With rapid growth rates in e-commerce, the topic of online fraud and payment defaults is more relevant than ever. The e-commerce industry is predicted to overtake physical in-store sales by 2027 with a global market volume of USD 6.52 trillion. This article deals specifically with the prevention of chargebacks.
Why product rental businesses are particularly at risk
chargebacks pose a risk for any online payment - but especially circular rental business models have to cope with tightened conditions. This is mainly because lower rental prices in a rental business model reduce the buying barrier for lower-income customers and provide them with access to the products. Generally, it is a good thing from both the company’s and the consumer’s point of view since it offers potential for business growth. However, if some of these new customers are not credit-worthy, their rental subscriptions may entail the risk of payment withdrawals.
While in a normal selling model via e-commerce you face the threat of a failing payment only once (at the point of sale), in a rental business model with recurring payments, you have to tremble with a non-payment or chargeback every month or sometimes even week. To ensure that your rental business will stay profitable in the long-term, prevention measures are essential.
An easy to implement and trusted way of protection are online real-time credit checks. These can easily protect your company against scenarios such as non-payment after the goods have been shipped, or chargebacks from the customer's bank. Which is frustrating — especially if you’re just starting.
Insights into customers’ risk profile
Over the past years and especially with the rise of technology, a wide range of applications within the credit check domain have been tested and partially established.
Checking the existence of the person
Credit checks are a process and they come with different versions. The first thing to be verified is if the person requesting the transaction even exists. Followed by further details such as if that person already has negative entries at debt collectors etc.
Some institutions, for example, intervene in social media platforms on which the specified person is registered. They use this method to verify the person as a real individual by matching different online profiles.
Checking banking and financial accounts
Within Europe, the PSD2 regulation set the path for so-called “open banking” — a system that allows access and control of consumers’ banking and financial accounts via third-party applications. This is a rather unpleasant system for banks, but it has advantages for online rental businesses and other retailers. This helps to understand whether the customer is financially strong enough to pay the monthly rental price. Besides, the data show’s, when the customers have the most money in their accounts. With this information, the date for the recurring rent payment can be timed properly.
Using credit check methods like this, chargebacks are avoided, which can otherwise be painful or even critical for the business. The costs for chargebacks can be within the range of $20-$100, depending on various factors such as bank, location, etc. In addition to the chargeback fees, there are operational costs, which arise from order processing and shipping, as well as customer acquisition costs for a customer who is no longer a customer. This usually leads to chargebacks being way higher than the initial transaction value. However, this does not have to be the case, as chargebacks are not a cost of doing business.
Time and convenience play a major role
In reality, credit checks can look different depending on the institution or application process. Merchants need to ensure a high level of security while providing the best customer experience for e-commerce shoppers.
To achieve this, we at circuly use a real-time solution in the checkout process of our software with immediate results. We carry out a credit check on every customer to score their profile once and ensure that they are solvent in the future. This is especially relevant if the customer decides to rent other product categories at higher prices at some point. This means that every customer who has been confirmed as a strong payer can rent flexibly via the different categories at different prices — without causing payment troubles.
Based on an analysis of the customer’s risk profile — i.e. the probability of the ability to pay — we determine different possible combinations of credit scoring solutions.
Optimized ranking for creditworthiness with scorecards
The traditional scorecard model of scoring institutions usually only provides a yes/no result, which is, on the one hand, secure, but on the other hand can also restrict purchases to those customers who are actually able to pay. For this reason, the creation of scorecards according to the customer takes place using our algorithm, in which different acceptance intervals can be used.
In this way, we can categorize according to prices and create scoring models ourselves. This means our scenario at the end can look like this:
- Score class 1–4: always accept.
- Score class 4–7: only accept if condition X is fulfilled.
- Score class > 7: reject.
With the help of this method, we help ensure the solvency of your rental customers and offer a long-term, scalable rental platform for your business.
If you want to learn more about how circuly can help you make your rental business ready to scale, get in touch via info@circuly.io and let’s have a virtual coffee together!
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