3D Secure: How to minimize fraud while maximizing conversion
In the first of our Revenue Optimization series, Xinying Teo discusses factors affecting revenue optimization, and why payment risk management has assumed greater importance now more than ever.
By Xinying Teo, APAC Team Lead, Risk Management
“Nothing happens in business until something gets sold.” The old truism still stands. Sales equal revenue, and if you’re not converting the maximum possible sales, your revenue suffers. As businesses grow and expand, it’s key to ensure you’re not losing revenue unnecessarily to either friction in the checkout process or to fraud.
Xinying Teo is the APAC Team Lead, Risk Management at Adyen and works with brands on revenue optimization and fraud protection
Many companies are growing their online presence and are more prudent with spending in a post-Covid world – it’s also why revenue optimization now plays a bigger part in business strategies.
When it comes to sales transactions, most businesses are, understandably, focused on increasing their authorization rates or auth rates – that is, the percentage of successful transactions.
Auth rates are determined by two things:
• The number of transactions that are approved or declined
• The number of transactions that are initially successful but are subsequently found to be fraudulent
"Because successful transactions means an increase in sales and thus greater revenue – businesses should aim for high auth rates."
Because successful transactions means an increase in sales and thus greater revenue – businesses should aim for high auth rates.
Most of the time, auth rates are associated with online transactions rather than in-store point-of-sale (POS) transactions. For the purpose of this article, we refer to auth rates for online ecommerce transactions.
High auth rates means more successful transactions and greater revenue
Auth rates vary across industries for many different reasons. Some industries are generally deemed more high-risk than others, for example, those that involve resellers. Several other factors can affect auth rates too, including whether you are processing locally or cross-border. To learn more, you can always get in touch with our team.
Generally speaking, if you operate an ecommerce business or have an online store, you should have in place certain risk settings that help to prevent fraudulent transactions. Plus, a sound user experience (UX) strategy to reduce friction in the checkout process and maximize the chances of successful transactions. Maximizing auth rates and preventing fraudulent transactions is a real balancing act.
Set your risk settings too high and you could end up declining good customers. Set them too low and you’ll end up processing more fraudulent transactions, which you may need to look into afterwards.
Some may ask: so why can’t I eliminate all friction points including dropping any form of authentication throughout the shopping process then try to recover revenue afterwards? Theoretically, you can.
"As a global payments service provider, Adyen is able to provide an overview in terms of shopping, payments and fraud trends. When we start seeing a pattern, we want to be able to anticipate and prepare our merchants."
However, reversing fraudulent transactions usually involves chargebacks – that is, bank-initiated recovery of spending. Chargebacks hurt because businesses aren’t just liable for recovering the transaction amount but also the recovery costs as well. This may then become an expensive and time-consuming endeavor. Plus, schemes like Visa and Mastercard also have chargeback and fraud programs that monitor merchant fraud levels. If fraud/chargeback rates are too high, merchants may be liable for hefty non-compliance penalties that may even exceed the total transaction amount. So, definitely a case of prevention is better than cure.
In Asia Pacific, over the last ten years or so, the focus has been on growth and expansion. For some businesses, minimizing loss of transactions or revenue optimization has been lower in priority.
But when things slowed down during the pandemic, revenue leaks became more significant. Fast-growing businesses that had been ignoring revenue leaks, suddenly found themselves taking on water. Risk management quickly became an issue of survival.
Businesses need to keep in mind consumers’ changing shopping behaviors especially in a post-pandemic world
The pandemic changed the way we shopped too. For example, there was a large increase in the number of online shoppers compared to pre-pandemic. With many shoppers shopping online for the first time, coupled with unfamiliarity of scams that seasoned online shoppers had learnt to identify and avoid, an increase in online scams were reported in many markets. The huge influx of online transactions also meant that there is a higher chance of fraud. Overall, these factors contribute to more declined transactions and more fraudulent transactions, which led to more chargebacks, all of which adversely affect revenue.
The growth of ecommerce in the last decade, further hastened by the pandemic, presents opportunities for businesses and fraudsters alike. It’s why there is a further interest globally in strong customer authentication (SCA).
Businesses and shoppers may already be familiar with SCA methods like one-time password (OTP) and two-factor authentication (2FA). Europe’s Revised Payment Service Directive (PSD2) leveraging 3DS2 (or EMV 3DS) is also a great example. Authentication may introduce just that little bit of friction in a shopper’s journey, but it can help businesses safeguard their revenue.
Here in APAC, businesses cater to a diverse range of cultures – and therefore, a varied payment landscape with different approaches to money, credit and payment flows. It’s unrealistic to apply the same risk management settings in markets that are so different. Flexibility and adaptability are vital.
Flexibility is key when it comes to risk management for markets in a diverse APAC
Leveraging an end-to-end global payments service provider like Adyen is useful for businesses here, as well as those with an international presence. Firstly, Adyen supports the key payment methods shoppers prefer – from credit cards to local payment methods across online, mobile and in-store channels. As a global payments service provider, we are also able to provide an overview in terms of shopping, payments and fraud trends. When we start seeing a pattern, we want to be able to anticipate and prepare our merchants.
Plus, Adyen’s single payments platform means all data is in one place so you can quickly understand shopper behavior – and enhance shopping experiences, improve brand loyalty and easily increase conversions. For example, minimizing authentication steps during checkout when you already know it’s a regular customer.
Risk, and risk management may sound scary especially for businesses that may be tackling related issues for the first time, but it doesn’t have to be. Understanding risk management, how it can help enhance customer experience, as well as the positive impact it can bring to your revenue, are important in helping your business prevail.
Want to learn more? Check out Revenue Optimization 2: The importance of payment risk management in the culturally diverse and high-growth APAC
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