23/10/2020 Risk management
Ethan Magnet

Purchase on account: Why it is worthwhile to manage the risk yourself

The relevance of online trade is now omnipresent. In times of digitalisation and omnichannel, it is not uncommon for stationary retailers to open up new online sales channels. The payment methods offered play a particularly important role here. There is no doubt that these can have a decisive influence on the turnover of the online shop. While prepayment is still mostly rejected by users, the introduction of purchase on account reduces the purchase abandonment rate by up to 79% (ibi Research, Erfolgsfaktor Payment, 2013). There are several reasons for the high popularity of purchase on account in Germany.

Firstly, most people are already familiar with the concept of buying on account from everyday life and are therefore easy to use. Secondly, there is no need to provide confidential account or credit card details. Finally, it is probably also crucial that buyers are basically able to check the goods they have purchased before they pay for them. These so-called “choice orders” are often required by customers buying, for example, fashion, shoes or workwear. In addition to all the opportunities offered by buying on account, especially to new customers, shop operators are more likely to see the associated risks. After all, buying on account means an increased risk of non-payment for them. Moreover, on the part of the online shop it increases the risk of becoming a victim of fraud.

It is not uncommon for these risks to lead to merchants not offering invoice purchases at all or outsourcing the issue completely to external service providers. The latter means that merchants do not have to worry about non-payment risks, as these are usually covered by the service provider. However, on closer inspection, this can also result in disadvantages for shop operators. This is because, apart from the costs that regularly arise for transactions, the retailer does not decide for himself whether to accept or reject invoice purchase requests. Rather, external service providers have their own risk criteria which decide which shopping baskets are allowed. This does not always have to be in the interests of the retailer, as service providers also have an interest in transactions that are of value to them.

In order to achieve an optimal balance between risk and buyer-friendliness, a more differentiated risk strategy is usually necessary. The basis for this is existing customer information, which the shop has at its disposal anyway. If online merchants look at their customers’ historical ordering behaviour, conclusions can already be drawn about expected payment behaviour and preferred payment methods. Furthermore, factors such as outstanding invoices, purchased items and delivery addresses can also be included. This information is often sufficient to make a decision on whether or not the customer can be offered the purchase on account. Especially with new customers it makes sense to use external information. For example, the inclusion of credit enquiries helps to assess the individual risk of non-payment. In this context, particular attention should be paid to which credit agencies are included. Particularly in cross-border online trade, there can be differences in data quality. The introduction of a separate strategy for risk assessment ultimately helps to find a middle way and to establish a balance between internal and external information. Of course, the size of the individual shopping basket and the increase in turnover that can be expected from the offer of purchase on account should always play a role here. Ultimately, however, it is worthwhile for the online shop to manage the issue of invoice purchases itself: it gets to know its customers better, can evaluate them in a more differentiated way and offer them “unsafe” payment methods more often than the competition might do – a decisive competitive advantage in the highly competitive eCommerce market.