1. New Fraud Threats
Global card fraud is projected to surpass $30 billion in 2020, with retailers expected to lose $130 billion to CNP fraud between 2018 and 2023. There is a never-ending battle between fraudsters finding new ways to cheat the system and people trying to protect the system: one type of fraud can be stopped just for a new approach to emerge and take its place. Identity fraud and account takeover are particularly costly for ecommerce merchants as the two most common sources of fraud.
With many transactions now going through 3-D Secure, it will be interesting to see if there is any noticeable shift in the categorisation of chargebacks from ‘Fraud’ to other reasons that shift liability to the merchant. If this is the case, then merchants could see their growing costs of chargebacks increase even further. Benchmarking chargeback and ‘friendly fraud’ rates against similar merchants is crucial to ensuring that these costs are controlled.
3-D Secure 2.0 – due to go live 2020 – could be make or break for online fraud, as the standard will enable richer data transmission at the point-of-sale and thus allow for more sophisticated risk-analysis. Will fraudsters find a way around it? For more details on fraud issues globally, please download our report ‘Global Fraud Trend Analysis and Review’ here.
2. Handling Rising Costs
It can be difficult to audit and validate the cost of card acceptance on a regular basis, with card scheme fees constantly changing and rising globally. Ecommerce merchants have been impacted more than most with fee increases for online-specific charges, such as the upcoming Visa inter-regional ecommerce fee increase in Europe on 1st April. In the past, merchants could charge customers a surcharge for more expensive payment types like credit and commercial cards, allowing them to offset these costs and maintain lower prices for all consumers.
The second Payment Services Directive (PSD2) banned surcharging throughout the European Economic Area (EEA) in January 2018, removing this practice from merchants’ already limited options for cost mitigation. Not only did merchants have to absorb these excessive costs on their existing credit-debit split of cards, but CMSPI has also seen evidence of a significant movement away from paying by debit cards towards credit cards. As credit card interchange is capped at a higher rate than for debit cards, the cost of this new payments mix is even higher than previous splits: one CMSPI ecommerce client saw its weighted average interchange fee rise from 0.242% in 2017 to 0.264% in 2018 because of this movement.
Although merchants cannot use surcharging to steer customers, payment is the final stage in the wider consideration of customer journeys: there are ways to construct checkout processes that direct customers towards certain payment methods.
3. Open Banking & PSD2 Innovations
Payment Initiation Service Providers (PISPs) – formalised by PSD2 – could soon provide merchants with robust competition to the card schemes through low-cost, near-instant payments from customers’ bank accounts. PSD2 compliant payment systems are being developed and improved constantly, with a few products in beta testing or even becoming available for commercial use.
4. Brexit Threats – For European Merchants, Too
Following the UK exit from the European Union, it is likely that card schemes will reclassify their EEA regions to exclude the UK, thus reclassifying previously intra-regional transactions between the EU and Britain as inter-regional. Not only do these transactions command significantly higher interchange fees as they are not capped by Interchange Fee Regulation (IFR), they also cost much more in terms of scheme fees: as much as ten times higher in some instances. Merchants across Europe and the UK could see an extra €1 billion in costs per year overall, with €456 million going to the card schemes and €553 million to issuing banks.
Merchants based in the UK, or elsewhere in Europe, with significant volumes from consumers in the other region will be adversely affected by this fee change, meaning that ecommerce and travel merchants will likely face large cost increases for the same transaction mix. Our experts have been helping clients prepare for Brexit and quantify the impact on costs of multiple scenarios.
5. One-Click Wonderland – Digital Wallets
The race to a truly frictionless payments environment is on. An increasing number of options for merchants – such as Apple Pay, Google Pay, PayPal, and Klarna – is welcome, but also brings added complexity to the checkout. Further, Visa and Mastercard, along with other card schemes, will be releasing their own unified wallet with a single-click ‘buy’ button, Secure Remote Commerce (SRC), and this could be live before the end of the year. Although claims of increased acceptance rates and reduced fraud have been made, SRC could reduce routing possibilities due to tokenisation – meaning online merchants will lose the cost benefits of accepting local card schemes.
Analysing your customer profile and optimising your wallet acceptance is crucial to ensuring a balance between cost and speed of checkout.
6. Acceptance Rates
Issuing banks have a far lower risk tolerance than merchants and will not hesitate to decline a transaction from a merchant it does not recognise. By disproportionately impacting new customers, incorrect declines are having a far wider impact on merchants’ revenues than just the initial loss of sales. Merchants face a number of issues and considerations in this area:
- Acquirers inflating reported acceptance rates
- Finding the supplier best suited to serve your business
- Analysing whether increasing acceptance rates will be negated by increased fraud and chargebacks
Our team has developed a tool to visualise discrepancies between true and reported acceptance rates in order to ensure market-leading acceptance optimised for your business.
7. Secure Customer Authentication and the Exemptions
From September 2019, as part of PSD2, merchants will have to prove someone’s identity with two of inherence, knowledge and/or possession – except when they don’t. Certain exemptions to Secure Customer Authentication (SCA) can allow merchants to maintain frictionless checkout experiences for many customers, ensuring cart abandonment rates are kept at acceptable levels. Merchants could be whitelisted by customers, use their own risk analysis for low value transactions, or use one of a number of other strategies, however it remains to be seen whether issuing banks will be able to support exemptions like these by the September deadline. How those exemptions are applied, and which merchants can make use of them, could be a game changer.
8. International Platform, Local Payments
There is a fine balance between a payments platform being both universal and consistent but also flexible enough to benefit from local variations in customer, regulation or technology. Too far one way and costs can spiral; too far the other and a merchant risks alienating customers. Online payment methods like iDeal (Netherlands) and SOFORT (Germany) can drive lower cart abandonment with consumers from those countries as well as be cost effective when local acquirers are used.
The issues with this strategy are that contracting with many acquirers across each country of operation can be costly in terms of contract management and that it removes the possibility of negotiating more competitive prices due to a consolidated estate. On the other hand, all-in-one solutions and suppliers offering connections to multiple Alternative Payment Methods (APMs) can often command premium fees for the service provided, making the problem a balancing act of customer experience and cost.