A Growing Issue - Dying ISPs and Thoughtless Chargebacks

[aci-john]

I used most of this as a reply to another post, but I decided it deserved its own thread. This gets a little to close to home, but this is what ISPs have to deal with on a day to day basis. Making sure you make the right decisions to make it to the next day.

Now Im going to tell you the main 3 reasons ISPs die.

- Financials
- Carrier Terminated for Having High Usage or Financial Debts.
- Class Action Fraud Suits.

Each of these could have been saved with better decisions. The #1 Reason out of these that ISPs die - is having too high of usage. Carriers wont put up with it. The last 7 big Virtual ISPs that left because of this was:

1 - ValueNet
2 - Access4Less / Joi Internet
3 - GenericISP
4 - DialPop
5 - FlxTek
6 - Knight Communications
7 - Affinity Internet Group

And I know of 3 More that will be closing shortly, and of a few in the middle of mergers and buyouts.

In Missouri where I am from - There were more than 26 ISPs in the last year to close out. I wont disclose their names yet since 4 of them are still pending, and the others I know personally. While prices go down, operations costs still are the same, if not more.

Now a couple of ISP Owners are gonna hate me for repeating this, but Freedomlist, attracts the highest usage subs on the web. Some Consumers find this place because they were searching for the Cheapest ISP, with the best terms, but would let them use it to death. Many New "Virtual ISPs" advertise here because its a free avenue. Many ISPs have actually died because of the users they got.... From places like this.

I cant think of 2 ISPs under $7, that have close to average level usage. I can only think of one.

Most smaller ISPs start from someone trying to get into an industry that they THINK is a cash cow but its not, and it takes serious time to build. You must have advertising capital, and must have the ability to get both online and offline customers. The online initiated customers, tend to be higher usage. The customers subscribed from offline sources will normally be average or light users.

The potential ISP has to find a carrier. This carrier will either allow them to buy per user, port, or hour. The safest way to test the water - is per user. Per port - and per hour is for Established ISPs that know their areas and coverage needs, and have the averages to buy massive amounts of online time.

The "unlimted access" can be interpreted 2 ways - Unlimited Connects throught the day, or by unmetered usage. Dedicated unmetered, is a true port, that has no hard cutoffs. You will pay dearly for this, normally only a business in the middle of nowhere woud buy this service. There are residential customers that THINK they can use it like this, but they will soon find there are drawbacks.

A Smart ISP would pick a capped service, so that they will be able to stop high usage customers from abusing their contract. Most customers will fit under a 150 hour account, so thats where caps start. 150, 200, 250, 300, Unmetered. These days - the carriers left in the game that offer unmetered will demand termination of a user thats on more than 350-400 hours per day. There are a few carriers that offer unlimited, but have a average usage open-end. This is where ISPs can die. Because this means if they cant maintain their average, and they go over the agreed amount - Overusage penalties kick in.

In most cases - a capped account - doesnt have an average on it. If the ISP doesnt make acceptable usage patters after adding 500+ users, the carrier can just choose not to renew the contract, or can give the ISP a 30-60 day notice of termination. Once the ISP tries to find a new carrier due to high usage, trust this, it will be a 60+ hour average, and no other carrier will put up with that, without charging at least $6 per user. Which means - that isp will be gone if they were charging less than 8 bux.

The trick to unmetered - and this works well - is getting 250-300 hour caps. If he needs a 300 hour account, honestly, ISPs that make 300 hour accounts normally market them as unlimited, because the price from the carrier is so close to unlimited, and anyone using 10 hours a day on a residential port from the carriers view - Needs to be terminated. I did, and still do believe in that.

Ive preached this before in the past. This is why most ISPs start locking down and laying more rules later, or they just dissappear. Flxtek did just like A4L, BUT charged a couple dollars more for unmetered. They carried such a high usage average that no one wanted to buy them out, and their carriers were starting to lose money. Plain and simple. The only people that would buy an ISP that has high usage but is charging more than $8 per month, are LocalNet, and Earthlink. Iserv and SCT might buy, but thats only cause the customer is paying enough that they just want the subs to average them in.

IM going to give an un-embellished scenario, as I overpriced it a while back just so the end user didnt have to know what a real ISP has to pay for service. But I will

DialStream, For example, Has 12 Networks. Each from a different carrier. Each of these networks has a different price per user, hour, or port. That is how we pay for service. Per port.

Customers honestly couldnt care less in most cases what their ISP is charged, as long as they get service. There are even some that piggy back off ISPs that dont track their systems., and some that prey on "free" providers.

Ill tell you now, if a provider is offering service free, its because they have a paid product, and they will have limits on the free service that eventually will force free users to use the Paid Service. Thats the whole reason why NetZero and Juno have 10 hour accounts. So that once you hit it, it will give you the link to pay for unlimited.

Now... Back to the usage issue - Lets go by port.

Lets Say a Port Costs 35 bucks a port. A Port, is an access line that a single dialup user can access a network to. In order for an ISP to stay in business, they need to charge a certain amount, and be able to get as many people into a port at as possible throughout the day. This is where your "Average Usage" becomes a factor.

The bigger the ISP the more customers they can average their ports into.

If an ISP has 1000 users, ISP expect them to be able to fit the into 80-100 ports. So at $35 a port on 100 ports, the isp would have raw cost of $3500 per month. Not bad but can be better. As the numbers rise to 5, 10, 20, 30, 40, 50 Thousand users, The number of ports doesnt need to be 100 per 1000 users, it actually is expected to drop to 15 users per port. That would mean that if 10,000 Users averaged to that. Instead of a cost of 35000 for having 1000 ports, they should be able to have about 667 Ports.

$6.95 x 10K = $69,500
$35.00 x 667 = $23,345

Difference = $46,155 Per Month Raw. (Before Other Fees)

Then you have the 800#, Support Costs, Accelerator Costs and Setup, Credit Card and ACH Processing Costs, Chargeback Reserves and Escrows for those who are :-x and Charge back instead of accepting terms of service and cancel the way they are asked to before signing up., And there are some ISPs that have to reserve money for debt collection and reporting methods - we will get to those later...

That stuff adds up. And Even if the ISP was charging $6.95 - that comes to $6950.00 Before some of these other costs are assessed. Basically, if Flxtek only had 1000 users, they could only afford to be a 1 man show with that kinda money. Youd need 1500 Customers just to have 1 person staffed. And probably wouldnt be making any money.

CSRs overseas run 400-800Mo Full Time. With no taxes to withhold, and if you own the call center they are in - Cost goes down bigtime.

Now for most ISPs here they buy from the carrier on a per user basis, and not per port. Which means they are buying per user, but then their carrier has to make sure they have enough ports to average in the ISPs users. Per user cost more, but then a grandma could have her own ISP cause she wont have to deal with ports.

BUT THEY STILL HAVE TO WATCH USAGE LEVELS.

The average dialup user is expected to use the net a little over an hour a day. Acceptable usage is 40 hours per month average per user on an ISPs portfolio. If they cant keep this average, the carrier may terminate their contract, hence ISPs disappearing. They either disappear because they cant pay the bills, or they got terminated by the carrier.

Per Port ISPs have to deal with these averages, but they have more control. They can allow a single user to use as much time as they want, if they have lots of other users using no where near the alotted time that would keep their average. Per port ISPs, if they charged 6.95 - And Kept 10,000 Customers on and averaging even 50-60 hours a user, would survive and probably have 2-3 Account Managers watching the customers, and the Owner would still be able to eat. Especially Seeing Sales would be almost a million per year. He could take home at least 100k per year if hes smart. (Puffs up chest 8-) )

I can tell you now, and I shouldnt say this. But Out of the top 50 ISPs on freedomlist, I can bet you less than 10 of them have at least 10,000 Users. So dont get mad and say "Oh Support is terrible" - Get an ISP that cost a lil more that actually has support averaged into the cost. And Trust me - youll pay at least 7.95 to get that. Steve at Poetworld is great.

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A CHARGEBACK RANT -

I think this needs to be covered since there is soo much fraud, and other elements going on these days. I think Ill let people know what they have pushed ISPs into.

Now seeing that during the holiday, I had a nice chunk of these myself, Im gonna embellish on Chargebacks. Chargebacks is a major thing in this industry. They come from Laziness, and people thinking that it will get them off the hook.

FACT - Charging back a $10.00 Payment - The ISP would need more than 10 New Subscribers to make up for that. Charging back a $5 payment on a dialup ISP hes going to need 20+ New customers to break even on that. A company like earthlink charging $21mo could eat the chargeback with just 2 new customers. That stuffs not a joke.

FACT - Charging back doesnt cancel the account. It only acts like a "stop payment" On advanced gateways, it can block the merchant from charging the card, but in most cases it does not. Technically - for a MAJOR ISP or telco - your account balance could keep on rolling until they decide to terminate your service. I know of several off the top of my head that can and will keep the account open til the customer cancels it, or 6 months+ passes so they can hit the customers for the bill, and start a collections file on them should they refuse to pay. IT HAPPENS EVERYDAY.

Simply put, Chargebacks for the wrong reason, are only effective for people with BAD credit, and have nothing to lose. Cause a decent size ISP, may eventually come after you for both the charges, and the Fee they were charged when the user calls themselves taking thier money back.

Ill explain how a chargeback works.

1. Customer calls their bank - and disputes the charge. Theres about 50 decent reasons for charging back. But with ISPs, theres only 3 Main Reasons: Fraudulent Use of Card, Services Not Rendered, and Cancelling a recurring transaction.

2. Bank SHOULD tell the customer to try and contact the Merchant. They will normally provide the number the merchant has on file with their processor, but if the customer has been given a different number than that, its best to try them both before coming to conclusions.

3. Bank will send a chargeback request to the processor to take the money back from the merchant, and the MERCHANT gets charged a fee, identical to a NSF fee from a bank. Same high price.

---------------------

Dont think for a second, that if its on the ISPs TOS, that they dont put up with it, that they wont eventually retaliate.

Processors, normally review the ISPs TOS before allowing them to process, so anything thats in there, they are allowed to enforce. A decent sized ISP, may operate just like your local Telco. Would you actually try and chargeback on your telephone bill? Ive heard some horror stories about people whoved tried. I sit with Telco CEOS and hear the darndest things! It may not be soon, it may be months or a year later, but if you owe enough, most will come after you.

The consumer has the right to chargeback any justified amount. But charging back just because you dont get your way, actually envokes the merchant protection side of it. We have the right to report bad debts.

Normally, if an ISP thats going to retaliate, they will send you a notice, to see if you are going to pay the bad debt. If you choose not to, they will simply file a Chargeoff against your credit, and/or Tell ChexSystems or Telecheck you make bad debts. If you paid it with a Checking account, thats a double whammie. A serious ISP would alert all 3 Brueaus, and Both Telecheck and ChexSystems.

What does this do....

Example: People who go to places like Walmart, and think they will write a check to pay for their items. If you had a negative refrence in TeleCheck as of April 2006, when Most Walmarts Started using Check Conversions, You wont be paying with a check... The check will come back declined.

If you are trying to get a loan, and they want a post dated check, Most will check ChexSystems before approving you. Same as TeleCheck but mostly used for Loans, You would be declined.

Chargeoffs, depending on the case can be drastic. A Fresh Chargeoff on perfect credit, would sear right into that score for more than a year. Hope no one would want a new car or loan with an optimized rate...

The only thing that can get someone off from a chargeback - is if their ISPs advertised contact numbers on their website or on the Statement are out of service. This does not mean just cause you got an answering machine every time you called but didnt leave a message, that youre fine. And incohearent messages dont count.

END OF MEGA-RANT.

*******************

I will admit. Chargeback risk has caused dialstream to pull its $3.95 and $4.95 plan. It would take more than 120 customers to make up for it at that rate. Two Simutaneous fraud cases spoiled it all.

[v_v]

John,

That was a very good and informative post (even if it is a duplicate). I can't say that I fully understood the overall charge back issue as you presented it, but it was still informative nonetheless. Thanks for sharing the information for our continuing enlightenment!

v_v
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[blsJason]

v_v wrote:

I can't say that I fully understood the overall charge back issue as you presented it, but it was still informative nonetheless.

I don't claim to know all of it, either, but I think what he's talking about is the costs for the ISP of disputing a charge.

The customer thinks 'when the charge is off my credit card, I don't have to worry about it.' However, the ISP has to pay a fee because the bank is not honoring the charge. This is not an issue of whether or not the customer used the account, or cancels correctly (or thinks they did).

I tried to summarize that from the ISP perspective only, and am probably a little off the mark. Anyone, feel free to respond/correct as appropriate.

I should mention I have some experience of dealing with the bank side of it - a few years ago, my job was making outbound calls to credit card holders (hmm... I wonder why? Hint: not for sales purposes! ), many times they'd say 'I don't want the account, cancel it;' but there's a recurring charge from someone on it. The system definitely said who put the charge on it, and provided a number so the card holder could contact the company. With the company I worked for, we insisted they take the name/number of the company the charge was from and handle it with them. However, occasionally someone would say 'I already called the company, they won't do it.' Then, we had a process to forward it to another department who might actually reverse the charge.
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[aci-john]

Great interpretation.

Boils down to: As these smaller ISPs dwindel off, the major ISPs are either going to take that hit, or not. As credit card fraud increases, ISPs are now taking less hits then they need to, they are paying more attention to the reason that chargeback took place, and what they will do about it.

Victims of fraud, are #1 problem. Less than 40% actually take the time to call around and get the merchant to remove the charges.

Lazy Consumers are the next. These are the customers that signed up without reading the terms, canceled in their own special way, (Emailing whatever company email they wish, sending a message through live chat, leaving a voicemail, etc.) and think because they "supposedly" cancelled X date, they get a refund for unused service.

What we do: We honor any credits that occur outside of terms. Plain and simple. If someone cancels by the 20th, or on the 20th, their account is terminated and they are removed from the billing system. No more charges, and definitely no credits. If they cancel on the 21st - We have arleady done and processed, and sent submissions to our provisioning to cancel services. They are in for another month. Typically at this point we get a couple people calling and groaning over their cancellation, and we tell them exactly how it works. Most accept it, about 1 per month doesnt.

As of this year, anyone who charges back to and ACI Family ISP, and its within our written TOS, expect a chargeoff on Experian. Plain and simple. Any Customer with AIT, expect a chargeoff on Equifax. Any with LocalNet, Expect collections calls. Any with AOL will eventually get sent to collections, and all 3 brueaus get informed. Charter Communications does a Writeoff file, and sends you to collections. The writeoff file will pretty much haunt your account for life. If you come back 10 years later, it will still be there. Balance, late charges, Returned Payment, and Reconnect Fees.

ISPs recieve chargeback fees for each returned item between $10 and $50. Expect that fee, plus the amount you took back to be included in the dispute. If they sent the file to collections, expect the collectors add-on fee as well.
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[v_v]

Thanks Jason and John for the further clarifications. Now I have another minor related question: 'from the ISP side, is a "chargeback" the same as issuing a credit, or are they somehow different?' Thus if there is a fee to the ISP for a chargeback, is there also a fee to the ISP for issuing a credit?

v_v
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[aci-john]

Yes there is a fee for anything an ISP does with paymenet information. Whether they are charging a card or taking it from a checking account, putting it back, Getting a chargeback.

And NO - A regular credit is nothing near to a chargeback. Its far worse. Its a FORCED CREDIT from the bank side.

The card issuing bank sends a request for the funds to be reversed, and the funds are literally forced from the ISPs bank account and put on hold. If we plan to dispute it with the card holder - then the Customer wont get the money til the dispute period is over. If we win, We get the money back, and the consumer might get hit with a fee from the bank, identical to the fee they charged us. Then, since the ISP still gets hit with the chargeback fee, (Anywhere from $10-50) most isps will go back and attempt to recover that from the customer.

This year, Ill be encouraging all ISPs that buy from us to not take those hits, and at the industry events this year, Ill personally be at most of them WITH a rep from Visa encouraging this.

Since Visa and MasterCard are no longer Non-Profit, they are really out there to make some serious money, and they penalize people who misuse cards. They hit the merchant if they get too many chargebacks, they penalize the customers with approving more fees and retaliation methods from the merchant, then on top of that, they are raising the fees again this year for merchants to take cards. So I can see things getting tighter than ever in 2007.

Visa and MasterCard have been pushing there chargeback defense programs to verify every single transaction that takes place on their network. Should they get it to an affordable level for all merchants - Its not gonna be pretty for consumers who chargeback because they think nothings gonna happen but they get their money back. This new program will flip the scale. If the merchant has done everything they are supposed to, and the cardholder is in the system and fully documented, if they chargeback and its invalid, the cardholder will be taking the hit.

And no - the prepaid cards dont save you or become a good alternative to childish games. These cards typically come up as unverified address, and therefore some ISPs can tell their processing system to decline the sales. And since most prepaid cards are mastercard, mastercard has set some nice penalties against these cards.

[v_v]

That was another good clarifying and informative answer. Thanks John.

v_v
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[Steve-o]

This looks fun... Think I'll join

With regards to chargebacks, we've eliminated most problems now with avs (address verification system). Sure, we still get hit every once in a while with a fraudulent charge, but I would guess 95% of card information stealing goes on with a simple take of the card, not with the retaining of card information including a statement.

Roughly 96% of all fraudulent charges we receive come from phishing or from merchant employees where the card number isn't accompanied with the address or the address never has the card. In either case, we decline them and force their hand to play by our rules. Once the card has been used illegally 3 times in our system it is reported to the individual card company as fraudulent and barred from future transactions on our system.

John hit the nail on the head, but doing a rant here I feel won't suffice. People are still going to try and charge back and every time we are going to point the card company to our TOS. You would be surprised guys how many times we see customers never attempt to cancel. They just see a charge and can't remember what it is for and calls the bank instead of the merchant listed. I get at least one of these per 2 weeks and it costs exactly what John said to recover.
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[all2ez]

Chargebacks were the reason we dropped AMEX. If a consumer asked AMEX to remove the charge for any reason for any time, it was done. AMEX said to us, the merchant, it is now your problem to deal with on your own and would provide no furthur assistance.

John - You should renegotiate with your CC provider. We simply would not deal with any CC clearing house that charged us a fee for chargbacks. We do not pay ANY fees for chargbacks. We deal with 10's of thousands of transactions every month, and we only get 4-5 chargbacks a month, most are fraud. We usually get a remittance advice as part of the CC investigation. If we determine it is fraud, we issue a credit back and cancel the account. If we determine it was an error on our part and the customer was in fact entitiled to a refund, we issue the credit. In most cases it is someone trying to get out of paying their bill due to us, we submit our evidence to support our position and our CC company will usually back us up and block the chargeback.

Jim

[aci-john]

Well Jim.... lemme know where to go for no chargebacks - and Ill do just that ^_^
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Coming Soon - MOBILE BROADBAND

[all2ez]

John, I would first suggest you get your current provider to remove these charges. They will tell you they can't, they can. If they say no way email me and I will get you a couple of options as we do use multiple clearing houses depending on the type of transactions.

Jim

[Steve-o]

John,

I'll hit you up by PM. I've got no chargeback fees now, of course I am paying a little more on the flat per trans side, but it saves me in the long run. My biggest costs are labor related.
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[v_v]

John, Jim, & Steve,

This is great you guys, the fact that you are working together to help each other out even though you are formally 'competitors.' To me such cooperation makes me thankful for the fact that Freedomlist exists! And hopefully whatever you guys can do to stay in business providing low cost ISP services for the rest of us, all the better! Keep on!!

v_v
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[Boz]

v_v wrote:

John, Jim, & Steve, This is great you guys, the fact that you are working together to help each other out even though you are formally 'competitors.' To me such cooperation makes me thankful for the fact that Freedomlist exists! And hopefully whatever you guys can do to stay in business providing low cost ISP services for the rest of us, all the better! Keep on!! v_v

Agreed!
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[aci-john]

Ill agree to re-open DialStream and keep it Under 10 if I get corrine to update my file here in the next week, LOL. Someone tried to used the Freedomlist post as a crutch means to chargeback because the contact numbers is out of date even tho the website isnt. I cant have that.

We will re-open dialstream after our new ordering system is in place. Due to new contracts, and more numbers, there will probably be a price increase, but not by much, and we will be offering the accelerator by itself on the order form.
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Coming Soon - MOBILE BROADBAND

[Steve-o]

There is much more than Freedomlist out there guys . I just have history here so I stick around.

You guys should designate someone as a press guy and get some passes for ISPCON in Orlando in March. Meet some of the guys.
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Independent, Refreshing.

[aci-john]

LOL - Steve - If I relied only on Freedomlist - id be broke. Hence the ISP acquiring, and having a premium label. And working on something else big as we speak :-)

I like to mix things up

As always - spring is too busy for me. I might go to hosting con and then go to ISP Con in the Fall.
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Coming Soon - MOBILE BROADBAND

[Corrine]

aci-john wrote:

Ill agree to re-open DialStream and keep it Under 10 if I get corrine to update my file here in the next week, LOL.

Send me the information.
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[Corrine]

aci-john wrote:

We will re-open dialstream after our new ordering system is in place. Due to new contracts, and more numbers, there will probably be a price increase, but not by much, and we will be offering the accelerator by itself on the order form.

I take it this hasn't been completed yet since I have not received any updated information.
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[Corrine]

Update received and entered:  http://www.freedomlist.com/find.php3?id=1391  
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