There is no question about the growing digitalization of businesses across Southeast Asia. The e-Conomy SEA 2020 report by Google, Temasek, and Bain & Co., reported that a third of all digital transactions since the start of the pandemic were from new customers. E-commerce has also ensured the sustainability of businesses that would have otherwise not survived or thrived, such as food and beverage.

There are risks associated with digital transactions, however, in the form of fraud. As merchants increase the adoption of digital payments, various forms of payment fraud schemes result in direct losses and losses from fighting such fraud.

Below are highlights of a TechNode Global Q&A with Shabab Muhaddes, APAC General Manager of Vesta, an instant, end-to-end transaction guarantee platform for online purchases. It counts leading brands in telco, e-commerce, travel, and financial services among its clients.

Headquartered in Portland, OR, with offices in Atlanta, Miami, Ireland, Mexico, and Singapore, the company uses machine learning backed by 25 years of transactional data history, which enables approvals of legitimate sales for customers, while eliminating chargebacks and other forms of digital fraud, driving the true cost of fraud to zero and transferring 100 percent of the liability for fraud, including chargeback processing, so customers can focus on increasing sales.

Shabab Muhaddes, APAC General Manager of Vesta
Shabab Muhaddes, APAC General Manager of Vesta

What are the emerging trends in digital payments and e-commerce in the Southeast Asia region?

The COVID-19 pandemic resulted in the greatest consumer and SME migration online. E-commerce saw a huge boom last year in SEA, with a 63 percent growth of the region’s e-commerce sector from $38 billion in 2019 to $62 billion in 2020. This surge in e-commerce has also prompted merchants to implement more digital payment platforms in their businesses as consumers increase their adoption of online transactions.

We’re expecting a long-lasting behavior of online purchases and digital transactions even after the pandemic, especially with more businesses continuing to focus their efforts on growing e-commerce as a key retail channel.

However, this increase in online transactions has also seen a corresponding growth in fraudulent transactions. Vesta works with merchants across various industries across the world, and we have observed an average 30 percent increase in transactions in the e-commerce segment between 2011 and 2020, and correspondingly, twice as many fraud attempts. As the pandemic continues to impact shoppers worldwide, CNP fraud is likely to continue increasing. Within Southeast Asia, the rate of attempted fraud is up to 12 times greater than the global average, and online merchants lose an average 1.6 percent of revenue to direct fraud each year.

This leads to a two-pronged challenge for retailers and merchants: They first have to fight fraud itself, and protect both current and future customers by securing their networks and declining fraudulent transactions; at the same time, they have to maximize approvals of legitimate transactions to protect the customer experience and their brand reputation.

Can you share three key challenges in the e-commerce industry, particularly those relevant to digital payments?

With more online transactions comes a higher risk of e-payment fraud. The spectrum of fraud techniques constantly grows, and this is making it challenging for any retailer with a digital presence in this day and age.

One key challenge for merchants is that they may end up spending more to fight it but find themselves at the risk of false declines — when a legitimate payment is declined due to suspected fraudulent activity. We estimate that false declines make up over half of all declined orders. The higher the price-point of the product, the higher the merchant’s decline rate will typically be. Having a valid purchase rejected not only has a direct impact on the merchant’s revenue but also its customers’ experience.

We’re also seeing account takeover fraud increasing rapidly and likely to continue impacting merchants in 2021 and beyond. A form of identity theft, account takeovers occur when a cybercriminal gains access to someone’s private account and personal information – common approaches include phishing attacks, or using purchased stolen credentials.

And with the recent surge in online shopping, friendly fraud is increasingly a challenging issue for merchants to manage and prevent. A form of chargeback fraud, it occurs when a merchant returns money to a customer, who may have had the ill intent of purchasing something but disputing the payment, and keeping the product or service after their payment is refunded.

How can technology and innovations solve e-commerce payment fraud?

As consumers race to go online and merchants race to accept more online transactions, fraudsters are targeting companies with weak fraud prevention systems. It is no longer practical to rely on manual intervention and rule-based technology to catch fraudulent transactions since the thresholds for fraudulent behavior keep changing. Instead, using modern AI and machine learning technology can help reduce friction for customers while improving fraud detection accuracy.

How is Vesta solving the problem of payments fraud? What is your unique proposition or edge?

Vesta has incorporated technology in our end-to-end prevention solution to combat frauds. Using machine learning backed by 25 years of transactional data history, we help increase approvals of legitimate sales for customers, while eliminating chargebacks and other forms of digital fraud. Expanding into the Philippines, we remain committed to enabling growth while managing risks for the region’s businesses and their revenues.

To meet the challenge of various fraud scenarios, we also employ a uniquely orchestrated approach that combines biometric evaluations with machine learning to discover and prevent fraud before any unauthorized transaction can occur.

Additionally, our graph link database helps us observe every transaction ever made on a site — from who created the order, to how it was paid and how it was delivered. This advanced feature draws connections between 2 trillion data points and helps us connect the dots in real-time, analyzing between fraudster networks vs. good networks. Our models constantly adapt to new threats on a global scale, drawing data from millions of transactions every minute. This real-time data allows us to make an accurate risk assessment in milliseconds, effectively preventing fraud while reducing false declines.

On top of our fraud prevention capabilities, our Payment Guarantee makes the decision whether to approve or decline a transaction in less than a second without adding any friction to the customer experience. Once a transaction is approved, the liability of fraud is taken off a merchant’s plate and is shifted to Vesta – should the transaction turn out to be a fraud, Vesta covers it immediately, with zero cost to the merchant.

This sets us apart, as fraud generally comes with a multi-dimensional cost
– from the refund of the charge to the cardholder (the victim of the theft), to the friction that was unnecessarily imposed on the customer. It is this ‘cost’ of fraud that we hope to entirely eliminate from merchants as far as possible.

What is the impact of improved risk management on digital commerce? Can you cite examples from the perspective of the enterprise, small e-commerce operations, and end-users?

Some businesses don’t realize the costs of payment fraud and the serious impact it can cause on their bottom line. While direct fraud loss — the amount that was fraudulently used for the purchase — makes up a significant component of the total cost of fraud, it’s also the catalyst for loss in other areas of their business.

Today, the average e-commerce merchant spends almost $4 fighting fraud for every $1 of direct fraud loss. Wrapped in that number are the costs of manual reviews pre and post transactions, staffing (quality control, rules management, IT programming, chargeback management, reconciliation, salaries), third-party transaction costs, and fees for shopping, restocking, marketing, and other overheads needed to mitigate these indirect costs of fraud.

Fraud attacks on your system are also a relatively easy way to damage consumer trust and brand reputation if businesses show their buyers that their payment options are not secure. Not only will they likely refuse to interact with your brand in the future, but they may also tell others about their experience. This can quickly result in a significant amount of lost revenue.

It is important to be pragmatic and implement solutions for fighting fraud, rather than let the cost of fraud stunt your company’s growth. To reduce these direct and indirect costs, businesses should invest in having proper and multi-layered fraud protection, thus putting consumers’ minds at ease.

5 E-commerce fraud prevention trends taking shape as the pandemic accelerates digital transactions