Small Businesses have to Contend With High Payment Default Rates

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An online payment transactions study by ECC Handel examines payment defaults in the German online market. In many cases, risk management measures are not being fully exploited.

The majority of online retailers have to face the risk of defaults. Due to the nature of the distance sales channel, there is no direct communication between sellers and buyers. In other words, it is not possible for traders to directly check the identity of their customers, as is possible via the checkout process in the stationary trade. The study, “Internet payment transactions from the trader’s perspective” shows that especially smaller companies are often faced with high credit losses.

Nearly 84 percent of companies with 51 to 250 employees and about 70 percent of companies with up to 50 employees reported increasing payment defaults of up to one percent. It is striking that it is especially the smaller companies that are often faced with incorrect address information, the non-acceptance of goods when paying by cash-on-delivery or with unpaid bills in spite of correct delivery.

Nearly a quarter of them reported payment defaults from one to five percent. Some specific companies, with up to 50 employees, even report being exposed to an existentially threatening non-payment of ten to twenty percent of their sales. But 5.6 percent of major online retailers have reported losses between 5.1 and 10 percent.

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In terms of risk management, there is still plenty of room for improvement
The fact that high default rates will always be on the agenda for online retailers shows that targeted risk management is an essential factor in the handling of payments. According to the study, large companies use significantly more in the way of risk management tools than small and medium-sized online retailers.Whereas if small companies use a risk-management strategy at all, it is usually in terms of very easy to integrate tools against cash-on-delivery / cash-in-advance risk or a range of payment methods that use larger, more complex business solutions. Small businesses often lack the necessary resources to implement complex systems. But even cost- and resource-limited measures, such as amount limits or address checks, are not being fully exploited by small- and medium-sized businesses.

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