When the customer has put the items they want in their shopping cart, you’re almost there. Now it’s time to pay. The customer wants it to be as convenient and secure as possible, but you don’t want to be stuck with your claim. In this article you will learn how to convince the customer at the checkout and at the same time avoid the risk of online payment fraud.
When it comes to payment fraud in online retail, the customers are usually the focus of media reports. Countless articles on the web reveal tips and tricks on how to identify reputable dealers. On the other hand, the billions in damage that retailers incur as a result of fraud and uncovered payments are rarely the focus.
Almost every German now shops online. Around 55 million customers regularly visit online shops. And as much as retailers can be happy about increasing sales, although the pandemic has also provided an additional growth spurt, financial damage is part of the everyday life of retailers: Like the survey “Fraud in online retail” by CRIF BÜRGEL from spring 2020 under 110 Online – and mail order companies from Germany and Switzerland has shown that 97 percent have already been victims of payment fraud. In other words: stuck with their outstanding claims.
Finding the balance between security and simplicity
The experience from several decades of e-commerce in Germany includes the realization that every additional click, every hurdle can affect the completion and conversion rates. Not only online retailers are faced with this dilemma, but also, for example, public transport companies that enable customers to buy tickets via app. On-boarding – i.e. the first steps in the app – should be as simple as possible, but this also increases the risk of being caught by a scammer.
The payment fraud management of companies moves in the field of tension between three pillars:
- Maximizing sales while
- Minimize losses from fraud and
- Minimize payment fraud prevention costs
A change in one place has an immediate impact on the other two factors. If you maximize payment fraud prevention through appropriate measures, this will be at the expense of sales, because even honest customers may feel deterred by the security questions and factors.
And the cost of payment fraud prevention is also increasing, reducing contribution margins. On the other hand, if you do without any protection, this will temporarily lead to higher sales, but at the same time increase losses due to fraud.
Controlling payment fraud management is therefore a fragile structure. Due to new scams or external influencing factors, the framework conditions are constantly changing, so that regular adjustments are necessary.
Economic difficulties among end customers (e.g. as a result of the pandemic) increase the likelihood that there will be more orders with fraudulent intent or from customers with poor credit ratings.
Avoid online payment fraud: the question of the payment mix
The checkout is of particular importance in online retail. It must be easy to understand and use. Good usability is extremely important here, because you mustn’t forget that paying is more of a chore from the customer’s point of view.
He is in the shop because he wants to fulfill a wish or is looking for a solution to a problem. If you have the task of hanging a shelf on the wall, you need a drill. And the customer then finds them online. But if the payment process is too complicated or the preferences, e.g. in relation to the desired payment method, are not adequately displayed, then he buys the machine from another dealer.
The customer wants to pay in a way that is familiar to him and that he prefers. Here, different processes have gained a firm place in the favor of customers. In the Netherlands, for example, customers pay using a method that only payment experts in Germany have heard of: iDEAL. An online retailer who does not offer this process in his shop there has little chance on the market.
As the ECC Payment Study shows, the situation in Germany looks like this (multiple answers were possible):
- 93 percent of consumers use the invoice
- 87 percent use PayPal
- 78 percent rely on direct debit
- 70 percent on the credit card
The open invoice is still the most popular “means of payment” in Germany. It looks similar in Switzerland, as the “E-Commerce Mood Barometer” shows. There, the bill and the credit card are equal in popularity.
And in Austria, too, the invoice dominates, as can also be seen from the ECC study. PayPal has it a little harder in the Alpine republic, but the percentage of credit cards is a little higher than in Switzerland.
A look at the studies of previous years shows that the distribution of these payment methods is relatively stable over time. There are always slight shifts, but purchase on account has been in first place in Germany for almost ten years.
Online Payments: What customers love comes with great risks for merchants
And this preference is also reflected in the market share of the payment methods in shops. According to a survey by the EHI Institute, 32.8 percent of orders in the shops are delivered against an open account, 18.3 percent against direct debit. In other words, half of the purchases in the shops are made with the payment methods that represent the highest risk for the merchant!
Not least because of the geographical and linguistic proximity and a very similar mentality, so-called cross-border commerce has increased significantly in Germany, Austria and Switzerland in recent years. It is becoming commonplace for customers to also shop in shops abroad. The consulting firm PwC found out that 71 percent of German online shoppers also order from abroad. And the company ibi Research determined that a similarly high percentage of retailers also accept orders from abroad or actively sell abroad.
In view of the growing e-commerce share in Austria and Switzerland (both in business with end customers and between companies, i.e. B2B), retailers who limit themselves to the domestic market are clearly wasting potential.
Avoid risks – actively control the online payment fraud
In order to minimize your own risks, you have to actively control the payment methods that the customer is allowed to choose. This is where payment and information service providers come into play. Some merchants outsource the risks from direct debits and purchases on account. You commission a payment service provider to process them. The merchant then receives his money from the service provider, minus a processing fee.
If the customer cannot or does not want to pay, the service provider must take care of collecting his outstanding debt. With some constructions, customers can also subsequently convert the purchase on account into an installment purchase. However, this only includes the contractual relationship between the payment provider and the end customer.
As the ECC study has shown, not all retailers are actively concerned about minimizing their risks. Only around half use the appropriate technical measures, although these have been available for several years.
The merchants who actively select the permitted payment methods rely on:
- Customer order history
- Internal procedure for assessing creditworthiness
- External procedures through the systems of information service providers
A combination is often used. For existing customers, the system checks whether payment problems have occurred in the past. If this is the case, the invoice will not be offered. The request then does not even end up with an external service provider. The data of a newly set up customer account, on the other hand, is always checked via an external system. However, relying solely on customer history can be risky, as the next section shows.
Ecommerce payment fraud has many faces – how to avoid them all
Unfortunately, retailers encounter payment fraud and default risks in e-commerce in many different forms.
- What lawyers call contract payment fraud is certainly one of the classics . The customer orders goods or services even though he already knows at the time of ordering that he cannot meet the demand at all. This can happen as an individual case, but also on a commercial basis. In this case, the criminals then order the goods from several retailers and under different identities in a very short time.
- Identity theft has become a major problem . Products are ordered or services used in the name and on account of a victim. Depending on the hurdles involved in creating a user account or checking an order from a new customer, the risk is high because the data sent by the fraudster seems plausible.
- Closely related to identity theft is the phenomenon of stolen payment information . The fraudsters either use stolen and therefore valid payment information (credit card numbers, IBAN, etc.) or generate it artificially. There is also brisk trading on the Internet for such data.
- User accounts taken over by fraudsters are quite perfidious from the merchants’ point of view . In this case, the criminals use the customer accounts that are actually legitimate. The data is either sold to third parties or misused for their own transactions. Such “account takeovers” are particularly difficult to identify at first glance, because after all, the “customer” logs in to the app or shop with correct data.
The best way to protect yourself against these payment fraud attempts is to work with a service provider. This gives you more reliable information about customer data than a self-check. Because: If you want to check the risks yourself, you can only do this with your own data. If an address has not yet become conspicuous, there is no indication that something could be wrong here. Information service providers, on the other hand, use a data pool that is made up of various sources and also contains damage reports from other companies. You will be warned if “goods have often disappeared” from an address or other abnormalities have occurred.
Non-payment: Criminal energy is not always behind it
If you, as a retailer, get stuck with your claim, it doesn’t always have to be a case of fraud, i.e. criminal energy lurking. In business with corporate customers, too, there is a risk of non-payment that should not be underestimated.
A company may have been operating on the brink of insolvency for a long time and the company has just caught the order in your shop. Such bankruptcies rarely happen overnight. In most cases, there were already disruptions in servicing loans or other receivables. With the information from an information service provider, who at best will provide you with data from the entire DA-CH region, you can check the creditworthiness of a company before accepting an order.
Conclusion: Data and AI that are as comprehensive as possible minimize risks
E-commerce continues to grow in Germany, Austria and Switzerland. The best conditions for online retailers – if they offer the payment methods customers want.
The customers prefer precisely the variants with the highest risks. Working with an information service provider is the best way to protect against fraud and payment defaults, both in end customer and business customer business. And with the use of AI, it also prevents fraud that is particularly difficult to detect, such as the takeover of user accounts.