Tackling E-Commerce Fraud While Retaining Good Customers
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Mexico’s e-commerce has never grown so fast, with an 81 percent increase in volume in 2020 compared to the previous year. But the explosive growth comes with an increased risk for fraud. Now, companies need to carefully balance risk prevention with optimal consumer experiences. Payment security experts agree that by identifying good customers and adopting new tech, the industry can make headway.
The pandemic truly kicked off the move toward e-commerce in Mexico, where now close to 10 percent of all retail takes place. This makes Mexico the fastest-growing e-commerce market in Latin America, although this development did not happen spontaneously. “Previous years of hard work have made the move to e-commerce possible. Mexico’s online ecosystem is now quite robust and even developed strongly before the pandemic,” said Pierre-Claude Blaise, CEO, AMVO. Yet as online activities grow, so does online fraud.
“The biggest challenge for Mexican companies is reaching the goal of having less than 1 percent fraudulent transactions, as dictated in international guidelines,” said Erick McKinney, Country Manager México, Adyen. Doing so is easier said than done. CONDUSEF, a regulatory body that defends users of products and financial services, has seen a massive increase in reported fraud over 2020, a trend that continues into 2021. McKinney emphasized that companies need to diversify their strategy and prepare to tackle irregularities, especially during busy times such as the consumer-focused deals of the Hot Sale and the Buen Fin. Emilio Vázquez, Senior Director Merchant & Acquirer Solutions, VISA, sees that companies are perhaps not taking enough measures. “In the meantime, the number of channels for delivery and communication in which fraud can occur only increase. This alters the situation drastically,” he said.
“Companies should look out carefully for fraudulent practices but there are a lot of challenges they need to overcome,” said Victor Islas, Country Manager, ClearSale Mexico. Industry insiders, however, emphasize the risk of being too careful in the face of fraud and thereby hurting good customers. “Figures show that about 35 percent of online orders are declined. Between 30-60 percent of this group are good customers,” McKinney explained.
It is essential to identify those good customers, said Christian León, Regional Director Latin America, Signifyd. “We have a major opportunity to identify new e-commerce users and give them a good check-out experience so that they will return often.” Nevertheless, this is complicated by fraud’s increasingly complex and sophisticated trappings. “The amount of risk you can take on is also significantly different for SMEs compared to big companies,” added Blaise.
So, what does this risk look like in Mexico? According to Léon, fraud is taking up 1-2 percent of e-commerce’s total costs. This makes Mexico once again the highest-ranking country in the region but costs are in fact higher. “The total cost is actually 3 percent if you sum up total implicit costs, because you lose more than just your product. Administration can be expensive, just like investing in anti-fraud measures,” he said. McKinney stressed that losing money because of fraud is inevitable but companies need to find a good balance between security and an easily navigated system. “Many companies would rather invest in other areas to improve their customer experience or offer at the end of the day,” he argued.
Islas knows the risks of losing customers: “If you have a high false decline rate, you lose a lot of potential lifetime customer value. About 58 percent of falsely declined customers do not come back and choose a competitor.” Reputational damage can also be a problem. “People are vocal about bad experiences and complain online,” said Islas. “Payments are part of a good customer experience,” agreed Blaise.
To solve the issue, experts are turning to technological developments. “Tech is key: machine learning and AI can be utilized to make fast real-time decisions instead of a costly and slow manual review,” Léon said. But this implementation should not go at the expense of the customer, warned Vázquez: “We have to put more focus on customer experience design and provide all the elements we need for safety seamlessly.” Tools such as network tokenization can help companies improve their operations.
Léon highlighted that companies can use tools that track behavioral data. Fraudsters, after all, do not use a website the same way as regular customers and AI or machine learning tools can help identify problematic visits, while supporting the correct real-time decisions.
Furthermore, standardization of these tools is important, according to McKinney: “Global standards can help prevent fraud,” he said. “It is also important to not try and reinvent the wheel, which Mexico’s ecosystem often tries to do,” he added.
Preventing fraud requires active approaches from all stakeholders involved. “We need to align all these different players if we are to prevent fraud from happening,” said Islas. “For the first time we have a chapter in the USMCA related to cyber criminality, this will push the Mexican government ahead. It is not a Mexican problem, after all, it is a global issue,” said Blaise.
The issue will not be solved any time soon, because fraudsters will continue to find new loopholes and trick the system. Nevertheless, the problem can be combatted. “We feel that e-commerce players will be better prepared for next year,” said Léon.