The growth of digital goods is meeting consumers’ demand for immediate fulfillment while also providing merchants with a remarkable revenue opportunity. But the same elements that make digital products compelling also challenge merchant operations and expose them to risk. Digital products require increased operating expenses for staff, vendors and systems that support payment and fraud functions. This presentation presented at MRC 2017, discusses how to prepare an organization to deal with high-risk goods and minimize fraud loss.

1. DIGITAL GOODS:
Balancing Risk and Reward
Presenter
Tom Byrnes
Chief Marketing Officer
Vesta Corporation

2. The Impact of E-Commerce Growth
The Consumer Evolution: Goods and Habits
Digital Goods: Driving the Growth of E-Commerce
From Physical to Digital Goods: The Shift for Merchants
We’ll Cover…
How to Balance Risk and Reward in Today’s Environment

3. The Consumer Evolution: Goods and Habits
• Convenience, product selection and price comparison are
driving millennials and other consumers to shop online and
abandon traditional brick and mortar stores
• Physical sales and traffic were down on Black Friday 2016,
while online sales rose in double digits to surpass $3B
• Black Friday 2016 was the first single day in history where
mobile traffic surpassed the million-dollar mark
• M-Commerce is forecast to be 45% of the total US
e-commerce market by 20201
E-Commerce
sales reached
9.1%in 20151
E-Commerce
sales expected
to reach
12.4%
by 20201

4. Digital Goods: Driving the Growth of E-Commerce
Digital gift card
sales are expected
to reach
$15B
by 2017
E-Book CAG is
projected to be
16%between 2016
and 2020
…for an expected
overall growth
of around
93%4
…for an annual
growth rate of
200%2
The US video
game industry
will grow to
$19.6B
in 2019
…representing
a mature
CAG rate of
5.5%3

5. From Physical to Digital Goods: The Shift for Merchants
Fraud and Chargeback Management
• The anticipated surge in CNP fraud is beginning to
manifest post-EMV
• Merchants are spending more on fraud and
chargeback management overall
• Digital goods merchants are being hit the hardest
• Difficult to balance effective fraud detection with a
friction-free (one-click) payment process
Fraud costs
digital goods merchants
8.6%of total revenue5

6. Digital Goods: Merchant Costs and Challenges
Operational Costs: The Bottom Line
• Processing digital goods requires five times
the number of staff than physical goods5
• Hiring and training specialized staff to
become fluent in chargebacks can account
for as much as 36-41% of fraud and
chargeback-related expenses5
• Payments for higher-risk goods often
require managing multiple processors
to load balance
DIGITAL MERCHANTS
SPENT 20% OF THEIR
OPERATIONAL BUDGET ON
FRAUD AND CHARGEBACK
MANAGEMENT IN 2015
AND THAT ROSE TO 23%
IN 2016

7. The Jackpot: Digital Goods Growth
The market’s new, but growing rapidly
The risks are high
The rewards are great

8. Self-Assessment: Look in the Mirror
• What would make you appeal to fraudsters?
• What would make you an easy target?
• What’s your product mix: High risk digital goods with immediate
fulfillment or lower-risk physical goods or subscription services?
• Is it easy for fraudsters to monetize your goods/services?
• How much fraud do you currently experience? Chargebacks?
• What’s your growth strategy? What new goods/services?
Payment Fraud and the Art of Attraction

9. Playing Smart: Driving Account Registration
Check it Out: A Win-Win Situation
• Merchants can acquire invaluable information
for fraud detection by incenting customers to
create a new account
• Deliver fast, friction-free “one-click”
checkout experience
• Tailor promotions based on purchase
preferences and buying habits

10. Playing Smart: Driving Account Registration
Verify Customer Information
• Require email and mobile phone opt-ins at
account creation
• Because they’re more difficult for fraudsters
to compromise, mobile opt-ins can be
most beneficial for high-risk products
• Match name, address, phone against
third-party databases
• Verify recency and/or ongoing usage of the
customer’s email address

11. Keep Good Accounts Safe
• EMV has pushed fraudsters toward remaining
vulnerabilities that were once thought to be
less convenient
• Armed with credentials from large breaches, fraudsters
are now targeting other kinds of accounts
• Mobile wallets are especially vulnerable
• Merchants are overly reliant on single
username/password authentication
• Widely used current solutions are easily compromised
Playing Smart: Account Takeover
FEWER THAN HALF OF
MERCHANTS SURVEYED
IMPLEMENT ANY SINGLE
AUTHENTICATION
SOLUTION BEYOND THE
STANDARD ACCOUNT
LOGIN CREDENTIALS.6

12. Keep ‘Em Guessing
• Keep track of your customer’s trends and
purchasing habits
• Watch for anomalies like purchases made via
new devices, non-typical product purchases,
and changes in contact information
• Consider implementing additional protection
measures like device fingerprinting,
geolocation and Out of Band Authentication
Playing Smart: Account Takeover
MANY ISSUERS BELIEVE
THAT THEY CANNOT
FURTHER REDUCE
TAKEOVERS WITHOUT
HURTING THE
CUSTOMER
EXPERIENCE.7

13. Hidden in Plain Site
• Tokenization provides the best way to protect data
• All data is encrypted and replaced with alphanumeric characters —
the merchant never captures, stores or transmits the data
• In addition to credit and debit card numbers, other varieties of data
can be tokenized: Social Security and Driver’s License numbers,
health records and prescription information…
• Tokenization keeps confidential data away from fraudsters but also
reduces PCI compliance mandates
Playing Smart: Tokenization

14. Play Your Best Hand: There’s No Silver Bullet Against Fraud
Combine people and technology for a complete solution that
mirrors your product mix
Don’t rely on just your customer data to mitigate fraud
Watch for unusual device usage, behavior, and purchase activity
Implement multiple fraud detection methods – move beyond
single authentication
Leverage models and rules for more sophisticated fraud detection

15. Questions

16. Thank you
Tom Byrnes
Chief Marketing Officer
Vesta Corporation
www.trustvesta.com

17. 1 https://chargebacks911.com/black-friday-cyber-monday-2016-sales-stats-early-analysis
2 https://www.giftcardgranny.com/statistics
3 http://www.pwc.com/outlook
4 https://selfstartr.com/what-to-sell-online
5 Vesta and Javelin Strategy, LLC: “The Impact of Fraud and
Chargeback Management on Operations”, 2015
6 Vesta and Javelin Strategy, LLC: “The Financial Impact of Fraud”, 2016
7 http://www.snapretail.com/resource/retailer-stats-tactics/?utm_content=infographic_retailerstats
Sources