Contactless payments have recently grown in popularity, and it's important that we examine the long-term effect this might have on the market.
The year 2020 has been a transformative year for payments and finance. We've obviously seen COVID-19 impact the market in ways no one could have predicted. However, some of the most interesting effects of the pandemic in the payments and finance space have been how the crisis impacted those trends that were already underway.
For instance, cross-border e-commerce was projected to expand at a rate of 20% this year. That projection is less likely now, given the travel restrictions and other obstacles to getting people and products across borders.
At the same time, though, quarantine conditions resulted in a surge of new domestic e-commerce activity. Early on in the crisis, consumers already reported shopping online 21% more often compared to before the quarantine. The digital marketplace has also made up for lost ground by penetrating further into brick-and-mortar territory.
Perhaps the most impactful change has been the emphasis placed on contactless payment options as a result of the virus. Transaction data finds that housebound consumers were spending more money online compared to before the outbreak. In the week between May 26 and June 1, e-commerce sales were 40% higher than what we observed in the week between February 24 and March 1.
Those shoppers who did opt to make a purchase from a physical retailer have increasingly turned to digital options like online ordering and buy-online, pick-up in store, or BOPUS, purchases. The same survey showed that BOPUS orders were up a shocking 248% during the period outlined above.
COVID-19 crisis driving remote channel growth
It's not difficult to understand why we would see an increase in activity through remote channels. After all, digital channels allow customers to still make brick-and-mortar purchases while minimizing points of contact. That said, it's worth taking note of such a dramatic surge in activity.
We also have to keep in mind whether this will have a long-term transformative effect on the market. As cases start to rise once again throughout the country, we should expect to see the continued growth of digital channels for commerce. While people rightly see contactless payment options as a way to reduce their risk of contracting COVID-19, there are other benefits to consider about these digital channels, too.
Take mobile wallet apps like Apple Pay, for instance; near-field communication (NFC) technologies allow consumers to check out in store without physically touching the card terminal. In addition, the app offers the same tokenization technology as EMV chip cards, plus the added benefit of employing two-factor authentication. The user must unlock the device and then enter another form of authentication to authorize a payment.
Digital payments can offer more convenience for consumers as well. Online ordering, for instance, can turn the in-store experience into a smooth, near-frictionless exchange, minimizing contact and reducing the time spent in the store to a matter of minutes, or even seconds.
As a merchant, it's in your favor to offer consumers a faster, more convenient in-store experience. Not only will you see happier and more loyal customers, you also have the opportunity to increase efficiency. For instance, relying more on in-store pickup, rather than the checkout line, enables you to reallocate staff and resources, reducing overhead in the process. Plus, as one recent study by Doddle notes, 85% of consumers end up making additional purchases when they arrive in store to pick up goods.
Consumers enjoy the convenience and ease of use
A smoother payments process is at the heart of improving the overall customer experience. As cited by Accenture, "as the payments universe expands, customer experience is becoming the prime competitive differentiator."
The customer experience is at the core of the click-and-collect model's long-term success. In the Doddle survey mentioned above, the primary factors cited by consumers when asked why they prefer click-and-collect include speed, convenience and a lack of shipping costs.
Customers clearly expect their experience with digital channels to entail as little friction as possible. Retailers who can meet that expectation will benefit from customer loyalty. That benefit will pay dividends in turn, as remote payment channels continue to grow in a post-COVID environment.
Of course, these new technologies and processes represent a disruptive force in the marketplace. A lot of retailers are effectively "making it up as they go." And with things still so uncertain regarding the mid- to long-term ramifications of COVID-19, that market disruption presents new vulnerabilities.
If we're going to examine the advances presented by new remote sales channels, we must also consider the downsides. For instance, there's an increased fraud threat associated with these new sales channels that we can't overlook.
New channels, new fraud threats
The restaurant industry can serve as a useful case study on this topic. In 2013, merchants in the food and beverage vertical reported one of the lowest average chargeback rates of any industry. Five years later, though, 28% of these merchants reported a chargeback rate between 0.5% and 1% of overall transactions, while 1 in 10 saw a chargeback rate above 1%.
What was the primary difference? It was the widespread introduction of online ordering and in-store pickup.
When you can't verify a cardholder's identity in-person, there's always going to be a higher risk of fraud as well as the resulting chargebacks. Thus, a card-not-present transaction conducted using click and collect will inherently represent more risk.
There are a variety of ways a fraudster can take advantage of remote channels. For instance, engaging in account takeover to compromise a user's account, completing a purchase, then picking up the goods in question before the legitimate user notices. You can conduct manual reviews, but the volume of transactions makes it impractical to screen each sale thoroughly.
Then there's the threat of friendly fraud. This occurs when a seemingly legitimate consumer makes a purchase, then later files a chargeback to recoup their funds. The problem with intercepting friendly fraud is that it's post-transactional; it can't be detected by standard anti-fraud tools, because it doesn't appear to be fraud until days, weeks or months after the sale.
Data is key to overcoming fraud
All this points us toward the fundamental question: How can merchants enjoy the benefits of click-and-collect retail channels while defending against abuse? There's no single answer to this question. Instead, the problem calls for a much more dynamic and adaptive response.
Technologies and business practices change quickly, but the industry policies that frame those changes are sluggish to respond. Thus, you need a comprehensive strategy capable of adapting quickly as new developments arise. At the same time, you want to avoid a spike in false declines, which can be a very costly problem.
A forthcoming study published by Edgar, Dunn & Company finds that merchants will lose $88 billion annually by 2023 to false declines. Even then, that figure is on the low end; another study published in 2019 suggests aggregate losses from false declines could be as high as $443 billion by next year.
So, how do we accomplish that? The key component is data.
Access to customer data is a vital resource in the fight against fraud. You can examine a wide variety of data points; the location of the device completing a click-and-collect order, for instance, can be used to help pinpoint orders within selected ZIP codes. Other options include device fingerprinting and behavioral analytics, which will help determine patterns that can be used in scoring potential transactions for fraud.
You can't base your decision on whether to accept or decline a transaction on a single data point. That's why you need a comprehensive strategy to mitigate fraud, employing multiple complementary detection tools. This will provide a more dynamic impression of each transaction, enabling much more informed decisioning.
Data for both pre- and post-transaction threats
Of course, your fraud strategy must also account for those post-transactional threats like friendly fraud. This means conducting a comprehensive overhaul of chargeback practices, ensuring you can reliably separate friendly fraud from legitimate disputes, then engaging in chargeback representment to recover revenue. It would also be useful to implement tools like the Visa Merchant Purchase Inquiry, which can eliminate some issues before they progress to the chargeback stage by automatically recalling transaction data.
Click-and-collect ordering and other digital channels offer tremendous lucrative potential. You need to be able to manage fraud and other vulnerabilities, though, to make the most of these offerings.