Like e-commerce, digital wallet use was affected by the pandemic. As shoppers sought contactless ways to pay in stores and shopped more online, digital wallets offered physical distance and convenience. Now, with new consumer habits in place after more than two years of adapting, the digital wallet market is forecast to grow by 18.9% year-over-year through 2028. Already in March 2021, when ClearSale surveyed 5,000 online shoppers in the U.S., U.K., Mexico, Canada, and Australia, 71% said they always or sometimes pay with a digital wallet.
Accepting digital wallet payments can increase conversions by simplifying checkout, but this payment method may complicate chargeback mitigation efforts by businesses when fraud occurs. To get the most value from digital wallets while minimizing the potential downside, businesses must understand why customers want wallet options – and they must create a fraud prevention strategy that addresses digital wallets’ unique fraud-risk profile.
Online shoppers prefer to pay with digital wallets
It’s easy to see why shoppers would choose contactless payments in stores during a pandemic, to maintain safe distances from cashiers and avoid touching terminals. The motivations for using digital wallets online are different: data security and convenience. The 71% of consumers who always or sometimes use digital wallets do so in place of entering their credit card information directly into websites.
That reduces their concerns about exposing their payment data to retailers. Specifically, 42% of the consumers surveyed said “not knowing if the website is legitimate or not” deters them from shopping online more, while 38% said concerns about website data security keep them from buying more online. In line with those concerns, the consumers surveyed are extremely unforgiving of fraud, with 84% saying they would never shop again on a website that allowed a fraudster to make a purchase with their credit card. So, even retailers that have strong protection against CNP fraud and account takeover fraud can benefit from offering customers a digital wallet option that they may perceive as safer than credit card payments.
The other upside of digital wallets for consumers is convenience, particularly for younger shoppers. While 40% of consumers of all ages said they always have their mobile phone within reach while they shop online, only 20% of shoppers younger than 55 have their credit card handy every time they shop. The added friction of having to get their physical card and key in the data can be enough to cause cart abandonment. 36% of surveyed consumers had abandoned an online purchase because checkout was too complex or took too long to complete. With a digital wallet, there’s no need to find the card and enter the data, because it’s stored in the wallet.
Overcome hurdles to challenge fraud
As online shopping surged during the pandemic, so did fraud. 80% of retailers reported a rise in so-called friendly fraud in 2021, and 31% reported problems in challenging friendly fraud chargebacks. This matters because while digital wallets offer authentication features like codes, fingerprints, or face scans to prevent account takeover if the customer’s phone is lost or stolen, those features can’t stop fraud committed by an otherwise legitimate customer.
If a customer buys an item and then claims it never arrived, the business loses out unless they can prove that the claim is false. That’s not always easy. A 2020 survey found that 48% of businesses reported the most success in challenging chargebacks to credit cards, while only 5% said they had the best results challenging digital wallet chargebacks. With each chargeback costing the business at least $20 in fees, plus the lost costs of marketing, fulfillment, shipping, and processing, successful chargeback mitigation is critical for profitability.
Eliminating digital wallet purchases would only drive customers to competitors who accept digital wallets. Imposing overly rigid fraud rules that automatically reject orders could increase false positives, which also drive customers away. 40% of the consumers surveyed said they’d boycott a website after a false decline. Instead, retailers can manage their digital wallet fraud risk by following a few best practices:
- Screen digital wallet orders the same way you screen card payment orders. Even though digital wallets are more secure than cards against third-party fraud, conducting your own anti-fraud scan can identify issues like an unfamiliar device, an unlikely new location, or another issue that raises a flag for manual review.
- Review the customer’s history with your store. Sometimes, a customer starts a friendly fraud habit after realizing how easy it can be to charge back a purchase. Data about your customers’ chargeback history with your store should be part of your fraud screening for all orders, including those paid with digital wallets. If a pattern emerges, the customer’s orders should be manually reviewed or, in extreme cases, blocked.
- Provide end-to-end order tracking and delivery confirmation. False claims of nondelivery are the friendly fraudster’s preferred method. With real-time order tracking and delivery confirmation – including a photograph of the delivered package at the shipping address – your business will have better proof to dispute these claims. Another upside is that real-time delivery tracking helps your good customers bring in items before package thieves can grab them.
- Check social media for chargeback fraud clues. When you suspect friendly fraud after the chargeback of a high-value item like a designer bag, a piece of jewelry, or a big television, it may be worth the cost of reviewing the customer’s social media for evidence that they received the item. Time-stamped and dated screenshots can help your case.
- Consider a chargeback mitigation team. Because managing chargeback challenges can pull a team’s focus away from order review, customer service, and other core tasks, businesses with the internal resources to do so may designate one group just to work on chargebacks. Others may decide to outsource some or all of their chargeback management issues to a third party to reduce losses and keep their chargeback ratio low enough to avoid higher processing rates.
It’s clear that digital wallets are quickly becoming a mainstream payment method, one that many consumers already prefer over credit cards. By proactively managing digital wallet orders, businesses can enjoy the benefits of offering digital payments while protecting their revenue from friendly fraud.