The payments industry is going to have to make some changes to ensure the long-term success of digital consumer-to-business payments.
U.S. digital sales are thriving, and consumer demand will only continue to grow. According to a report from the U.S. Department of Commerce, U.S. online retail sales nearly quadrupled in the decade from 2005 to 2015. In light of this strong growth and customer interest in digital-commerce channels, digital payments must become a higher priority for payment-system stakeholders.
The common goal for participants in U.S. commerce is to provide the best experience for the customer. Convenience and improved interactive features are cornerstones of digital and interconnected payments. The retail industry has introduced new service models to meet customer demand and expectations for the future of commerce. It’s critical our payment partners follow suit to help ensure that a seamless and secure digital-shopping experience can be provided for all customers across diverse channels.
Today, a customer can buy an airline ticket through a mobile app, order groceries online and stop by the store to pick them up on the way home from work, or re-order light bulbs or laundry detergent simply by speaking to a smart device in their home. Innovation will thrive if stakeholders work together as equal partners to manage and improve the customer experience for digital and connected payments.
Unfortunately, many card-network acceptance and pricing policies are stuck in the 20th century, along with fax orders and 1960s magnetic-stripe technology. The card-not-present (CNP) model is no longer relevant in today’s digital age. CNP was established for mail and phone orders to identify these higher-risk transactions, which introduced higher acceptance costs and liability for the merchant. However, today’s digital technology allows us to leverage advanced authentication data points, despite a plastic card not being present. The network approach to cost and liability for digital transactions must align with the technologies available to mitigate risk.
The Merchant Advisory Group Digital Task Force recently asked that several global payment card networks rethink their policies for digital commerce. Drastic innovation in credit and debit payment, and in supporting policies, is necessary to ensure the payment experience keeps pace with the constant advances shaping digital commerce for consumers.
Two critical areas of change will be better fraud prevention and customer authentication by all parties. Here, we’ll need a balanced approach towards investments and ongoing costs to ensure a more equitable and efficient system for all stakeholders. In the first quarter of last year, digital fraud had already overtaken all other payment card fraud in the U.S. with losses of $5.65 billion, according to industry sources. That’s more than 40% of total U.S. card fraud.
Merchants shoulder the majority of these digital fraud losses, as confirmed by U.S. Federal Reserve data. These fraud losses must be more evenly distributed across all payment-business stakeholders to ensure every party has the proper incentives to innovate and secure the system.
With the U.S. migration to chip cards—a solution that helps prevent in-store card fraud only—data shows that fraud attempts are already migrating to online channels. Last year during the holiday season, fraud attempts were up 31% on digital transactions. The largest digital-commerce businesses will thwart most of these fraud attempts and resolve emerging fraud threats quickly. But small businesses, and others that are new to the digital environment, will have a difficult time managing the significant migration of fraud attacks online.
Even for the most sophisticated digital merchants, the increase in fraud attempts is a challenge that requires significant investments in time and resources. Many large merchants use advanced data analysis, such as IP and email addresses, geolocation information (on an opt-in basis), device type, behavioral analysis of shopping patterns, and several other factors to help thwart fraud attempts and mitigate fraud losses. However, digital payments continue to incur some of the highest card-network fees.
This dynamic must change to ensure all stakeholders have the flexibility to determine how best to direct their fraud-prevention resources and investments to provide a better digital-commerce experience for our common customers. The growth and ultimate success of digital payments depend on it.
—Laura Townsend is senior vice president of operations at the Merchant Advisory Group (MAG).