Lost in Transaction Payment Strategies for Changing Consumer Behaviours Volume I & II

Lost in Transaction Payment strategies for changing consumer behaviours Volume I & II

www.paysafe.com

@PaysafeGroup

paysafegroup Contents

Volume I Contradictory perspectives 4 The evolution of payments 5 Executive summary 6 Cash culture clash 12 Why people don’t buy 20

Volume II Introduction 24 Key findings 25 The consumer view 26 Merchant payment methods 28 How prepared are todays merchants? 32 Conclusion 36

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 3 Volume I: Contradictory perspectives The evolution of payments

The most common view about money and payments A fast-paced and versatile payments environment is taking today suggest impending doom for cash payments. shape, where cash is evolving to merge with digital formats so that people can spend it easily, both online and in-store.

Hard currency is being phased out as Main On average, 75% of 18-34 Developments in this new environment Online shopping is yesterday’s news: for Street shopping is over. Bricks and mortar are so fast that some businesses face the nearly twenty years, commerce has adapted stores are becoming increasingly irrelevant in year-olds in Canada and risk of becoming irrelevant and potentially to the fact that the customer journey is no a consumer market focused on e-commerce. the United States said they obsolete, unless they stay on top of this longer linear and the final transaction isn’t Since 2002, US department stores have lost evolution. Reworking business capabilities, necessarily a cash exchange. So, where is 448,000 jobs (representing a 25% decline), preferred to shop online redesigning operating models and managing the next market disruption coming from? while the number of store closures this year rather than going into change to accommodate the new payments is on pace to surpass the worst environment is the entry ticket to maintaining According to our study, the key depths of the Great Recession.i physical stores. healthy customer relationships in a global trends unfolding include: system where attitudes to how one makes Yet, Amazon has opened several physical society. Consumer card payments surpassed purchases with cash, card and credit are fluid. -- Increased consumer confidence retail outlets, including the first-ever cash payments for the first time in 2016, in mobile payments checkout-free store, and acquired organic registering USD $23.1 trillion globally.ii To get to the heart of what is really grocery retailer, Whole Foods. Black Friday going on in this fast-moving, disruptive -- A proliferation of new ways to process is still every bit as chaotic on the floor as It can be challenging to know which narrative payments ecosystem, Paysafe Group a transaction it is online. While The Wall Street Journal to believe, but one thing is certain: digital commissioned an independent research opines about the struggle to completely payments are standard. The success story study to investigate consumer buying -- Consumer behaviour that is increasingly replace cash with digital alternatives and for commerce today is about meeting habits, attitudes to cash and the preferred fluent in ‘multi-browsing’ on the move, that Bloomberg reports on the Danish government the permutations and combinations of payment choices across the United States, is, walking into a store to buy something now allowing some shops to refuse cash payment methods and customer experience Canada and the United Kingdom. and walking right out again if they find payments amid its move toward a ‘post-cash’ that shoppers have come to expect. a better deal on their mobile phone.

For travel and leisure purchases, Americans prefer online shopping, but apps are favoured over mobile sites and now dominate online cab bookings.

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 5 Executive summary A seismic shift Businesses thrive or die based on their ability spent via contactless in May 2017, up 12% Lost in Transaction is a new independent research to forecast market trends and to adjust in just one year.iii project conducted by Paysafe in conjunction with accordingly in order to capitalise on ‘the next big thing’. Within the payments industry, At the heart of this behavioural shift is the Loudhouse, a London-based research agency. businesses are witnessing a seismic shift consumer’s desire for greater choice and toward digitised transactions. Five years ago, convenience. Additionally, completing a contactless payments barely existed in the purchase on a mobile phone is becoming UK, yet today, a third of card payments are mainstream behaviour, rather than one It reveals that attitudes towards buying and convenience, reach and flexibility in their now contactless. A total of £4.5 billion was relegated to early adopters of technology. payment in Canada, the United States and payment solutions whilst balancing the the United Kingdom are changing rapidly. consumer need for secure transactions. In all three markets, consumer behaviour, particularly amongst 18 to 35-year-olds, Read on to learn more about current shows a confidence in mobile shopping changes in shopping habits, attitudes to The world is a different place to the one where and a demand for multi-platform payment cash, the uptake of new payment methods, traditional hard currency was the only option. options. In order for businesses to succeed, and how businesses can meet multi- they must offer a two-pronged approach faceted consumer demands when it comes Today, people shop in new ways. Mobile is a to the customer experience: choice, to an age-old transaction: payment. preferred device and physical stores are showrooms as much as they are outlets. Key findings Danny Chazonoff, Chief Operating Officer, Paysafe

42%

Security remains a concern for continued 42% of respondents cite hidden transaction contactless & mobile wallet payment fees and delivery charges as the main reason adoption for the UK, US and Canada for abandoning their online shopping carts

46% 85%

46% are dual-browsing – looking There’s a generational shift to mobile for better deals on their mobile wallets, with over 85% of 18-34 while browsing in a physical shop year-olds expecting to use them more over the next two years

54%

54% of consumers expect to stop using cash for shopping in the next two years

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 7 Fig. 1: Changes in shopping habits Accessing emerging consumer segments

Strongly agree Agree Disagree Strongly disagree Don’t know Age plays a significant role in today’s world while paying in the digital – turning consumer shopping behaviour. Across their original proposition on its head. all three markets, those under the age Target are now following suit with an of 34 are the most confident mobile in-store mobile payment offering. 20% 26% 24% 27% 3% shoppers, comfortable with using a phone Many more retailers will surely follow to browse while scanning the aisles. the showroom model, while there are When I am in a shop, I often use my mobile phone to shop around for better deals elsewhere others that will lose custom to them. The flip side of this trend is that with just a few 26% 36% 17% 16% 5% modifications to a payment suite (either in-store It’s clear that these retail giants are or online), companies can make their products catering for buyer types emerging from I am increasingly confident about using my mobile or services immediately more accessible Millennials and Generation Z – people who phone for shopping & ordering purchases to these emerging consumer segments. prefer dual-browsing and consider the convenience it offers as essential to their 30% 38% 18% 12% 2% Within this context there are many retail experience. These retailers understand disruptors intent on providing new shopping the experiences consumers will expect in five I shop online rather than going into physical experiences. The Amazon supermarket years from now, and are creating prototype stores much more than I did a year ago demonstrates that one can shop in the real versions of tomorrow’s technology.

From dual-screening to dual-browsing Levelling the playing field

The emergence of dual-browsing – when traditional catalogue businesses, such A few modifications to the payments suite true for smaller companies. And by being able people browse and buy online, while as the ‘warehouse’ retailer Argos, have can mean that a business will immediately be to provide a similar range of payment, pricing physically in-store – was inevitable. However, maintained or expanded their space able to offer the same options at the checkout and shipping options, a local bookshop some businesses have prepared for it far on the UK retail map in recent years. as established competitors. This is particularly can be on the same footing as Amazon. better than others. The Apple Store is a prime example of the reimagining of the retail The basic lesson is that new modes of customer experience. The physical store shopping have big implications and they is no longer just a place to buy products, become bigger when audience demographics New payment technologies are now levelling the but rather, a space to nurture customers. In are brought into the equation. This is playing field. Even smaller businesses can rely on May 2017, Apple announced its ‘Today at primarily because businesses that fail to Apple’ educational programme, designed prepare their ground for the shoppers of first-rate capabilities in payment, authentication to drive brand loyalty by providing creative tomorrow (whether through ignorance or and security. It’s a springboard they can use to classes such as photography and coding. stubbornness) will almost inevitably miss This was effectively a shift towards a out on huge opportunities. The iconic compete with the big guys. showroom experience, where customers Canadian retailer, Eaton’s, didn’t move with immerse themselves in the brand, rather the times and foresee changing consumer Jean-François Noël, CEO of FANS Entertainment and GOLO than simply buying products off the shelves. taste filed for bankruptcy in 1999. In the United States, popular electronics retailer Other stores which have embraced the RadioShack filed for bankruptcy twice since online shopping experience with the in- 2015 because it couldn’t respond to the store encounter have done more than just competition that online retailers such as survive – they’ve prospered. For instance, eBay and Amazon presented to the market.

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 9 Fig. 2: How shopping behaviour is changing A whole new world

The research challenges businesses to leveraging them. While Netflix and Amazon reimagine the shopping experiences and Prime created a new normal in viewing allow for behaviours that were almost behaviours, network television quickly caught 18-25 26-34 35-44 45-55 56-64 65 or over Male Female unthinkable ten years ago. Particularly on and adjusted the broadcast model to because the emerging typologies of how content is consumed: on demand, on shoppers from Millennial and the move and in a multitude of formats. I shop online rather than going into physical stores much more than I did a year ago Generation Z demographics will expect it. The payments equivalent of this journey It’s tough. But there’s a parallel in the starts with merchants understanding how 81% 79% 76% 70% lesson TV companies learned from dual- consumers use money, where they use it screening. It’s not about merely tolerating and which formats they prefer. % % % % 74 74 76 72 new behaviours. It’s about embracing and 76% 75% 64% 61%

66% 61% 49% 73% 64% of Canadians we surveyed 70% 59% 56% 70% buy their flights online. 58% 51% 35% 61%

I am increasingly confident about using my mobile phone for shopping & ordering purchases What we’re buying

The research uncovers some general trends across regions. For example, most 81% 81% 76% 63% people still prefer to buy their groceries in person (94% in the US, 96% in the 84% 83% 81% 70% Canada and 78% in the UK). And even though a taxi service can be paid for in cash, the trend in this payment behaviour is shifting, particularly in the UK 70% 69% 58% 53% where half of those surveyed use an app to order a cab.

However, there are certain regional trends. 56% 38% 20% 64% 66% 47% 39% 73% UK consumers are the most likely to buy goods such as clothes, furniture and gifts online (either via a PC/laptop, tablet or phone). While in the US, it’s 44% 36% 16% 50% becoming common to use an app (19%) or PC/laptop (24%) to order lunch. And Canadians are the most likely to buy flights and holidays on the internet.

When I am in a shop, I often use my mobile phone to shop around for better deals elsewhere

47% 63% 49% 45% 63% 68% 70% 59% 60% 58% 47% 45%

33% 20% 06% 37% 45% 30% 22% 54% 34% 22% 12% 39%

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 11 Cash culture clash Fig. 3: What’s in my wallet?

To understand a little more about the changing nature of cash, and why this affects consumers and businesses alike, we asked respondents about their relationship with money, what they carry and what they use. A comparison 56% of Brits typically carry The average American The average Canadian carries of American, British and Canadian wallets is shown in Figure 3. no more than £20 in cash carries $50 in cash under $50 in cash

34% typically visit an 54% typically visit an 56% typically visit an ATM just once a month ATM just once a month ATM just once a month

45% used cashback 54% have used cash 40% used cashback in in the last month back in the last month the last month

30% wrote a cheque 50% wrote a cheque in 40% wrote a cheque in the last month the last month in the last month

One in four Canadians between the ages of 18 and 34 are cash-free. One in five Americans aged between 56 and 64 are also cash-free. The days of The US may still favour With younger withdrawing enough writing checks, but Canadians adopting cash for an evening out don’t let that mislead a less cash-centric are no more, with many you. Americans are approach, the happy to pay on a card. embracing new opportunity for There’s more trust in payment methods innovation is becoming new technology and quicker than most. clearer. Contactless alternative cash One in seven have used payments and mobile payments. cryptocurrencies; one in wallets are now Lorenzo Pellegrino, six biometrics. These normalised and CEO - Digital Wallets early adopters are growing payment & Income Access, creating momentum methods. Paysafe for wider adoption Daniel Kornitzer, and change. Chief Product Officer, Paysafe Joe Daly, Chief Operating Officer, Paysafe Payment Processing, North America

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 13 Fig. 4: How much cash do you carry on a typical day? Fig. 5: Why not using mobile wallet

18-25 26-34 35-44 45-55 56-64 65 or over Male Female Don’t really know much about it None – I rarely carry cash 6% 8% 40% Haven’t been bothered to set up a wallet 13% 25% 20% 14% Concerns about 18% 18% 17% phone being stolen 25% 26% 19% 22% Don’t like taking my phone out to pay

Worried there would 34% 15% 5% 9% be mistakes in what I am charged 18% 20% 12% 26% Hard to keep track 16% 14% 11% of spending

31% Other

Don’t know 9% 21% 16% Total 12% 21% 17% NB: Respondents were able to provide multiple answers 16% 22% 19% Mobility, convenience and catching the wave These are clear signs that change is afoot. businesses will respond with agile operating Cash in its traditional form of notes and models and relevant payment methods. Our research shows that contactless only US respondents were slightly sceptical coins is losing traction among consumers payments (Figure 6) and mobile wallets about its convenience (with only 49% rating in all markets, and particularly among the The question for today’s businesses is, (Figure 7) are popular among many it as easier to use). younger demographic. As these newer despite consumers being apparently respondents. Three in five Britons and generations become the dominant consumer cash-free, by what means and format Canadians are using contactless payment, This is the crest of the first wave of behavioural force, this shift away from traditional cash are they spending their cash instead? and the younger demographics in each change when it comes to mobile payments. will become the established order. Savvy market are twice as likely to use Apple Our research shows that while nearly four or Android Pay than their older peers. in five people carry less cash than they did a year ago, consumers still aren’t wholly Both contactless and mobile wallet solutions comfortable with contactless payments – tick that crucial box of convenience. The they’d rather pay with their mobile. Across majority of those who have used a mobile all respondents, we are seeing behaviour AltCash: Barriers to entry wallet agree that it is more convenient than that is leap-frogging card payments carrying cash. And out of those surveyed, and going straight to digital wallets. While innovators and early adopters are moving to contactless payment and cryptocurrencies, the path towards cash alternatives – or AltCash – isn’t entirely smooth for the remaining consumer base. For example, the main barrier to faster adoption of contactless payment is security, according to respondents across the US, UK and Canada (63%, 68% and 64% respectively).

As illustrated by Figure 5, poor knowledge and general apathy are the most prevalent barriers to the wider adoption of mobile wallets. However, with a third of respondents citing concerns about phone theft and a quarter preferring not to take their phones out when paying, security issues are also very much top of mind.

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 15 Fig. 6: Regional differences in cash and contactless behaviour

Strongly agree Tend to agree Tend to disagree Strongly disagree Don’t know

As very few merchants accept them as payment, Lost in 18% 28% 18% 26% 10% 12% 25% 22% 31% 10% Transaction did not ask UK respondents about cheques. I expect to still be using cheques to make payments I expect to still be using cheques to make payments in 2 years’ time in 2 years’ time

24% 32% 19% 9% 16% 21% 29% 30% 13% 7% 24% 34% 28% 9% 5%

I worry about being charged the wrong I worry about being charged the wrong I worry about being charged the wrong amount with contactless amount with contactless amount with contactless

30% 33% 15% 8% 14% 28% 36% 20% 9% 7% 34% 34% 21% 6% 5% I worry about how secure contactless is I worry about how secure contactless is I worry about how secure contactless is

21% 28% 15% 12% 24% 27% 44% 11% 8% 10% 31% 38% 13% 10% 8% Contactless is a much quicker, easier, more convenient Contactless is a much quicker, easier, more convenient Contactless is a much quicker, easier, more convenient way to pay for everyday things way to pay for everyday things way to pay for everyday things

17% 23% 20% 23% 17% 19% 29% 23% 16% 13% 19% 25% 25% 23% 8%

I prefer to shop in places that accept contactless payment I prefer to shop in places that accept contactless payment I prefer to shop in places that accept contactless payment

18% 21% 20% 31% 10% 22% 30% 20% 21% 7% 27% 30% 15% 25% 3% I have used contactless payments more and more often I have used contactless payments more and more often I have used contactless payments more and more often in the past 6 months in the past 6 months in the past 6 months

22% 32% 26% 14% 6% 21% 31% 29% 14% 5% 22% 33% 25% 13% 7%

In 2 years time, I doubt I will need to carry any cash In 2 years time, I doubt I will need to carry any cash In 2 years time, I doubt I will need to carry any cash at all for shopping at all for shopping at all for shopping

37% 26% 22% 9% 6% 33% 31% 24% 9% 3% 35% 30% 22% 8% 5%

I carry less cash than I did a year ago I carry less cash than I did a year ago I carry less cash than I did a year ago

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 17 Fig. 7: Behaviours in cash and contactless usage (combined) Fig. 8: Awareness of emerging payment and security technologies

Strongly agree Agree Disagree Strongly disagree (under 5%) Don’t know (under 5%) Never heard of Have heard of but do not use Have heard of & use a little Have heard of & use a lot

41% 38% 14% 26% 58% 11% 5%

Paying using my mobile is more convenient than contactless Voice activated systems (eg Echo or Alexa)

43% 40% 11% 32% 56% 7% 4%

Paying using my mobile is more convenient than cash Cryptocurrency (eg Bitcoin)

40% 39% 14% 30% 55% 10% 5%

I’d be willing to use my mobile to pay for higher priced items if the limit was raised Verified identity through biometrics

44% 42% 9%

I will be using my mobile wallet much more for making payments in 2 years’ time Fig. 9: Attitudes to emerging payment and security technologies 57% 32% 7% Too risky and unknown for me to use at present I use my mobile wallet much more for making payments now than 2 years ago I’m not keen to use these, but expect that some merchants will force me to I can see the benefits but have concerns about security and privacy This is the future, within 2 or 3 years everyone will be using this

Simply the beginning 39% 23% 25% 13% Awareness of the more cutting-edge payment If online shopping was the first wave innovations is – at present – comparatively of change that radically transformed Voice activated systems (eg Echo or Alexa) low. But, given the trends suggested commerce, then the mechanism by which by the research, early adopters set the commerce is conducted is likely to be 54% 20% 16% 10% agenda and we can expect awareness of the next wave of innovation that takes cryptocurrencies and biometric identity hold. While Bitcoin is not yet mainstream, Cryptocurrency (eg Bitcoin) verification to become more mainstream. nearly half of those surveyed were aware of it, and expect merchants to offer it as 40% 24% 21% 15% a payment option in the near future.

Verified identity through biometrics

The payments trend

With the research showing a generational As the evolution of cash continues to trend towards mobile wallet usage (86% of accelerate, so too will the demand for 18-25 year-olds and 89% of 26-34 year-olds businesses to ensure their payments think they’ll be using it more in two years), offerings keep pace in terms of choice, the future of alternative cash payments and convenience, speed and accessibility. mobile wallets becoming the norm is clear.

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 19 Why people don’t buy The root cause of abandonment Customers are fickle, with 40% citing their are a particularly hot topic in the UK at the Not surprisingly, if there’s a payments challenge every merchant wants main reason for cart abandonment is to shop moment, where the government has recently to solve, it’s the abandoned cart. Of those we surveyed, 67% of people around elsewhere. Retailers who will win their announced that charges for paying by credit custom therefore need to have the perfect or debit card, which can be as high as 20%, had abandoned an online shopping cart in the last month. product, website functionality, price point are to end. Similar conversations in the US and service. And any business that tries to are also underway. make buyers incur ‘hidden’ fees will find their carts abandoned in favour of those who don’t. However, as Figure 11 and Figure 12 show, hidden fees are not the only reason for While we know the migration to online year-olds prone to ditching their shopping It’s not hard to imagine why. The research abandoned carts. Inconvenient delivery, shopping has grown markedly in the last few two to three times a month. And almost one shows that regardless of age or region, poor website performance and a lack of years (an increase of 54% since 2000), the in five 18-25 year-olds will do so once a week. customers find hidden transaction fees payment options are also cited as problems. fact is that carts are still being abandoned both confusing and annoying. Such fees at an alarming rate. The average consumer The question any business should performs an online walkout twice a month, ask themselves is, why? with 38% of 18-25 year-olds and 39% of 26-34 Fig. 11: Which of the following have prompted you to abandon your shopping cart/trolley

Hidden transaction Decide to shop Product not in Inconvenient Fig. 10: In the past month how often have you left a merchant’s online website fees and delivery around further stock, delivery delivery times with items still in your shopping cart? charges will take too long

Mean Have not done Once 2-3 times 43% 35% 29% 26% in last month 37% 45% 31% 25%

2.03 32% 17% 30% 45% 40% 24% 22% 2.5 25% 14% 36% Total 42% Total 40% Total 28% Total 24% 1.9 33% 16% 30%

Can’t decide Website is Lack of Problems or Total 2.14 Total 30% Total 16% Total 32% what I want too slow payment options excessive fees

4-5 times 6-7 times 8-10 times 11-15 times 18% 24% 20% 12% (ie about once a week) (ie at least twice a week) 26% 19% 17% 13%

10% 3% 1% 1% 27% 16% 20% 23% 12% 4% 3% 1% Total 24% Total 20% Total 19% Total 16% 10% 2% 1% 1%

Security or Website is not easy Total 11% Total 3% Total 2% Total 1% payment approval to use on a mobile

11% 10% More than Don’t know 15 times 12% 11% 9% 7% 2% 5%

2% 3% Total 11% Total 10% 1% 5%

Total 2% Total 4%

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 21 Fig. 12: Shopping cart abandonment reasons (by age) The future of payments

The consumer environment is changing. Tomorrow’s success relies on businesses Society has nearly achieved fluency with being able to flex their payment capabilities online shopping and we are now moving and reflect the evolution of cash. Because 18-25 26-34 35-44 45-55 56-64 65 or over Male Female towards new possibilities. Future consumers cash-free is not the same as cash-less. At the will embrace these new possibilities with same time, many businesses will need also gusto. Improved authentication methods to call into question what purpose, if any, Hidden transaction Decide to shop Product not in Inconvenient and cryptocurrency will enhance security, a physical presence serves them. They also fees and delivery around further stock, delivery delivery times therefore encouraging people to pay must accept that shopping behaviours will charges will take too long anytime, anywhere and anyhow. always be in flux, and that the customer journey will never again be a linear process. However, as payment options increase, 42% 38% 39% 39% 32% 29% 30% 30% many businesses will inadvertently exclude And finally, the proliferation of different themselves from reaching those consumers payment methods means that customers 40% 43% 37% 45% 29% 23% 24% 16% who choose not to use credit, or choose not expect to be catered for when parting with to provide their bank details online. To stay their money. Those merchants who seize the 50% 48% 44% 47% 30% 25% 17% 9% relevant and accessible to this customer opportunities provided by this new normal base, businesses must offer the alternative will be best placed for the next big wave in 39% 43% 32% 46% 32% 46% 28% 22% cash solutions these customers prefer. omnichannel retail.

Total 42% Total 40% Total 28% Total 24%

Can’t decide Website is Lack of Problems or Cash-free is not cash-less. Inclusion is key. For consumers what I want too slow payment options excessive fees Consumers have more without bank or credit cards, the

31% 25% 22% 18% 26% 21% 19% 19% ways than ever to spend ability to convert cash into e-money cash online, but via voucher based systems is critical 18% 24% 22% 19% 17% 17% 15% 9% businesses are not to their ability to participate in the 21% 26% 19% 14% 12% 11% 15% 10% keeping pace. e-economy.

16% 29% 22% 18% 20% 18% 19% 13% Oscar Nieboer, Udo Muller,

Chief Marketing Officer, CEO of paysafecard, Total 24% Total 20% Total 19% Total 16% Paysafe Paysafe

Security or Website is not easy payment approval to use on a mobile

13% 13% 16% 10%

10% 10% 9% 8%

10% 6% 6% 5%

13% 9% 9% 10%

Total 11% Total 10%

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 23 Volume II: Introduction Key findings

More than two decades since the advent of the web, The most significant finding from this report is successful digital business strategies remain an elusive that convenience matters less then security to target for many e-commerce operators and vendors. the majority of consumers.

Intense competition, an increasingly Finding the right balance between The widely-held belief that consumers Finally, fraud reduction must be a complex blend of marketing channels, customer convenience and confidence in value convenience above all is a potentially priority for merchants across the board. cross-border challenges, fraud, risk, and a transaction security is one of the greatest dangerous one; investment in customer While many merchants are investing in multitude of digital distractions all conspire challenges that merchants face. As experience is undoubtedly important, but experience, they must also continue to invest to make life difficult for merchants – not payment methods proliferate and customer not at the expense of trust and security. in payments methods that not only make least when it comes to payments, the critical preferences shift accordingly, that balance consumers feel safer but which actually are component in successful sales transactions. will become even harder to maintain. The second key finding of this study more secure. Reduction in the incidence of is the sense that security and trust fraud in particular must be a key objective Today, the primary battleground for In Volume I, we looked at the trends in customers have for a merchant is for any merchant conducting transactions attracting customer spend is the so-called payments methods, and how consumer directly correlated to how their data is online. Failure to do so will lead to financial customer experience. Make life easy and preferences are changing. Volume II looks protected. High-profile stories of major losses for companies and consumers enjoyable for customers, the argument at how businesses can meet challenges brands suffering data breaches – credit alike. Conversely, the merchants that goes, and the money will inevitably follow; set out by a fast moving payments monitoring agency Equifax and payday loan successfully reduce fraud and demonstrate a mantra currently driving design and industry and ever-evolving consumer company CashNetUSA are just two of the robust security will have more trusted implementation strategies across the whole demand. In particular, it examines the most recent examples – continue to dent relationships, greater frequency of purchases, continuum of digital retail environments. reality of consumer expectations around consumer confidence. So too has growing and fewer customers lost in transaction. experience and security; why merchant public awareness of the threat of identity The big question for retailers is how well attitudes towards payment methods theft. The practical impact of these threats these strategies really translate into greater might not be sufficiently well aligned is a real and measurable one; our research Customers have spoken. It’s sales volumes. Innovation around customer to those expectations; and, ultimately, shows that most consumers would readily experience is clearly a vital factor in attracting how they may be losing significant accept more stringent methods of payment not about making paying and keeping customers. But many other business and revenue as a result. security, including two-factor authentication, online easier anymore. It’s factors continue to play a critical role in if it could lead to a reduction in fraud. converting experience over to transactions. about making it safer. Concerns about fraud in particular and the Thirdly, there is also a high correlation Businesses need to listen. safety of merchants’ payment methods 67% of people have between trust in merchants and the in general remains a serious barrier to abandoned an online payments methods they use, even if that Oscar Nieboer, Chief Marketing Officer, completed transactions. The abandoned trust is misplaced. Merchants offering Paysafe Group shopping cart, in particular, has long shopping cart in the trusted payments mechanisms are seen as been a thorn in the side of digital vendors, last month secure by extension, despite the fact that representing not just lost immediate sales even the most well-known payments brands but future growth and advocacy too. are vulnerable to fraud – 8% of consumers surveyed here were victims of fraud through digital wallet usage in the last year.

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 25 The Consumer View

An inevitable risk?

Online fraud is hardly a new phenomenon. Of those who do fall victim to fraud, many Since the beginning of the e-commerce eventually recover their losses – 83% of credit explosion in the late 1990s, the web has been card users, 78% of bank account users and a fertile ground for hackers and fraudsters 70% of digital wallet users. Across those targeting consumers with weak security three payment channels, however, more defences. What is new, however, is that than one in five shoppers suffer permanent consumers now view fraud as an inevitable losses, often running into hundreds of part of shopping online. Consumers are dollars or pounds. Even those who are more conscious of, and educated about, reimbursed are likely to have a negative fraud than they ever have been; in surveying view of the whole experience – not just Right the wrong balance three key retail markets (US, Canada and the merchant involved but the payment the UK,), our study found that around method used too. For example, the 70% half of the consumers in each country of consumers who have experienced fraud It is unsurprising, then, that consumers 58% of consumers said that they would see fraud as an inevitable risk if they use via a digital wallet are likely to have greatly are starting to favour security and fraud be willing to accept whatever security online retailers1. At the same time, 81% of diminished trust in both the retailer and protection over the convenience of quick measures are necessary to eradicate consumers avoid shopping via unsecured the payments platform from then on. and easy online purchases. Exactly how fraud, with two-thirds being open to a or public networks, a clear behavioural businesses are responding to this trend two-step authentication process – a clear response to the very real threats of fraud. is less clear-cut. Just over half (54%) of challenge to the idea that all consumers merchants believe their consumers are not want password-free, one-click payment fully aware of the risks of fraud according to methods rather than more secure this study – and 36% fear their customers processes that, by their very nature, take will resist further fraud reduction measures more time. Yet only 36% of merchants Fig. 1: What payments systems do you use? / Have you suffered from fraud and, if so, did you recover your losses? that might compromise convenience. say that they would increase security regardless of the impact on convenience. This dichotomy is illustrated by the imbalance Payment types used % of users who had experienced fraud in past year between buyers and sellers in terms of This balancing act is now at the heart their acceptance of better security. of every modern digital business.

Credit cards 71% 23% of which 83% got their money back

Bank account 66% 16% of which 78% got their money back

e-wallets eg Paypal 58% 14% of which 70% got their money back We’re all guilty of saying one thing but doing Mobile wallets eg Apple Pay, Android Pay 12% 18% another. Consumers say they’re up for extra % iTunes or other 11% 14 security measures but will they continue to be Ganing accounts such as Xbox 7% 19% “ engaged when if, for example, they encounter None of these 4% double authentication? Daniel Kornitzer, Chief Product Officer, Paysafe Group

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 27 Merchant Payment Methods Fig. 3: Payment methods offered by country

Navigating the payments landscape. Online Offline

Credit cards 96% 98% 98% 79% 77% 65% Debit cards 88% 94% 68% 77% 82% 72% Check - - - 74% 60% 57% Life for today’s digital merchants is lives and the dramatic increase in so-called Prepaid cards and e-vouchers 42% 43% 51% 41% 29% 39% complicated by the sheer number of online commuter commerce, adoption rates of e-wallets e.g. Paypal 74% 80% 77% 35% 30% 24% payments options that consumers demand. cloud-based digital wallets such as PayPal still Mobile wallets e.g. Apple Pay, Android Pay 62% 59% 45% 35% 37% 30% Inevitably, cards continue to dominate the greatly exceed that of device-based mobile Other account e.g. iTunes, Xbox Live 24% 20% 28% - - - landscape – despite the fact that nearly 40% wallets among retailers (77% versus 55% Direct Bank Transfer 57% 60% 55% 41% 46% 29% of merchants would like to see less use of respectively). Perhaps the most surprising Crypto Currencies e.g. Bitcoin 23% 22% 23% 11% 13% 17% both credit and debit cards, according to trend here is the presence of blockchain- this research. One notable feature of this based systems such as Bitcoin, already Voice-activated systems e.g. Echo or Alexa 21% 18% 26% - - - breakdown is the difference in adoption rates offered by 23% of retailers we surveyed Biometric systems e.g. fingerprint 18% 20% 21% 16% 18% 13% of digital and mobile wallets. Despite the – an indication that cryptocurrencies dominance of mobile devices in consumers’ are rapidly getting a seat at the table.

How will this picture evolve over the next significant growth in traditional card-based with 24% of respondents planning to two years? Lost in Transaction: Volume I methods, but Figure 4 shows that the big adopt them by 2019; and the growth in showed that 89% of people believe they will news is in wallets; both digital and mobile cryptocurrencies is set to grow too, with Fig. 2: Online payment methods offered be using their mobile wallets much more wallets are expected to make increasingly one in five retailers planning to introduce in two years’ time, and that a quarter (23%) important contributions, with retailers either them over the same period. The key agree that cryptocurrencies such as bitcoin prioritising their use, introducing them challenge for merchants adopting these Credit cards 97% are a key element in the future payments or (in the case of digital wallets) both. still emerging technologies will be to ensure landscape. Both of these findings are that they meet consumer expectations Debit cards 83% supported by the merchant adoption plans Voice-activated systems like Amazon’s around security and trust – still an unknown e-wallets eg Paypal 77% highlighted in this study. Merchants expect Alexa, too, will become more widespread, quantity at large scale in the retail world.

Direct bank transfer 57%

Mobile wallets eg Apple Pay, Android Pay 55% Fig. 4: Which of these payment methods do you currently accept and expect to see growing over the next two years? Prepaid cards and e-vouchers 45% And which do you plan to introduce in the next two years?

Other account e.g. iTunes, Xbox Live 24%

Cryptocurrencies e.g. Bitcoin 23% Credit cards 97% 1% Growing share Will introduce Voice Activated systems e.g. Echo 22% Debit cards 38% 2%

Biometric systmes e.g. fingerprint 20% e-wallets eg Paypal 24% 15%

Other 1% Direct bank transfer 66% 11%

Check 0% Mobile wallets eg Apple Pay, Android Pay 49% 26%

Prepaid cards and e-vouchers 8% 17%

Other account e.g. iTunes, Xbox Live 24% 12%

Cryptocurrencies e.g. Bitcoin 15% 19%

Voice Activated systems e.g. Echo 11% 24%

Biometric systmes e.g. fingerprint 10% 18%

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 29 Fig. 6: Which of the following types of fraud are currently impacting your It’s not just consumer demand that is driving these adoption business, and which is having the greatest impact on your business? patterns. This study shows that several other factors – fees, ease of management, speed and – crucially – security also come into the picture for merchants assessing the suite of payment methods they offer, as Figure 5 shows. Fraud types impacting the business Greatest impact

Chargeback fraud/ 61% 46% 49% 45% 44% friendly fraud Account takeover 39% 24% 27% 26% 20% Fig. 5: What is driving the growth in usage of payment methods? Clean fraud 33% 30% 24% 29% 37%

None of these 17% Mobile wallet e-wallets Credit cards Debit cards 71%

% 59 58% 51% As new technologies develop to improve consumer experience, so too will new types of 46% 44% fraud. To maintain the balance between security and convenience, fraud detection methods % % % % 41 40 40 % 39 38% 39 and processes will need to adapt accordingly – and they will need to do so quickly. % 36% % 34% 35 35 30% 30% 27% 23% A sense of fraud control is just as important as convenience to consumers; something that merchants haven’t ranked as highly in the Customer demand Faster payment Easier to manage Higher security Lower fees “ checkout experience. Andrea Dunlop, CEO Acquiring & Card Solutions, Paysafe Group

Fighting Fraud on Three Fronts

One critical factor for consideration Traditional cards are at the top of the list of when adopting new technologies is their methods that retailers are looking to retire; susceptibility to fraud. Only once that is nearly two-thirds (60%) of businesses think fully understood can merchants make credit cards are most vulnerable to fraud. accurate assessments about the balance of risk and convenience to consumers. Just as important are the types of fraud The reverse is also true; by determining committed, and how these are intrinsically risk, they can also make better decisions linked to certain payment methods. Figure 6 about which technologies to phase out. explains which forms of fraud businesses are The Three Key Types of Fraud most likely to suffer from. Chargeback fraud As part of this research, Paysafe sought to is causing the greatest global impact overall, identify a link between specific payment and is hitting US businesses the hardest. Chargeback/ Friendly fraud: Account takeover fraud: The use of Clean fraud: A method whereby a methods businesses are looking to phase On the other hand, clean fraud is having a Friendly fraud occurs when a limited personal information such as fraudster has been able to carry out out and how susceptible they are to fraud. significant impact on Canadian businesses. 1 merchant receives a chargeback 2 a name and credit card number to 3a purchase by using a complete because the cardholder denies making the conduct payment fraud. In this scenario, a profile of stolen data that makes the purchase or receiving the order, yet the fraudster poses as a genuine customer and transaction appear legitimate, rendering goods or services were actually received. gains control of an account, changing a few the merchant unable to identify that fraud details, such as email or address, to allow has been committed. them to make transactions.

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 31 How prepared are Figure 8 shows us that just over half (52%) of businesses More than 40 percent across our three surveyed markets review their anti-fraud of all businesses today’s merchants? measures every six months. More worryingly, 36% of respondents review their fraud measures only every 12 months surveyed report that or less – a potential problem given the rapid evolution of more than 5 percent of Fraud readiness at the front line. fraudulent behaviour and activity in the digital realm. their transactions are fraudulent. Fig. 8: How often do you review your anti-fraud measures?

How prepared are merchants to combat detection techniques such as bank account Frequency of review of anti-fraud methods fraud? This study measured their readiness checks and address verification systems by examining three critical factors: what are still the most widely-used, although the Every 6 months Every 12 months Every 18 months or less frequently When necessary verification factors they use, how often growing amount of data available about 29% 7% 12% they review their IT security and the individuals is having a significant impact Total 52% level of their anti-fraud investment. on the availability and usage of fraud 25% 2% 11% detection methods; biometrics, social media 62% Figure 7 looks at the verification measures usage and geo-location are all in use by 27% 5% 14% used by country. Conventional fraud merchants, most prominently in the US. 53% 14% 11% 42% 33%

Fig. 7: Which of the following identity verification techniques does your organisation currently use? The evolution of big data will make payments

Note: figures in green indicate Used Used to target mobile smarter and easier and help to redress the balance above-average usage; figures in red indicate below-average usage between security and convenience. Big data will be “ the ultimate key to tightening up security at POS, Fraud rules 53% 63% 53% 28% 37% 32% online and bricks and mortar environment. Bank account checks 57% 65% 33% 29% 32% 12% Address verification systems 48% 56% 36% 16% 28% 18% Todd Linden, CEO Paysafe Payment Processing North America CVV checks 49% 49% 42% 30% 29% 22% Email checks 36% 53% 46% 14% 22% 20% Device checks 33% 40% 41% 18% 27% 27% Geo-location checks 27% 24% 27% 11% 15% 14% Social media 24% 21% 23% 8% 11% 12% Biometric screening techniques 25% 20% 17% 15% 14% 14% Voice recognition systems 20% 19% 17% 11% 11% 14% BIN number validation 20% 19% 16% 9% 13% 9% 3DS 12% 15% 10% 4% 8% 5%

Lost in Transaction 33 The anti-fraud paradox Challenging a fixed mindset when it comes to fraud

Part of the difficulty in making sensible There is already significant pressure on The good news is that most businesses agree. difficulty and complexity of managing decisions about fraud reduction is that its businesses to put the consumer first when Eight in ten businesses intend to increase fraud in retail environments. While there resolution often conflicts with business addressing this paradox. Merchants who their anti-fraud spend by at least 10% in is widespread agreement that anti-fraud targets. While there is widespread agreement do not utilise measures such as AVS, CVV2 the next 12-24 months. Nearly two thirds implementations are expensive – identified that it’s a serious problem – 71% of and 3DS/VbV will have their consumers’ (64%) of them have a positive view of anti- by 61% of respondents as the most significant respondents say that transactional fraud transactions seen as high-risk by card issuers. fraud expenditure, viewing it as a strategic challenge to managing fraud – many other is a top priority at board level – there are Their systems will then likely automatically means to reduce losses to the business and perceived barriers exist. Lack of consumer conflicts over how best to deal with it. decline their transactions, so that ‘easy increase profits. More worryingly, though, awareness about fraud (54%) combined Three-quarters (74%) of businesses say merchant checkouts’ equals ‘quickly only 35% think the business itself benefits with their resistance to anti-fraud measures that there is pressure to reduce fraudulent declined transactions.’ Good merchant from fraud prevention, viewing it principally (36%) are seen as potential obstacles; so too transactions through more effective anti-fraud measures actually increase as a measure which impacts the bottom is the risk that measures quickly become verification methods; yet a nearly equivalent transactions success, and thus customer line – not a fundamental basis for building ineffective due to the constant and rapid number (65%) say that there’s pressure to satisfaction and long-term retention. trust with consumers and the increased evolution of fraudulent activity (40%). Just increase transaction volumes by reducing ID prosperity that results from that trust. over a third of those we interviewed placed verification thresholds, thereby exposing the high importance on a good user experience business and its consumers to greater risk. One likely factor contributing to this cynical and see anti-fraud capabilities as part view of fraud prevention is the sheer and parcel of the full customer journey.

Overall

There is pressure on our business to produce more effective verification measures in 74% 78% 76% 66% Fig. 9: What are the top three challenges of identifying, managing and protecting against fraud across different payment methods? order to reduce fraudulent transactions

There is pressure to increase transaction Cost of implication 61% volumes and customer sign-ups by reducing risk 65% 69% 67% 60% thresholds for ID verification in our business Lack of awareness about fraud 54%

Measures quickly become ineffective % Transactional fraud is a top priority 40 71% 77% 73% 62% of boardroom discussions Losee of business to vendors with faster payments systems 36%

Resistence from customers 36%

Compromise in terms of user friendliness 34% Fraud mitigation measures aren’t optional in Mobile devices as a single acess point of failure to a wide range of services 30% today’s business environment – they’re a critical Social media 9% part of building and maintaining good long-term “ reputations with consumers. Shaun Lavelle, VP Risk, Payment Processing, Paysafe Group

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 35 Conclusion Finding that balance is not just about Paysafe is one of those partners. For more investing in technology. As this report than twenty years, we’ve been helping our Finding the balance: winning payments shows, many variables are in play for customers find the right balance of risk and strategies for businesses and consumers. merchants seeking to maximise their convenience for their business and their revenues while optimising experiences for customers. We’re firmly entrenched in every customers – not least a coherent strategy aspect of the digital payments environment, around anti-fraud measures which takes full from conventional card to digital and mobile account of their value as a foundation for wallet-based technologies and beyond; trusted business, not just another burden from blockchain to voice recognition, we’re Today’s smartest merchants are abandoning and contactless cards. But they also want on the bottom line. The reality is that all investing heavily in emerging technologies long-held assumptions and rebooting convenient modern payment methods; not payments methods carry some element that will become critical components of their thinking about customer desires and just contactless cards and digital wallets, but of cost and risk; the trick for merchants is future payments models that come to fruition expectations. Our research across both cryptocurrencies and voice recognition too. to accurately assess those factors before next year or in the next decade. We’re still volumes of Lost in Transaction shows that adoption, so that its impact against culturally tied very closely to the physical new payment methods are on the rise; Prevailing industry wisdom suggests that convenience can be accurately measured. world too, as part of our direct relationship customers increasingly love e-wallets, convenience should be the winner in with a truly global merchant and consumer mobile payments and cryptocurrencies, this battle. That idea is the driving force As the number of payments methods and community around the world. Whatever and there are clear signs that early behind today’s experience-focused retail technologies proliferates, the challenge for challenges lie ahead in commerce, Paysafe adopters are quickly embracing these. channels designed for minimum friction businesses in assessing and implementing is already working to help you solve them. and maximum throughput; channels that them grows accordingly. Making good Trends like these clearly suit businesses too. put the fewest possible barriers between decisions about which to invest in – and, New digital payments methods avoid the buyers and their good as possible. inevitably, which to phase out – is no longer a potentially hefty charges that are associated decision that can be made by web designers The challenge facing merchants is clear. It’s with taking credit card payments, but they can Lost in Transaction: Volume II shows how or finance departments alone. It’s a strategic, about achieving the right balance between also avoid the most obvious and unavoidable important both sides of this equation are. business-critical decision that needs to be type of fraud that occurs when cards are In particular, it demonstrates the need for made alongside experienced payments delivering the most frictionless consumer stolen – both critical factors in the rate of merchants to balance experience and security partners with the expertise and insight to “ experience possible, while enhancing adoption of new technologies requiring extremely carefully. However easy customers take full account of specific business needs. verification methods to reduce risk thresholds. more robust authentication measures. want their lives to be, they also want them to be secure and private; and that means The interplay between risk and convenience is The shift to new forms of payment comes robust, thorough security, even if speed about more than just technology. not just with new security requirements, of service is impacted. The challenge for but broader concerns too. Lost in merchants is how to utilise new payments Danny Chazonoff, Chief Operating Officer, Paysafe Group Transaction: Volume One showed that technologies in a way that offers the right consumers were increasingly worried about balance of convenience and security. security, especially around lost phones

Research methodology

Lost in Transaction is an independent Other sources: research project, conducted by the London- Internet Shopping in Canada: An Examination based agency Loudhouse. We spoke to of Data, Trends and Patterns. Statistics 3,038 consumers and 300 businesses in the Canada. December 2009. UK, Canada and the United States about their online shopping behaviours, payment habits Online Shopping and E-Commerce. Pew and attitudes to security. Respondents came Research Center. Smith, Aaron & Anderson, from six different age groups and a variety of Monica. December 2016. professions.

i Why the Death of Malls Is About More Than Shopping. Time Magazine, US Edition, 20 July 2017. Sanburn, Josh. ii Personal Credit Cards: Building Loyalty in a Changing Landscape. Euromonitor International. 2016. iii UK Finance, UK Card Expenditure Statistics. June 2017.

www.paysafe.com @PaysafeGroup paysafegroup Lost in Transaction 37 www.paysafe.com @PaysafeGroup paysafegroup [email protected]