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Launching into an emerging market can be a risky move for any global business.  While spend in developing markets isn’t typically as high as, say, in the U.S., consumers in these geographies are quickly opening up lucrative possibilities for global merchants thanks to the availability of lower-cost smartphones and wireless broadband, the ongoing adoption of eCommerce and the move on the part of many countries to innovative their national payments infrastructure.

What this ecosystem evolution means is the payments technology is ready to support global merchants’ needs to facilitate payments for consumers regardless of their location. Yet as these businesses expand across borders, their cross-border payment strategies must prioritize a local experience for the end-user, says Sebastián Kanovich, Chief Executive Officer at dLocal.

Speaking with Karen Webster, Kanovich described why multinational enterprises need to understand the unique payment needs of customers depending on where they reside and how they shop. It’s key to driving adoption of electronic payments, he said, and to helping global merchants succeed in markets they had previously shunned.

The Emerging Market Opportunity

For organizations based in Europe, China and the U.S., Kanovich said he’s seen emerging markets become more of a priority within the global growth roadmap. That wasn’t always the case, however — and only a few years ago, even Kanovich said he didn’t expect to witness the kind of growth in some emerging geographies that he’s seen.

“Only a few years back they would have said they don’t feel confident enough,” he said of organizations’ consideration of emerging markets. “But for instance, Nigeria has to be our fastest-growing market. And to be completely honest, we didn’t see that coming two years ago.”

These regions can be invaluable to organizations seeking growth — but in order for them to succeed in these markets, businesses must localize the payment experience for the end-user.

Cash remains king in many areas, for example, but that doesn’t mean that merchants cannot innovate. Traditionally, it takes 48 hours to confirm a cash payment to a merchant. Now, that confirmation can happen in real time.

“So the user is still paying with cash,” said Kanovich, “but the whole experience changes. And the fact that the confirmation is instant opens up a whole new set of use-cases.”

Working with — not against — customer payment habits is an essential component of finding success in new territory.

Encouraging The Digital Payments Shift

Cash is sticky, but Kanovich said he’s seeing a shift in how consumers pay. That can be due, in part, to high mobile phone penetration and growing adoption of online commerce — but for companies like dLocal who facilitate these cross-border transactions for firms like Spotify and Facebook, one of the most valuable changes in the payments landscape has been innovation of national payment infrastructures.

He highlighted India’s UPI specifically as a particularly sophisticated payment scheme, and one that signals how emerging markets’ payment infrastructures are quickly surpassing those of their more developed neighbors.

“In all of these emerging markets, a lot of them are leapfrogging and are now ahead of the U.S. and Europe, from a purely payments perspective,” he said. “UPI is definitely a much better product than ACH, for instance.”

As these infrastructures grow more sophisticated, the opportunity for payment technologies to integrate into national schemes and facilitate global transactions widens. But the principle remains the same, said Kanovich: don’t focus on educating a consumer on a new payment technology. Rather, make that payment technology so easy to use that consumers adopt them regardless of their understanding.

Amid this ecosystem of payments innovation, competition is growing. For dLocal, which recently raised $200 million, that competition is a positive thing — though Kanovich acknowledged that the market remains highly fragmented. Remaining “payments agnostic” to support any kind of payment method is important to remaining competitive, particularly as merchants face the prospect of “provider fatigue” amid more payment service providers stepping into the space.

What will win out in the end is common sense in order to provide ease-of-use, drive adoption and meet the payments needs of both merchant and customer.

“Payments, it’s not rocket science,” noted Kanovich. “You obviously need to be good in technology, have a great product — but at the end of the day, it’s accumulation of common sense, and you need to build one block on top of the other.”

Criminals are not the only security threats financial institutions (FIs) and their merchant clients face — these entities often need to defend themselves against consumers as well.

Friendly fraud has been on the rise for years, with customers contacting their banks to falsely assert that their credit cards have been used online for unauthorized purchases. These instances are painful for merchants and FIs alike, as the former could lose money on sales and already-delivered goods, and the latter are forced spend considerable time and effort handling unwarranted claims.

Undeserved chargebacks are no trivial issue, either, as the number of such false claims rose 41 percent between 2016 and 2018. Merchants also appear reluctant to dispute friendly fraud, as many seem to believe they do not have the resources to do so or that they cannot adequately prove chargebacks are fraudulent. Recent reporting stated that retailers contest only 25 percent of friendly fraud incidents, for example, which results in a multitude of customers undeservedly winning these cases. The pandemic could be encouraging these unwarranted disputes, too, as the uptick in card-not-present (CNP) transactions from consumers shopping online leads to a corresponding rise in CNP fraud claims.

This month’s Deep Dive explores why consumers engage in friendly fraud and how FIs and merchants can adopt technologies like artificial intelligence (AI) and new authorization strategies to better curb the problem.

Why Customers Go Bad

Chargebacks are intended to safeguard consumers from thieves or malicious merchants, but the feature can be abused in certain instances. Unscrupulous customers can inaccurately assert that card payments were unauthorized or that the items they purchased never arrived, then urge their banks to reverse the transactions. Other shoppers, meanwhile, make claims for less nefarious but nonetheless damaging reasons.

Some frustrated consumers may not recognize the difference between requesting refunds from retailers and filing chargebacks with their FIs, which can lead them to seek redress from their banks when they should have lodged complaints with merchants. Consumers in other cases may simply not recognize the transactions on their billing statements, mistakenly believing the purchases were fraudulent.

FIs must thoroughly investigate chargeback cases to protect customers when fraud does occur, but the process can be cumbersome. Card issuers that are convinced of their customers’ truthfulness ask merchant acquirers to extract money from sellers’ accounts, which can then be used to refund consumers for disputed purchases. Acquirers may debate the chargebacks with the issuers, or merchants may provide their acquirers with evidence of the transactions’ legitimacy and ask the acquirers to dispute the claims. Merchants often struggle to produce information to prove their cases, however, and FIs may find it challenging to quickly ascertain the truth. This can ultimately result in lengthy efforts to investigate cases that should not have been filed, sapping employees’ time.

The Cost Of Undue Chargebacks

Retailers suffer significantly from friendly fraud, reportedly losing $35 billion to such issues in fiscal year 2019 alone. Customers who file chargebacks receive refunds from merchants, and FIs typically impose heavy fees on these retailers. Consumers also do not need to return the items they receive in these cases, saddling retailers with inventory costs in addition to other expenses. Businesses could even see FIs freeze their accounts if they are deemed to have accrued too many chargebacks.

FIs also lose money to fraudulent chargebacks because they must dedicate a significant amount of staff time to investigating claims and managing disputes. This can take focus away from other projects and reduce the profit they make on each customer or transaction. Keeping retailers and consumers satisfied thus requires quickly and accurately assessing chargeback filings.

Combining Friendly Fraud

One 2019 report that polled 200 merchants found that businesses struggled to contest false chargebacks, even as they confronted high levels of such abuse. Respondents believed 46 percent of the chargebacks filed against them were due to friendly fraud, for example, and 56 percent of responding firms said that the number of wrongful chargebacks had grown over the past three years. Thirty-one percent of the businesses cited “identifying friendly fraud” as the most difficult part of their chargeback management, however, while 29 percent pointed to the effort needed to dispute such claims as a significant challenge.

Card networks, FIs and merchants are all working to fight this growing problem. Some card networks have launched services to help merchants communicate with customers about unrecognized transactions before unnecessary chargebacks are filed, for example. Retailers are meanwhile asking customers to supply more data during checkout, including details that criminals would be unlikely to possess, such as addresses or card verification value (CVV) codes. This can help merchants prove that the individuals making purchases are legitimate customers. Retailers are also working to more clearly display information on how customers can request refunds rather than resort to chargebacks.

FIs are also taking aim at the issue, leveraging advanced analytics solutions to help them better distinguish between genuine and illegitimate claims. AI tools can reportedly help banks review claims and draw on customers’ data to inform their evaluations. This could allow FIs to determine whether shoppers previously patronized the merchants in question, for example, and whether disputed transactions fit preexisting behavioral profiles.

Friendly fraud is unlikely to subside anytime soon, especially as the pandemic pushes more purchasing online and gives malicious as well as confused consumers more opportunities to file false chargebacks. FIs may thus be wise to upgrade their chargeback management strategies, as doing so could allow them to keep customers safe and mitigate harm for merchants and FIs.

Card-issuing financial institutions (FIs) have numerous stakeholders to protect when facilitating online transactions, as they must keep cardholders safe from criminal schemes while simultaneously defending merchants from shoppers who may be conducting friendly fraud. Issuers safeguard customers by detecting and thwarting bad actors’ attempts to use stolen details online as well as allowing consumers to file chargebacks should fraudsters manage to slip through and make illegitimate purchases.

These protections enable customers to recoup funds lost in wrongful transactions, but consumers sometimes file claims on purchases they actually made. This means FIs must be able to distinguish genuine chargebacks from unwarranted ones to ensure that retailers are not unfairly harmed. 

The stakes can be high, too. Issuers need to offer consumers quick relief if they become eCommerce fraud victims, and those failing to do so may risk seeing customers pull other FIs’ cards to the top of their wallets. Banks and credit unions cannot simply take customers at their word without investigating, however, as rubber-stamping chargeback claims can put merchants in painful situations if they are compelled to refund legitimate transactions. 

Reliably filtering friendly fraud- from criminal misconduct thus depends on strong communication and deep customer insights, Mohamad Tayba, senior manager of fraud at Alliant Credit Union, said in a recent PYMNTS interview. He explained how FIs can use everything from old-fashioned phone calls to streamlined digital communication tools and AI-powered behavioral analysis to keep customers and merchants safe. 

Data Insights

Friendly fraud occurs for many reasons. Unscrupulous customers sometimes try to cheat the system, but often it occurs when shoppers are simply confused about their receipts. They may fail to recognize billers’ names or be unaware of orders placed by family members, Tayba said. FIs’ staff can usually reach out to customers to address such issues, although they may wish to leverage data analytics tools first to determine more about the chargebacks they are examining. 

FIs that firmly understand customers’ card-purchasing histories and patterns can better assess whether contested transactions match their typical behaviors. Issuers that spot unusual details or activities suggesting foul play could determine that chargebacks are justified, but transactions that appear normal could warrant reaching out to cardholders to jog their memories and ultimately result in erroneous claims being dropped. 

“There are factors out there that will give you an idea that, ‘Hey, this may be a falsified claim,’” Tayba said. “One thing Alliant Credit Union did is really invest in our own data scientists, artificial intelligence [and] predictive analytics. … We’ve been creating strategies around the behaviors of our members [and] what they’re doing around the claims: When are they filing claims? What are the transactions that they’ve been [making] with the credit card?” 

FIs are also privy to details about how their customers typically engage online, such as which devices and IP addresses they normally use to access issuers’ digital platforms. FIs can check whether chargebacks have been filed from those same devices and IP addresses, enabling them to make more informed decisions about whether to investigate claims or contact customers to clear up confusion surrounding orders. 

“Sometimes the member tells us, ‘Oh, yeah, I misunderstood what the transaction said, and that’s definitely me,’” Tayba said. “Sometimes we say, ‘Hey, your computer may have malware on it because it is the same computer that you [tend to] use, but it is definitely a fraudulent transaction.’” 

Developing deep insights into how contested purchases fit customers’ transaction histories and usual online activities can help FIs better conclude what may have transpired. 

Communication And Confirmation

Tayba said communication is often key to clearing up friendly fraud cases as well as thwarting criminal activities that would warrant chargebacks. Issuers can text customers to confirm suspicious-seeming purchases that have been flagged by their AI-powered fraud detection systems, for example, or they could call consumers to discuss chargebacks that do get filed. The flow of information should not be between just FIs and their cardholders, either — issuers must also contact retailers to understand what took place. 

“We review our fraud claims, [and] sometimes [the strategy] is as simple as picking up a phone and getting some information from the merchant,” he said.

Tayba said that FIs should also seek out offerings that can provide even faster flows of information. One especially promising digital tool allows customers and issuers to query merchants about transactions before cardholders file chargebacks. Such an approach can enable customers to get clarification about unrecognized purchases, heading off unwarranted claims and lengthy investigations. Direct discussion with merchants can help shoppers determine whether they had simply forgotten that they placed orders or whether the transactions were fraudulent. 

Protecting merchants and consumers by accurately assessing chargebacks can be difficult work. Blending robust data analysis with open communication can ease these challenges, however, and lead to safer card transactions for all involved parties. 

The pandemic has pushed us to do all things digitally while opening up new vectors of attack. Those new avenues of fraud have leveraged hallmarks of the current pandemic — fears over public health and concerns about stimulus checks issued by the government — to snare unwitting victims. 

According to some estimates, as many as 22 percent of Americans have been impacted by COVID-related fraud.  

In a podcast interview with PYMNTS, Andy Renshaw, vice president of product at Feedzai, said that an integrated approach to anti-money laundering efforts, fraud prevention and cybersecurity can stymie the bad guys’ best efforts — and even improve financial institutions’ (FIs’) reputations in the process. 

“From a pandemic perspective, we've seen in many ways a two-pronged attack from fraudsters,” said Renshaw. On the one hand, fraudsters have been exploiting something that’s long been extant: the shift to digital commerce and payments, where consumers buy more goods and services than ever online (now including protective gear, of course).

Then there’s the focus fraudsters are training on government assistance to individuals, families and businesses, a pandemic-specific trend.

“A number of countries globally have offered new borrowing schemes or have created the opportunity for those who are struggling to access money in some way, shape or form,” said Renshaw. And so, fraudsters seek to gain access to those funds — or at least target who they know to be “cash-rich” individuals.

There’s a flip side to the equation, too, where criminals look to find vulnerabilities within FIs themselves. The sudden move to remote work has meant call centers are staffed by individuals working from home, and financial teams are far-flung. People may not have access to the data they need to optimize their fraud strategy due to, say, VPN or bandwidth issues.  

“The other thing that is lost is the slightly softer skill set of collaboration,” said Renshaw. “You would have picked up the phone or maybe even just wandered over a few desks and had a conversation with somebody about whether they were seeing the same [fraud-related activity].” 

Cyberattacks have the ability to seriously hobble the firms that have had to rely on their digital backbones for day-to-day operations.

“This does create an appetite for cyberattacks,” maintained Renshaw. “That might include things like phishing or business email compromise, or it may be a more sustained attack on an organization to actually disrupt their ability to function by targeting their digital network.”

Against that backdrop, FIs are fearful about large-scale attacks, which are designed to divert attention and resources away from one area of operations in order to render them vulnerable and provide an “in” to attackers.

Collaboration is the best approach FIs can take to be proactive against fraud. It’s important to break down the silos that exist within an FI, and to leverage artificial intelligence (AI) and machine learning to detect fraud efforts.

As it turns out, simply having access to data is not enough. “It’s one thing to generate millions of rows of data per day, but it's not really data you want — it’s insight,” maintained Renshaw.  

Within FIs, he said, silos mean that cyber-data doesn’t sit with customer data, and anti-money laundering (AML) information may not lie alongside regulatory data. In some FIs, one team might be examining the victims of fraud, while someone else might be looking for the fraudsters — and yet still another branch may be looking at various activity through a regulatory or policy lens.  

“The convergence of areas like fraud, AML and cyber operations create the opportunity to answer different questions and derive different policies, which can have a direct impact on the protection of customers, but can also decrease criminals’ appetite to even attack an organization in the first place,” explained Renshaw. It’s a framework known as fraud and anti-money laundering (FRAML).

To illustrate how collaboration can work within the FI, he noted that a fraudster might try to move money they had gained access to seven or more times in an effort to cover their tracks. But concerted efforts to track the fund flows can “watch over” all the points the money has touched, and who it’s touched.

“Suddenly, you get a ‘spider web,’ and this network effect comes together rather quickly,” as each department feeds complementary data to other observers, said Renshaw.

Stopping fraud early has the net benefit of reducing costs for the organization both in terms of financial loss and in managing fraud. Customers are more fully protected, and the criminals look toward the paths of lesser resistance.

“If you get this right, you can create this kind of halo effect, where the overall fraud attempts are reduced over time,” explained Renshaw.

Lower rates of fraud incidents can improve an FI’s reputation and free up capital to put back into innovating financial services and products.

“You may be able to offer better rates. You certainly may be able to have a better journey, where you can show that protection is taking place for the end user,” said Renshaw. “There is the reality of protection — and there is the perception as well.”

It’s the end of another week and the end of a busy month. The PYMNTS Weekender is here to catch you up on the latest payments and commerce news. We have deep dives on retail’s digital D2C shift, blank-check companies, and DoorDash’s IPO plans.

Top News

DoorDash Moves Ahead With Q4 IPO Plans

DoorDash, the San Francisco-based prepared food delivery service, is planning to go public by year’s end, after filing confidentially in February. Like other delivery companies, DoorDash has become an essential business during COVID-19.

Goldman Sachs Eyes Creating $2B Tech Fund

Goldman Sachs is pondering a $2 billion venture and growth fund that could boost its stature in the world of technology investing and help it court bigger investors and investments. The $2 billion amount would make it one of the largest in the field, excepting Softbank’s Vision Fund.

Truist CIO: Overcoming The Roadblocks To Faster Payments

The COVID-19 pandemic has accelerated the need for FIs to quickly scale and roll out faster payment experiences, whether that means offering businesses instant access to loans or enabling access to consumers’ stimulus funds without any wait, says Bryce Elliott, CIO at Truist Bank. In this month’s FI’s Guide To Modernizing Digital Payments, Elliott discusses how legacy infrastructure can get in the way and how turning to cloud-based tools can help FIs.

How AI Helps Visa ‘Step In’ (Smartly) When Issuers Go Offline

When one part of a payments ecosystem goes offline, transactions can’t be completed. Visa announced today that its Smarter Stand-In Processing (Smarter STIP) leverages artificial intelligence (AI) to help the network act as “backup” processor to accept or decline authorizations when issuers go offline. Gourab Basu, vice president of global network processing at Visa, tells PYMNTS how deep learning keeps card (and card not present) transactions flowing.

Chipotle’s Chief Restaurant Officer On What’s Next For Restaurants

Chipotle recently beat analysts’ Q2 estimates as big boosts in order-ahead sales partly offset the hit to on-site dining. Scott Boatwright, Chipotle’s chief restaurant officer, tells PYMNTS that the chain had been improving its digital channel long before the pandemic and is using it to target an entirely new customer segment. Here’s how he sees the digital-first restaurant landscape shaking out.

Trackers and Reports

New Report: Helping Retail Treasurers Navigate The Digital D2C Shift (“How To” Playbook)

Not only have retail sales shifted online, but more consumers are buying more of what they want directly from the brand. In The Mastering Multichannel Commerce Playbook: The New Retail Reality, PYMNTS examines the supply chain, payments and liquidity requirements that confront treasurers as they manage the dynamics of this new retail channel.

How One Cloud-Native Business Bank Overcame Its Cloud-Migration Roadblocks (Digital Banks And The Power of The Cloud Tracker)

Even cloud-native banks can struggle to roll out solutions with the speed that customers need. In the latest Digital Banks And The Power Of The Cloud Tracker, Andrew Smith, director of technical operations for online business bank, Holvi, explains how to efficiently scale and deploy cloud services without slowing product rollouts.

Report: Helping Retailers Solve The Payments Piece Of The eCommerce Puzzle (Anatomy Of A Consumer Payment Playbook)

Six in 10 consumers are shopping more online and less in stores than they did before the pandemic. In the inaugural Anatomy Of A Consumer Payment Playbook, Rachel Wilkie, senior director of eCommerce for online footwear retailer Merrell, explains how innovations in payments are helping them attract customers and keep them loyal.

Fun, Cool, and Otherwise Interesting

Uber Health’s Push To Close Prescription Deliveries Last Mile

Uber Health made big news this past week with the announcement that it was scaling up its delivery services to include pharmaceutical products in some locales. That’s a major new add-on for Uber Health, which the ride-hailing firm launched in 2018 to provide patients with transportation to and from medical appointments.

The Specs on SPACs – And Why Blank-Check Firms Get Backing

‘SPACs,’ or ‘special purpose acquisition companies,’ have suddenly become the hottest thing in investing, raising money to buy a privately held firm that wants to go public without all of the paperwork. Are SPACs the wave of the future?

What The Amazon Fresh Store Says About The Future Of Grocery Shopping

Amazon on Thursday opened Amazon Fresh in Los Angeles — a combination grocery and curated Amazon-branded merch store with a heavy dose of technology in the form of smart carts that auto-checkout and Alexa-powered kiosks. Here’s why it holds clues into how Amazon thinks the future of grocery shopping will look.

Salesforce's Addition To Dow Spotlights Connected Economy Impact

The Dow Jones Industrial Average has announced plans to swap out three stocks, including replacing Exxon Mobil Corp. with Salesforce.com. It’s only one stock index, but the Dow is shorthand for big business, and the swap speaks loudly to the tech sector’s growth.