Fashion Industry Focus (Part 1): How A Bad Payments Experience Can Put Off Good Customers

08th November 2020
Toby McFarlane
Toby McFarlane

Retail has evolved incredibly quickly in 2020 and the payments industry has struggled to keep up. In this two-part series, we discuss four ways that the pandemic has impacted payments in the apparel/fashion sector. In this first blog, we look at acceptance – the process of getting good customers through the check-out.

For the fashion sector, the pandemic has highlighted the importance on having a robust strategy for online payments acceptance. The plethora of challenges that come with eCommerce and mCommerce experiences are vastly different to in-store payments. How retailers approach online authentication has become business critical.

1 | Getting Good Customers Through The Checkout

Simply put, an approval rate is the proportion of transactions a merchant submits for authorisation that ultimately get accepted (or approved) by the customer’s issuing bank. The problem for merchants moving online can be summarised equally as succinctly: approval rates for in-store purchases average 97%, while the average approval rate for online purchases plummets to 85%. We can see this illustrated in Figure 1 where CMSPI has calculated average approval rates across Card Present, and Card Not Present transactions. The shift to online as a result of the pandemic caused a major shift in the amount of good customers retailers were able to get through the check-out.

Figure 1: The Shift to Online and Average Approval Rates (2020) Source – CMSPI Estimates

For the same customer – that goes into a store, or visits a website – with the same card, purchasing the same goods, online merchants face an additional 12% of those transactions failing after the customer clicks pay. Many of those failed transactions will actually be legitimate customers with enough funds in their account being wrongly declined. In fact, CMSPI estimates that roughly 1 in 5 declined transactions fall into this category, causing a major headache for merchants that ultimately are likely to be blamed for that failure by customers – losing both revenue and potential repeat business.

A lack of transparency in approvals, and a supply chain that is failing to deal with the issues this causes, makes getting transactions over the line extremely difficult for online merchants.

Further, when finding the right strategy to tackle fraud, it is crucially important to balance out how it may impact your approvals. What is the economic model of your fraud tool, and what are they being tasked to do? CMSPI works with many retailers across Europe (and the globe) to set up the most optimal fraud strategy. These market-leading strategies mean merchants don’t lose out on millions of dollars in revenue.

Often times, retailers aren’t aware there is an issue, but with CMSPI’s scientific, data-driven approach to approvals & fraud, coupled with a view across the market, we have been able to achieve substantial revenue growth for our clients.

2 | Business Critical; The SCA Mandate Looms

Regulatory change means that European merchants are likely to see this situation exacerbated in the coming months. The second Payment Services Directive (or PSD2) entered into force on 13th January 2018 in Europe. One of its central tenets was the introduction of Strong Customer Authentication, a set of requirements intended to improve the security of online transactions.

To be SCA compliant, banks must authenticate all transactions by satisfying two of: knowledge, inherence, and possession. Traditional Chip & PIN methods satisfy this in the face-to-face environment, but the requirement generates a much greater issue for online retailers. The initial deadline for compliance was 14th September 2019, but this was extended to 31st December 2020 in response to a lack of industry preparedness.

Toby McFarlane - Head of Approvals & Fraud

EMVCo is a body established by the global card schemes such as Visa, Mastercard, and UnionPay to generate industry-wide standards for the acceptance of payments. The EMVCo authentication protocol chosen to support online card transactions and ensure SCA compliance, 3D-Secure version 2 (3SD2), is still yet to be supported by many issuing banks across Europe. This is likely to lead to much lower average approval rates, placing a large number of transactions at risk.

CMSPI’s recent paper on the impact of SCA – where we analysed September testing data – suggests that €92bn worth of online sales are at risk across Europe (excluding the UK) in 2021 as a result of this implementation date. This is based on 2019 volumes, meaning that the actual cost is likely to be greater, forecasted provisionally at €131bn due to higher online volumes in the pandemic. The impacts of this mandate are likely to differ between countries but are an important consideration for online retailers.

Of course, measures like SCA have the positive intention of decreasing fraud rates. Because of their additional complexities, however, they make it imperative for merchants to adopt a holistic payments strategy that balances fraud risk whilst maximising sales. This means ensuring regulatory compliance, maximising exemptions, and holding suppliers to account.

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Read Part 2 In Our Fashion Indusry Focus