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Digital Products: Controlling Fraud and Operational Costs
Presented by
Chris Uriarte Chief Payments and
Product Officer
Vesta Corporation
Growth
Vulnerability How business processes &
practices influence digital
product fraud
Solutions Strategies supporting the digital
lifestyle that every retailer should
consider
Prevent Fraud, Increase Revenue
1
2
3
Ticket
What is the Digital Experience?
55%
of U.S. adults
own smartphones
2013
75%
of U.S. adults
own smartphones
2014
mCommerce: The New Normal
Mobile Commerce
(mCommerce) adoption
soars to
15%
of all merchants
• More than double the %
that the channel accepted
last year
• Indicates that this approach
is being adopted quickly by
the consumer
The cost associated with
mobile channel fraud are
more than
3x
the initial losses
• $3.34 per dollar of fraud
losses
• Mobile channel has the
highest amount of fraudulent
transactions
Growth
Consumer preferences
are changing and
demanding
convenience through
digital products
$2B 2013 eBook
(20% of all book
sales)
>$5B 2014 Music
Download (39% of $15B
globally)
>$118B 2014 Digital
Gift Cards (8x more than
2012)
$57B 2013 Digital
content sales
globally
$-
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
2012 2013 2014 2015 2016
Gift card spend & eGifting spend ($Billions)
Source: CEB
TowerGroup, “Gift Cards
State of the Union 2013”
Gift Card Growth
Challenges of Digital Sales for Online Retailers
• Customer experience is king
• Card-not-present transaction
• No physical address required for
delivery
• Instant delivery of product, that is
easy to monetize in a secondary
market
• Driving competitive growth as part
of an overall customer acquisition
strategy
• Traditional fraud prevention
solutions won’t work
Retailer Challenges
EMV Liability Shift
Fraud App / Acct Takeover
Counterfeit
Mail Non-receipt
10%
30%
50%
70%
2001 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘08 ‘10 ‘11 2012
Card Fraud in U.K. 2001-12
Card-Not-Present
Source: UKPA
Merchant Time to Assess Risk
10 mins 4 hr 24 hrs 1 hr 48 hrs
Financial
Risk
High
Low
Laptops
Dog Supplies
Children’s Clothes eBooks
Physical Gift Cards
Watches
Virtual Gift Cards
Online Gaming
Travel
Increased Complexity
Time lag for solutions to take effect
Va
lue
of
fra
ud
Time 2006 2013
Familiarity with weaknesses and
technology increases fraud
Solutions implemented to reduce fraud
Fraud rises as new technologies are
cracked and new weaknesses found
New solution is implemented to
reduce fraud Implies
innovation
Fraud Control Lifecycle
Adapting Fraud Solutions to Operational Complexity
@
$
@
@
$
Transitional Business Models
Future Past
D I G I T A L G O O D S
How Fraudsters Turn Data into Dollars
13
14
15
$
P H Y S I C A L G O O D S
@
Physical goods return on investment was $100:$1. In today’s world, return on
investment is closer to $300:$1.
What’s Your Strategy?
Operational Model to Maximize Conversions
»
Risk strategy 1 Risk
strategy 2 Risk strategy 3 Risk
strategy 4 Risk strategy 5 Risk
strategy 6 STORE PICK-UP EXPEDITED SHIPPING
DIGITAL / MEDIA
PRODUCTS
LOW RISK MEDIUM RISK HIGH RISK
Customer driven
Fraud Prevention
Cost driven
Operationally driven
Transaction Conversions
Will this be your experience?
Conversion Success
Risk Decline Rate
(3-20%)
Authorization Decline
Rate (5-35%)
Net Settlement
Chargeback Rate
(0-1%)
Settlement
(60-90%)
Fraud and Solutions to Mitigate Risk
Challenges Ahead Planning Ahead
Immediate Delivery
Risk Strategy Segmentation
Heavy Dependence on 3rd Parties
Competitive Environment
Locker Delivery
Vulnerabilities
• Growth in digital products
• Explosion in mobile devices
• Consumer expectations in
digital lifestyle
• Upcoming EMV
• Consumer shift from physical
store to virtual
• Payment Preferences
• Complexity of solutions
Assess the current state of your program • Will it provide the level of loss prevention for new digital products?
• Will it provide the highest level of customer experience? Equal to other products?
Plan • Can you segment payment and risk processing by SKU or other segmentation?
• Do you have segmented KPIs in place today?
• Standard ROI matrix or process? Decision threshold?
• If implementing an in-house solution do you have the resources?
Execute • Will you be able to implement and reach success milestones, KPIs?
• How will implementation impact current processes?
• Do you have the systems, training and people resources to reach your goals?
Your Strategy: Assess, Plan & Execute
