at once.”
Almost All Pass
While there are dozens of credit card processors offering different levels of service to online merchants, most have similar policies when it comes to the companies they will deal with. And most rate e-tailers a good risk.
In fact, the Electronic Clearinghouse, one of the largest credit card processing service companies, notes that 98 percent of all merchants that apply for its services pass muster.
“There is always some risk involved,” said Matt Ide, a spokesman for Nashua, New Hampshire-based Merchant Express, which provides credit transaction services to small and mid-size online businesses. “But e-commerce sites are a big part of our business. We can’t turn them away.”
However, Ide said credit card processors as a group do tend to avoid certain business models and industries completely.
Many credit card companies believe that businesses in the online gambling, pornography and water-filter industries are too risky to back, according to Ide.
“Anything that has a history of bad customer experience,” Ide told the E-Commerce Times. “Because that’s the kind of situation where we can be stuck in the middle holding the bag.”
But e-tail sites aren’t yet on the avoid-at-all-costs list. And a business has to be in bad shape before a credit card processor will think about severing ties.
Even with a retailer as large as Buy.com, a transaction company is probably only responsible for a small number of transactions at any one time, Ide noted.
“The transfer happens pretty quickly,” Ide said. “The danger is that if a consumer is unhappy and the merchant is gone, they’re going to come after you.”
Meanwhile, even though Buy.com convinced its processing company to continue operations after founder Blum provided additional funding — with some of that cash likely set aside to secure future credit card transactions, Crawford speculated — the e-tailer’s outlook is still clouded at best.
“There are a lot of strong players in this space already,” Crawford said. “This was more of a symptom than the problem, but even with it fixed, I don’t think they can hang on too long.”