by Keith Briscoe, Chief Marketing & Product Officer

Goodbye fraud, hello customer experience

If the headline to my editorial caught you by surprise, let me explain. While we’re not kissing ecommerce fraud completely goodbye anytime soon (courtesy of those increasingly organised fraudsters, confused customers, and savvy consumers looking for ways to game the system), the payments industry is continuing to direct its focus toward the far more lucrative domain of ‘customer experience’.

If 2018 has shown the payments community one thing, it’s that we’re at a critical inflection point and moment of decision as an ecosystem. As I’ve talked to payments professionals this year and closely followed the lightning-fast pace of change, the nature of this key ‘moment’ is coming into sharp focus.

The pendulum shift from fraud to customer experience

The CNP fraud conversation continues to shift increasingly to defining moments of customer experience. While fraud is no longer the central concern, it’s still very much part of the picture as the industry continues to cope with a rampant ‘friendly fraud’ (or false claims) problem. Ethoca’s assessment is that the CNP chargeback problem is estimated at USD 50 billion, comprised of a combination of blended OPEX for both merchant and card issuer, and lost value on transactions that are falsely disputed by cardholders (sometimes unwittingly, but increasingly abusive in nature). As a blended average across all merchant categories, friendly fraud is hovering in the 30 to 40% range, but it’s most acutely felt in digital goods where it can exceed 90%.

The most staggering fact is that while USD 50 billion is a headline-grabbing number, it pales next to the lost transaction value and customer insult factor that comes with false declines – when good transactions are falsely rejected due to apparent fraud risk. Aite Group estimates that false declines are costing the industry USD 331 billion annually, and that number is set to rise as the pervasive influence of friendly fraud continues to wreak havoc with effective fraud decisioning.

The compounding regulatory ripple effect

One of the biggest ironies of 2018 is that the rise in customer experience together with cardholder protection are reaching a crescendo just as the regulatory environment is about to kick into motion a series of changes that will potentially make it harder than ever to create a frictionless customer experience. Enter PSD2 – particularly the Strong Customer Authentication (SCA) component of the updated payment directive release by the EBA.

When two-factor authentication becomes mandatory on all transactions over EUR 30, the industry will be waiting with bated breath to measure the impact of customer conversion and declines. It’s important to remember that potentially 30% of all customer declines are never tried again on another card in the cardholder’s wallet. And while SCA exception scenarios exist when fraud rates can be held in check at a PSP or acquirer level, it will prove to be very challenging for ecommerce merchants to realise that benefit with so many false claims in the system.

3DS 2.0 holds the promise of delivering higher acceptance rates as long as merchants can get comfortable with sharing extended data fields with card issuers to benefit from liability shift. However, in parallel with this key question, there is a lot of chatter about the ‘death of fraud detection’ given that merchants can simply accept every transaction and let 3DS liability sort out the rest. That would be a tremendously short-sighted move, ultimately straining the delicate card issuer – merchant acceptance balance.

For a start, this approach would trigger more step-up authentication at the card issuer, introducing increased friction – and abandonment – into the purchase process. In addition, facing increased losses as a result of liability shift, card issuers’ acceptance and fraud detection models would likely decline more. Once again, we’re seeing all of this potentially set the stage for anything but a good customer experience. Creating customer habituation will be key (ease of use, minimal friction and virtual invisibility). But it must be balanced with responsible and equitable behaviours from both merchants and card issuers and enabled by innovative technology that encourages productive, value-based collaboration.

The case for collaboration

So where is all this heading? During no other period in the history of payments has the time been more right for industry collaboration to solve the most pressing problems in ecommerce. The rise of what we at Ethoca call ‘bi-lateral rich data exchange’ is optimally positioned to solve these increasing challenges. Here are three recommendations for solving the most pressing customer experience and transaction acceptance challenges heading into 2019:

1. Take the noise out of the system – The tricky thing with friendly fraud is that it’s virtually impossible to detect with typical fraud detection tools because it’s largely behavioural in nature. It simply doesn’t ‘look’ like fraud, because it isn’t. Making merchants’ deep purchase and account insight available to card issuers’ mobile applications and to call centre agents – at the pivotal moment of customer concern – is a critical first step in helping customers understand what they bought. The result: better fraud decisioning (less garbage in means higher-performing detection systems), fewer false declines, fewer fraud claims, and improved customer experience.

2. Set the stage for ‘post transaction customer experience’ – Utilising rich data and intelligence sharing between card issuers and merchants to solve for dispute challenges is just step one. Think about where this goes from here: when cardholders have access to their consolidated digital receipts in the bank’s mobile app, that’s where customer experience enters ‘next level’ territory. That digital journey should matter as much to banks as it does to merchants, laying the foundation for highly relevant cross-sell opportunities and deeper engagement over the course of the purchase journey.

3. Build the business case incrementally – One of the biggest challenges in realising the full potential of bi-lateral rich data exchange between card issuers and merchants is finding the ‘wedge’ use case(s) that prove the value through an incremental approach. Ethoca’s view is that by starting with the biggest pain points – moments of dispute or concern that can be instantly resolved with real-time intelligence ‘in the moment’ – card issuers and merchants alike will become increasingly comfortable with sharing intelligence that drives the best possible customer experience.

At Ethoca, we’re welcoming 2019 with open arms and excitement: the times, it seems, have caught up with collaboration.