Visa had one major message for merchant attendees at MRC Vegas 2023 this year: the U.S. may go into recession, but so what?
The credit card network, which was the overall sponsor of what is perhaps the most important annual conference for risk and payments professionals, delivered the message in the form of a keynote presentation by its Principal U.S. Economist Michael Brown that was chock full of data and graphs. However, the bottom-line was simple. According to Brown, the strength of the U.S. labor market should keep consumer spending healthy and ensure that if there is a technical recession, it would be a short and shallow one.
Visa’s team of U.S. economists predict that GDP will still grow this year relative to last year, albeit a small 1 percent improvement. But Brown prefaced his presentation by openly stating, “we have no idea what is going on.” Instead, he provided what can be called an educated guess backed by a lot of analysis. While some economic indicators are showing an economic recession in the U.S., such as a decline in industrial production, most are not or at least not yet.
Along with the other credit card networks, Visa has reason to be upbeat about the economy. Last quarter, Visa, Mastercard and American Express all reported significant year over year growth in earnings. Visa in particular grew 12 percent in the fourth quarter, and outpacing the rate of inflation.
In the beginning of March, Visa also shared with the market its transaction data from January and February, with both months showing double digit year over year growth in U.S. payment volumes (i.e. including both credit and debit card payments). With U.S. inflation ranging between six and seven percent, that means Visa is experiencing real economic growth in payments volumes beyond just cost-based price increases. Cross-border volumes were even stronger, with growth exceeding one-third year over year in both months.
Why do merchants still need to worry?
However, not everything is healthy with the U.S. economy. Debt spending by U.S. consumers has ballooned as credit card debt has reached a record high of $986 billion in the last quarter of 2022. The level of credit card debt now exceeds the heights reached pre-Covid 19 and the debt drawdown partially facilitated by the economic stimulus program. Total U.S. household debt also climbed during the fourth quarter to a record $16.9 trillion. According to experts, households are nearing the breaking point where the level of credit card debt will be unsustainable for most people. Meanwhile, major issuers have been reporting rising credit card delinquency rates.
What does this mean for U.S. merchants? Whether there is a technical recession or not, there is a growing pool of people who cannot afford their lifestyles and to make their credit card payments. Like with any downturn, you should expect this dynamic to foster an increase in true fraud attacks as well as friendly fraud chargebacks as more people turn to either outright crime or to malicious opportunistic behavior to make ends meet. Already last year, Visa reported that friendly fraud grew between 20 and 30 percent. Don’t expect that trend to slow down. As we saw during the Great Recession and during the Covid-19 pandemic, when people are squeezed economically, fraud flourishes.
The spawning of professional fraudsters is harder to predict or show statistics for, but it stands to reason that more people will turn to the “victimless crime” of eCommerce fraud when they have a hard time making ends meet in the legitimate economy. Fraud certainly seems to be growing. According to a MRC Vegas 2023 presentation by Frank Walsh, CTO of Human Security, account takeover (ATO) attacks have risen 15 percent in the past 12 months, while new account fraud has grown by 64 percent during the same period. So, either there are more fraudsters out there or existing fraudsters are getting better at scaling their attacks. Possibly both.
What practical steps can merchants take to defend themselves from fraud?
All this is to say that while Visa and the other credit card networks can enjoy the boom in card-based payments, merchants need to worry more about getting hit by the various types of fraud out there. Moreover, not just a handful of one-off attacks, but being assaulted by fraud at scale.
The answer is a combination of machine learning solutions and some manual review (whether by your solution vendor or by an internal team).
To quote Aengus Neary, Operations Manager at Booking.com, “You can’t exist at scale without machine learning, but you still need manual review.”
With machine learning solutions you can automatically block true fraud attempts with speed and precision and optimize your response to illegitimate chargeback claims to maximize revenue recovery. However, to adapt quickly to new true fraud trends and changes in chargeback rules and your own checkout process, you will need experienced analysts. You need these people to think creatively about true-fraud and label new and unusual fraud attempts to train the machine learning models. You also need people who understand the ins and outs of chargeback rules and rules updates as well as how your product is being sold to adjust the way you handle chargebacks in representment and arbitration.
Of course, the minute humans are involved in approving or denying transactions, you need to worry about decision fatigue. This is especially true during periods of peak transaction volume and/or fraud attacks. Neary in the MRC Vegas 2023 session “Creating In-house Manual Review Operations at Scale” advocated rotating manual review analysts through a variety of tasks to keep them fresh as opposed to keeping them focused on just one task. Whatever your solution for human fatigue, it reinforces the need to automate and use machine learning as much as possible when you are operating at scale. Let the machine do the heavy lifting and you should get better results. Humans are there to guide and tweak the solution not to replace it.
Other steps merchants can take
For friendly fraud in particular, there are a handful of non-vendor specific steps that can be implemented to improve your chargeback ratio and recovery rates. If you are interested in hearing more, please contact one of my chargeback expert colleagues at Justt. For those of you who either strongly agree or disagree with my take on the state of the U.S. economy and what it means for merchants, don’t hesitate to reach out and let me know via LinkedIn or Twitter.
To all you merchants out there, may your 2023 be a prosperous one.