November 18, 2021
By Tricia Kemp, Oak HC/FT
eCommerce volumes have exploded in the last 5 years, accounting for ~15% of all retail transactions. This recent acceleration - largely due to the COVID-19 pandemic - has also brought a wave of new commerce infrastructure technology companies that are helping to improve the eCommerce experience for both merchants and consumers.
Balancing Innovation Integration with Fraud Prevention
Some of the most important early innovations these new companies are introducing have been built around fraud tools. Credit card fraud, for example, is often easier to conduct at scale online, and merchants historically have had to face a trade-off of creating high friction checkout experiences to reduce fraud. Merchants now use sophisticated data and machine learning models to detect fraud pre-purchase and accurately decline cards flagged to be associated with fraudulent transactions. Newer innovations have introduced biometrics, more complex data sources or more mature data consortium models to stay ahead of the increasingly creative bad guys.
Many now mature companies have driven innovation in this space, including Feedzai, which uses complex machine learning models to enable card issuers, payment processors, or merchants to monitor transactions in real-time and detect fraud at the point of a transaction authorization or account opening. Riskified, which recently IPO’d, also uses machine learning models and data from the checkout flow to detect fraud without interrupting the customer experience, specifically for eCommerce merchants. These tools have revolutionized eCommerce by enabling merchants to optimize the checkout experience and reduce friction for the customer while also reducing fraud losses.
The Missed Opportunity: Post-purchase Experience
While there has been a ton of innovation created and implemented and venture capital dollars spent to optimize the user experience, improve checkout flows and stop fraudulent transactions pre-purchase, there has been little attention focused on the post-purchase experience. However, the opportunity is just as large and relevant for merchants and their customers. A customer’s relationship with a merchant does not stop once an item is purchased, and the next wave of innovation in eCommerce will be around optimizing and improving this post-purchase relationship.
To put numbers to it, 60-80% of merchants’ losses occur after a purchase is made through a post-purchase chargeback, which can account for more than $100 billion in annual losses or up to 1% of some merchant’s revenue. Post-purchase chargebacks often occur as friendly fraud, where a real, usually good customer, claims to not have received an item, or disagrees with a refund policy and disputes the transaction with their credit card company whenin reality, this customer did receive the item or should not be owed a refund.
Credit card companies have historically prioritized customer relationships, and due to a liability shift rule enacted in 2015, these losses are the merchant’s responsibility. With little incentive to upset their customers, these refunds are usually quickly paid out to the customers by the credit card issuer. While merchants have the right to fight back against the credit card issuer refunding customers on their behalf, the process is often complex, highly manual and costly. Not wanting to deal with the complexity, merchants often write off the losses without a fight. On average, only 20-30% of recoverable dollars post-purchase are actually recovered. These friendly fraud incidents are sometimes one-time offenders, or customers taking advantage of friendly refund policies but could also be more complex scam rings. These pain points exist in traditional retail eCommerce, but also in online services or even crypto currency purchases, where disputes are common, but returns are often not possible.
Combatting Future Friendly-Fraud
As eCommerce platforms are becoming more sophisticated, and their data richer, tools are emerging that are able to automate this dispute process and recover these dollars on the merchant’s behalf. Justt, an Oak HC/FT portfolio company, is one example that helps merchants recover up to 80% of the dollars left on the table post-purchase. Justt’s high success rates are a result of their ability to gather data from multiple sources and use machine learning models to identify chargebacks that have high potential for recovery. For example, integrations into the point of sale for eCommerce platforms like Shopify can not only verify the real customer at purchase but also verify shipping and delivery. They also automate evidence collection and filing of dispute forms to the exact, but constantly changing, specifications of a specific card issuer that will yield the highest chance of winning. This both lowers the cost to process each chargeback, which is historically a very manual process and the barrier for many merchants to even put up a fight, but also increases success rates.
Similar to how innovations changed pre-purchase checkout flows, merchants no longer have to compromise on optimizing the post-purchase customer experience at the expense of lost revenue. Now they can carefully decide when to refund a customer that is right and defend themselves when they may be taken advantage of.
Innovations around improving the post-purchase experience are still in early days and extend beyond just chargeback and refund management. End-to-end eCommerce solutions provider Cart.com recently partnered with Extend, allowing merchants of all sizes to offer extended warranty and product protection plans to customers. Route, which is changing the post-purchase customer experience through shipping insurance and order tracking, and Kangaroo, a smart home device that monitors porches for stolen packages, are also expanding the customer experience beyond the shopping cart. These platforms not only improve the customers’ post-purchase experience but also produce new rich data sets for merchants to provide better customer service when any issues may arise, a win-win for both the consumer and merchant.
As eCommerce will unquestionably maintain its prevalence and continue to grow, we can be sure that technology will continue to drive the customer and merchant experience to be more and more aligned. This will require a holistic outlook of the whole process – through post-purchase.
This article originally appeared in Forbes.