Neil Smith, Regional Head, Issuers EMEA & APAC at Verifi
Building and sustaining consumer loyalty is a high priority for issuers. Lose consumer loyalty and you lose business.
Consumers are progressively exploring the freedom to shop where they want, when they want, and how they want. The responsibility for understanding, implementing and managing payment channels lies firmly with merchants, but issuers should also have an understanding of these channels in order to better spot fraudulent transactions.
With consumers increasingly purchasing across channels, mitigating risk and stopping fraudsters in their tracks is becoming more of a challenge. Last year, in the UK alone, almost five million people had money stolen from their bank or credit card account, at a cost of around £840 each according to the price comparison site, Compare the Market. As fraudulent transactions rise so does customer confusion and payment disputes. As a result, chargebacks are fast becoming a serious threat to issuers – mounting to a $31 billion problem for the payments industry, according to a report conducted by Javelin Strategy & Research and commissioned by Verifi.
To ensure they maintain customer loyalty, issuers need to adapt to the expectation by consumers that their loss will be resolved quickly.
Challenger banks have proven to be nimble and consumers can opt to move providers quickly, should they be disappointed with their current banking experience. While many issuers understand the need to adapt to changing consumer preferences and create friction-free experiences, it can be difficult for them to do so successfully.
So, what are chargebacks?
Chargebacks are essentially the reversal of an outbound transfer of funds from a consumer’s debit or credit card. They occur for various reasons, such as quality issues with products, deliveries not turning up, or confusion on bank statement.
Usually, a chargeback is initiated when a consumer calls their card-issuing bank, rather than the merchant, to dispute a transaction. In fact, according to a Javelin Strategy & Research report commissioned by Verifi, consumers are increasingly leaving merchants out of the dispute process, initiating a fraud-related chargeback directly with issuing banks up to 76 per cent of the time.
Tackling consumer pain points
When consumers are confused by their card statements or question card transactions, up to 66 per cent of the time they blame the merchant for the problem according to Javelin Strategy & Research. In the majority of transaction disputes, consumers wish to deal directly with their card-issuing bank. However, eliminating merchants from the process means consumers are at a disadvantage dealing only with issuers, who lack the necessary transaction information to determine if the dispute is legitimate. Usually, an issuer will provide a temporary refund, which can serve to alleviate the concern over lost funds and improve loyalty to the issuer. However, the consumer is left assuming the merchant is responsible for the possible fraud. This in turn creates ill will and a reduction in merchant loyalty.
Further still, the issuer also risks losing consumer loyalty as they are admitting to processing a potentially fraudulent claim and only accept it by the consumer’s declaration. Continuing with this inefficient dispute process, costs are only set to rise for merchants and issuers which will ultimately be borne by consumers.
Although both merchants and issuers bear the risk of losing future business and damage to brand reputation following a dispute or chargeback, it is merchants who see the bigger impact on their bottom line. Unfortunately for merchants, the Javelin Strategy & Research report saw that 63 per cent of consumers decrease their patronage when they have encountered a negative chargeback experience. This is significantly higher when compared with the decline in card usage experienced by issuers. 43 per cent of consumers use their card less after a true fraud dispute and 39 per cent for friendly fraud disputes.
Some merchants resist challenging the chargeback and accept it as the cost of doing business, preferring instead to avoid conflict and keep the consumer happy. On the other hand, forgive and forget might not always be a good idea. Merchants generally bear significantly higher costs in the chargeback process. Fines, increase in operational costs, lost goods and refunds all combine to create inhibiting costs just to keep a happy consumer.
Mastering the chargeback process with collaboration
To proactively reduce or even completely eliminate chargebacks, it’s vital that merchants remain vigilant against credit card fraud as part of best practices for consumer service.
Innovations in the payment industry – such as solutions that facilitate better and more timely exchange of pertinent transaction or dispute data between the merchant and the issuer – can further reduce or resolve disputes more efficiently. Implementing a collaboration solution helps to minimise the negative financial impacts of fraud and friendly fraud, and retain more sales as a result.
Moreover, improving collaboration among merchants and issuers throughout the dispute process can also help to reduce chargebacks. Implementing steps such as providing clear billing descriptors and fostering order data-sharing between merchant and issuer can improve consumer loyalty for merchants and issuers alike. Such collaboration solutions can provide issuer call centre staff with access to transaction information from the merchant’s CRM system. Using this information, issuer staff can deflect disputed transactions and prevent a chargeback. The next line of defense for issuers is to implement a solution that pushes real-time dispute notifications to merchants, to review and resolve disputes faster to reduce time, resources, and costs associated with the chargeback process. Use of combined solutions can result in lowered overall dispute volume, reduced operational costs and inefficiencies.
The bottom line is that it is in the interest of all parties along the payment chain – for issuers, acquirers, and merchants – to implement improved dispute practices. Consumers are more likely to remain loyal if they encounter a positive brand experience, which will help both issuers and merchants to maintain customer loyalty – all as a result of truly mastering the chargeback process.
WHAT DOES 2020 LOOK LIKE FOR P2P LENDING?
By Roberts Lasovskis, Investment Platform Lead, TWINO
It’s a new year; time for resolutions and forward planning, positivity and drive. But the peer-to-peer industry would do well to engage in a bit of introspection as well; a look back to the year gone by, which serves as a more than useful reminder of what can happen in less propitious times, even for the well-intentioned.
2019 saw two major failures in the European peer-to-peer market, with both Lendy’s collapse in May and FundingSecure in October putting investor capital at risk. Between the two, a combined £240m of savers’ money was put at risk, leading to the inevitable questions of regulators. On top of the two lenders failing, the well-established Funding Circle came into difficulties with its new withdrawal processes raising investor concern. But in all three stories from last year is a sign of how peer-to-peer can succeed in 2020, providing last year’s lessons are learnt.
There is one aspect of the two peer-to-peer collapses last year that stood out for much of the criticism from both media and investors. Both Lendy and FundingSecure came advertised as ‘approved by the FCA’, yet in collapse, both displayed structural faults and warning signs that should perhaps have been noticed earlier. Managing credit risk is an expensive learning process, but should be taken very seriously, and using as many data sources and as much testing as possible. Inevitably, these high-profile failures will cause a tightening of regulation across the industry, which should be welcomed.
The industry should embrace the ongoing development of its regulation – it is not something to just be tolerated and survived. Higher levels of scrutiny from administrators lead to better industry structures and more robust business models that generate greater trust from consumers. This is an inevitable step for a maturing industry, and now is the time for peer-to-peer to ensure its regulations are fit for purpose, and that investor money is not put at unnecessary risk.
But regulation is about more than just stopping the high-profile failures and helping to build consumer trust in the sector. When implemented properly, regulation encourages the development of better products; companies are forced to innovate and adapt to meet the new challenges, eliminating the number of shortcuts or ‘easy options’ that are taken when developing a product for consumers. Ultimately, this creates safer and more sustainable returns for investors.
Transparency is key
One of the major lessons the past year has taught us is the importance of transparency, particularly when communicating with investors. But whether it’s investors, borrowers or other industry partners, transparency and clear communication are key to rebuilding trust in the P2P sector, and even as specifically as in individual products or companies. Take Funding Circle as an example. It is undoubtedly one of the most successful businesses in the sector, and yet has been suffering a recent crisis in trust, which has been largely caused by customers not fully understanding what procedural changes are going to mean for their money.
The changes in question are not necessarily the full problem. The model is no less safe, and the business is no less high-profile. Nor do investors automatically object to the idea of a delay before they can access their money (look at fixed-term savings accounts for example). As with all peer to peer lending platforms, it is simply a question of understanding risk – customers misinterpreted the changes as a sign that their money was under threat and understandably rushed to protect it.
The customer is king
Fintech exploded as a sector in the wake of the 2008 financial crash, as a reaction to bad practices in the financial services industry. The industry was created with a promise of ‘customer-first’ products; solutions to fix the shortcomings in finance and financial services, and to pivot them back to a consumer-focus. From product development to marketing and communications, peer-to-peer must remember where it came from and ensure that the customer always comes first.
This is particularly important should another economic downturn materialise, as many are predicting within the next couple of years. Fintech businesses emerged as the success stories from the last downturn by creating solutions that focused on their customers. They should do so again.
For all the perceived problems in the P2P sector, the fundamental market for the products have not changed; investors who want to generate good returns still need to be connected with those seeking convenient loans. By remembering where it came from, and the problems it set out to solve, the sector can still thrive in 2020, even if the predicted economic downturn does transpire. To avoid the pitfalls other providers have fallen into, peer-to-peer must embrace regulation, communicate with transparency and focus on leveraging their expertise to provide trustworthy customer-centric solutions.
WHAT ARE THE PAYMENTS TRENDS FOR 2020?
By Sunil Dixit, VP of Product, Adyen
There are some big changes in store in 2020, some obvious, some less so. In the payments landscape, it’s all about user convenience and customer experience, whether that’s through increased security for card users, or new ways to pay. Fragmented payments systems and services, from online to in-store, will move towards a unified centralised payment stack. We think there are a few trends to watch in 2020.
Ecommerce is continuing to expand and it’s supporting the rise of the subscription economy and innovative platform business models. With more sensitive card data than ever being shared to complete payment at the checkout, protective steps must be taken to secure this information by all parties. To combat the rise in fraud, tokenisation will become an increasingly common way to protect payment details. In the first half of the year 140,344 fraud attacks were recorded by RSA’s Fraud and Risk Intelligence (FRI) team. That represents 32 attacks every hour and is an increase from 86,344 in the last six months of 2018. So, what is tokenisation, and how can it help?
Tokenisation is used to safeguard a card’s payment card number (PAN) by replacing it with a worthless, unique string of numbers – a token. Payment tokens are generated per card, per merchant. This means that the customer’s sensitive PAN is substituted by a token and not transmitted during the transaction, making the payment more secure. The beauty of network tokenisation is that it helps protect businesses and customers from the financial hits of data theft. Even if hackers manage to steal tokenised data, they cannot use the stolen tokens to pay online since they are unable to link the token to payment information stored securely by the payment partner. Furthermore, network tokens are always up-to-date. If your payment card changes after a loss or theft, the token can still be used to pay, ensuring you can continue to enjoy streaming services without disruption.
Strong Customer Authentication (SCA)
The implementation of the second Payment Services Directive (PSD2) will continue to roll out across Europe in the new year, with certain transactions requiring authentication for purchase. 3DS 2.0 uses the full capabilities of mobile devices to create a more secure way to identify the customer, without adding friction to their checkout experience.
Some banks are expected to launch SCA in a gradual fashion over the course of 2020, with others not going live until the end of this year. This is due to the European Banking Authority announcing a delay in the deadline of PSD2 enforcement to 31st Dec 2020. There is still a lot of ambiguity for merchants looking to ensure they are able to support the new directive. With the possibility of EU regulators enforcing PSD2 at different times, businesses will need technology that can dynamically apply SCA to ensure payments aren’t declined due to SCA not being active.
Biometrics take centre stage
2019 saw the first biometric fingerprint credit card issued by a UK bank – expect 2020 to see more of this kind of payment innovation. With smartphones unlocking themselves through facial recognition and fingerprint scanning, biometric security is already ingrained into most of our lives. As payment providers look to increase security, both in response to PSD2 regulations and the increasing sophistication of fraud tactics, biometrics data is going to become an incredibly important tool for purchases. Beyond the UK and Europe, Australian and Brazilian banks are getting on board with 3DS 2.0, ahead of the decommissioning of 3DS 1.0 over the coming years.
Transactions through 3D Secure 2 already incorporate biometric authentication such as fingerprint and voice recognition or facial scans into the process. Even better, 3DS 2.0 can use data collected in checkout to authenticate a transaction without intervention from the customer. This creates an improved customer experience for mobile transactions that require strong authentication.
Expect to see your personal features becoming a more secure way to pay as banks and merchants look to step up their fight against fraudsters.
The payments landscape moves fast to support on-the-go customers carrying smart mobile devices. Self-service kiosks in quick service restaurants, endless aisle inventory in retail, apps that can be a hotel key card as well as a mode of booking and paying for an overnight stay. All these experiences offer exciting possibilities for improving customers’ lives and provide unprecedented levels of data and insights for businesses. Make sure your payments stack is ready for 2020 to deliver the experiences your customers deserve.
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