One of the more unfortunate consequences of the great digital shift for merchants — particularly small ones — has been a surge in fraud and chargebacks. Chargebacks have always been an issue, but for those merchants that operated primarily via physical stores pre-pandemic, it wasn’t a top-of-mind concern, PAAY CEO Yitz Mendlowitz told Karen Webster in a recent conversation. But with the rapid pivot to online business and card-not-present transactions, and the mass influx of fraudsters that came along with it, merchants found themselves facing unprecedented levels of fraud.
“When they pivot to online — even if everything about the transaction stays the same, it’s the same merchant accounts, selling the same items, to the same cardholder, using the same card — the difference is instead of it being an in-store card, the transaction now shifts to eCommerce, and those conversion rates can drop by 20 percent,” Mendlowitz said.
The reason those conversions are dropping, he noted, is because merchants are suddenly declining a lot more of those transactions — because they feel they have to do so. Given the choice between letting a bad transaction through and accidentally blocking a good one, merchants will often opt for the latter, because fraud can end up costing them staggering amounts at best, and at worst can cause their merchant accounts to be shut down if they log too many chargebacks.
As the chargeback scourge has arisen, there’s been an increase in technological tools to combat it. Mastercard’s Ethoca offering, for example, was designed to clear up consumers’ confusion about items on their statements, such as unclear merchants’ names. In an interview with PYMNTS, Melissa Jankowski, head of debit and ATM services at FIS, noted that Ethoca fosters communication between merchants, issuers, acquirers and financial institutions (FIs) before and during the dispute process. That communication “allows us to take a look and to educate each other when we [have] transactions [that] look fishy based on consumer behavior,” she said. “And when we get to a point where there is potentially a chargeback or a dispute, we can communicate with one another before that chargeback is actually processed.”
Other technologies to prevent chargebacks include behavioral biometrics and additional layers of authentication. Verified by Visa, for example, can help boost fraud prevention efforts by determining, from an issuer’s perspective, whether cardholders’ activity is consistent with valid use. Leveraging advanced technologies like 3-D Secure and tokenization add more levels of protection amid the eCommerce boom.
And then there are firms like Fast, which is working to take the fear of chargebacks off the table entirely with its new zero-fraud guarantee: Every merchant using Fast Checkout is 100 percent guarded against fraudulent chargebacks. The company says it will offer the service at no cost, as opposed to the 0.4 percent chargeback fee that other companies use.
According to the company’s blog, Fast’s product “is built into the platform to maximize purchase acceptance while also mitigating ongoing risk exposure. It even protects expedited orders, same-day shipping and in-store pickup, so protecting revenue does not interfere with delivery speed.”
“After many years in the payments and risk space, I spend an inordinate amount of time thinking about how to improve the buying and selling experience, while reducing fraud,” the blog says. “So I want to share some of my thinking behind this big decision by Fast to include Zero Fraud in our core offering. We never want the risk of fraud (or the burden of chargebacks) to hinder Fast merchants from selling their products.”
As for merchants themselves, recent PYMNTS data indicates that among other things, faster settlement processes have the potential to draw down the fraud risks associated with eCommerce, including chargebacks. The leading benefits cited by small businesses that have used rapid settlement solutions over the previous 12 months are convenience (42.8 percent), speed (42.5 percent) and ease of use (39.5 percent).
However, the benefits go even deeper within the small business sector. Such businesses are unlikely to have dedicated IT teams, which means they likely place a premium on speed and functionality when adopting new payment solutions. At least one-quarter of firms that have used such services believe they helped to better manage cash flows (32.4 percent), improved operational efficiencies (27.4 percent) and reduced fraud risks (23.7 percent). Taken together, these benefits have the potential to boost businesses’ bottom lines.
And it’s a problem that needs solving, arguably yesterday. Because the digital shift has happened, and merchants are never going to be able to return to a world where they could avoid this problem by being mostly physical and eschewing digital transactions. According to recent PYMNTS data, 64 percent of millennial consumers have paid via digital wallets in the last three months, 60 percent of consumers said they prefer merchants that offer digital payment options and 19 percent of consumers named card on file as their preferred payment method.
The digital payments wave will continue growing, which means the fraudsters will keep on coming — and merchants will need ever-better ways to shut down mounting chargebacks.