Digital Payments in 2020: Remote Ordering and Managing Risk

2020 has already been a transformative year in digital payments. As COVID-19 continues to impact the market, we’ve seen a massive shift toward ecommerce.

This could be a temporary development, but with many stores closed or under limited capacity, it’s likely that many of these new online consumers will stick around.

The rise in contactless payment as a result of the coronavirus has been a key trend. Consumers are adopting options like mobile ordering and in-store pickup at an astonishing rate.

Experts already anticipated that click-and-collect would be a $35 billion channel by the end of 2020. Ninety-two percent of consumers in the U.S. said they would “definitely” or “probably” try online ordering or delivery services, while 78% said they would be willing to try in-store pickup. This was before the pandemic, so those figures are certainly higher.

Click-and-Collect Benefits Merchants, Consumers

We’ve already seen a tipping point in favor of ecommerce. And, with consumers embracing these new options, it will define the payments space over the next decade. While many are doing so to avoid virus exposure, there are plenty of other benefits.

Digital payments offer a faster, more convenient consumer experience, and merchants benefit as well. For instance, while implementing mobile ordering or other digital payment options demand an upfront investment, they can also reduce net overhead. Shops can devote fewer man hours to the checkout process, while making other operations, like tracking inventory, much more efficient.

Merchants can also incorporate loyalty programs into their ecommerce platforms. While rolling out and managing such a program will require further investment, it will almost certainly pay off by improving customer retention. They enjoy the savings, while merchants get a loyal base of satisfied customers.

Options like Apple Pay and Samsung Pay offer improved security compared to conventional card purchases. Consumers enjoy the same EMV tokenization technology, with the added benefits of two-factor authentication, requiring them to unlock the device and provide authorization to complete a payment. This can be done by passcode, but a biometric indicator like fingerprinting is even more secure.

No New Development is Free of Risk

Any discussion of technological advances disrupting the market has to consider the downside, in this case the potential for fraud and other abuse on ecommerce platforms.

Fraudsters have already found ways to abuse mobile ordering to steal goods from retailers. For example, a bad actor might take over a user’s account, complete a purchase and pick up the merchandise before the legitimate buyer even notices. That’s just one tactic; trends in chargeback issuances suggest that BOPUS abuse is a much more widespread problem.

If we look back at 2013, the restaurant industry had one of the lowest average rates of chargeback issuances. Five years later, more than 25% of surveyed merchants in this vertical reported chargeback-to-transaction ratios of 0.5% to 1.0%. One in ten merchants had chargeback rates above 1% of total transactions. The key factor here is the widespread adoption of click-and-collect food ordering.

Chargeback abuse tends to go hand-in-hand with digital payments. Consider this example: A customer opens an app and orders food for pickup, then realizes they ordered from the wrong location. When the buyer realizes the mistake, she calls her bank and disputes the charge, claiming it was unauthorized. This is a textbook case of friendly fraud.

These challenges are unfortunately an unavoidable reality of ecommerce. That’s not a good reason to reject BOPIS and other digital channels, though.

If we look at a major retailer like Best Buy, in-store pickup is now a cornerstone of its operations, accounting for 40% of all digital purchases. It would be foolish to write off those potential profits. Thus, the factor that really determines the future of digital payments will be how well retailers and financial institutions mitigate risk.

Multi-Layer Responses to Click-and-Collect Problems

Making the most of digital payments over the next decade demands a multilayered approach.

Merchants should adopt basic practices, like using address verification (AVS) and geolocation. They should also reject order pickups beyond a certain distance from the ZIP code tied to the customer’s card. This would prevent many cases of criminal fraud, as well as prevent legitimate buyers from accidentally submitting orders to the wrong store. That’s just one example; merchants need a dynamic strategy with a variety of complimentary tools to identify buyers.

Merchants should also consider how they manage chargebacks. The current COVID-19 crisis has already led to a spike in chargeback activity. Now, with more and more disputes coming, it’s never been more important to understand the sources of chargebacks, and how best to prevent them.

The next decade looks bright for retailers that manage to hang on through the COVID-19 crisis and leverage digital payments effectively. That’s easier said than done, of course. The first step toward success is understanding the current landscape and how to meet the coming challenges.

Monica Eaton-Cardone is Co-Founder and COO of Chargebacks911