It’s been a little more than a year since shutdowns first began across the U.S. in an attempt to contain the spread of COVID-19. We’ve seen some immense changes to how we do business in that time. One of the most substantial changes has been in the way consumers conduct payments.
As covered in a recent post, the pandemic made it impossible for most to conduct “business as usual.” This forced many merchants to experiment with new sales and payment channels they might not have used before; for example, contactless payments and in-store or curbside pickup. For their part, consumers have embraced digital shopping channels, including eCommerce and hybrid options like online ordering.
One study found that consumers spent $861.12 billion online with U.S. retailers in 2020. This is a 44% increase over the $598.02 billion spent in 2019. The same data found a sharp growth in the adoption of curbside pickup, as 43.7% of top retailers now provide this option, up from 6.9% in 2019. That’s more than a six-fold increase in just one year.
These are all great innovations. By embracing a wider range of shopping channels and payment options, sellers can deliver better experiences for cardholders. Plus, merchants have new ways to reach their buyers that extend beyond the walls of the physical store.
All that said, we must also acknowledge the shortcomings of these technologies, as well as new vulnerabilities they present.
Digital Fraud Surging Post-COVID
Increased usage of card-not-present payments is directly related to a surge in reports of unauthorized payments and other fraudulent activity. This isn’t a new phenomenon; in fact, we can see a good case in point by looking at the restaurant industry.
The 2018 State of Chargebacks report found that more than one in four merchants in the food and beverage space reported a chargeback rate between 0.5% and 1% of total transactions. But, just five years earlier, merchants in the same vertical reported virtually no chargebacks, meaning customers requested very few payment reversals in this space. The difference was the widespread expansion of online ordering and click-and-collect options.
It’s more difficult to verify a buyer’s identity in the card-not-present space because the merchant never has physical possession of the payment card. Bad actors can take advantage of this fact, which is why nearly one-quarter of all digital interactions in 2020 were fraud attempts.
Even more worrying, many of these claims will, themselves, be fraudulent. This is a practice commonly known as “friendly fraud.”
In either case, the cardholder’s bank will issue a chargeback and allow the customer to claw back funds from a transaction at the seller’s expense. There are other costs to consider here as well, including lost merchandise, shipping and processing costs, and chargeback fees assessed by banks. Over time, these issuances negatively impact the merchant’s chargeback-to-transaction ratio, which can jeopardize the entire business.
Technology Must Keep Pace With Threat Sources
Innovation in payments technology is good. However, it has to go hand-in-hand with concern for these and other complications.
We are seeing some progress; for instance, businesses throughout Europe are now in the process of getting up to speed with Strong Customer Authentication (SCA) compliance. These protocols impose stricter standards for verifying customers during a card-not-present transaction.
As noted in a recent study on the subject, though, early tests show only a 76% success rate for authenticating browser-based transactions using SCA. With mobile and gaming console transactions, the figure drops to just 48%. When we look at customer card abandonment, we see that one-quarter of customers abandoned their app-based purchases because of friction caused by SCA requirements.
Troubles with implementing new processes are not unique to SCA requirements, or to specific product categories or sales models. Instead, they illustrate a broader point: anytime we see a substantial change to customers’ shopping and buying habits, there will be an uptick in fraud, abuse, chargebacks, and other problems.
Balancing Risk and Reward
Part of the issue is psychology. With new channels like click-and-collect, we’re training consumers to expect greater convenience with less friction. This leads buyers to have a lower threshold for acceptable resistance at checkout. At the same time, buyer’s remorse or simple misunderstandings can lead customers to request chargebacks without a valid reason to do so.
The fact is that new channels like click-and-collect and mobile order are going to define commerce in the future. In fact, 10% of all sales conducted in the U.S. will be fulfilled through the click-and-collect channel by 2025. Even that will likely prove to be a low projection, depending on how things pan out with COVID-19 and the reopening of businesses. Consumers surveyed reported that curbside pickup was the “most helpful thing” in their lives during COVID-19, outpacing video calling, online video streaming, telemedicine and mobile food and grocery services.
The focus now must be on finding ways to offer these technologies without causing a surge in fraud. There are some approaches we can take to refine the technology; for instance, refusing in-store pickups beyond a certain distance from the ZIP code associated with the credit card billing address. Merchants can also roll out tools to scan a customer’s photo ID as part of the in-store pickup process. This can help them verify users, and also provide critical information later in the event of a chargeback.
The genie has really been let out of the bottle in regard to alternate shopping channels. Consumers got a taste and found that they liked the convenience and ease of use. Now, then, the focus must be to develop solutions to refine technologies and processes to provide the same quality experience while reducing risk. And, given what’s at stake, it’s not a question that we can afford to get wrong.