Bridging the gap: enhancing merchant-issuer collaboration in the age of LPMs

By Laura Carruthers , Director of Fraud Prevention at Boku.

Ecommerce is changing. It’s become a central feature in all of our lives. Boku’s latest research revealed just how accustomed we’ve become to the products and services we want being a click away: the ecommerce market is estimated at $60tn and forecast to grow by 65% by 2028?.

As ecommerce has moved into ubiquity, the way customers experience the payment process has become more of a differentiator and is now critical to success for merchants.

And often, the experience is defined by the convenience of the payment method. Customers want more flexibility, more security, and less friction when they pay for things. To achieve this, companies are turning to alternative payment methods and in turn, bringing the hegemony of card-based transactions to an end.

Don’t get me wrong: card still has a big part to play in the payments mix. But local payment methods (LPMs) - such as mobile wallets and A2A payments – are quickly gaining in popularity across the world as consumers either lack access to cards or simply prefer alternatives.

The shift is taking place in traditionally card-dominated regions like the UK and US as well as more fragmented payment markets like Latin America (LATAM) and Asia Pacific (APAC).

In markets like Brazil and India, for example, consumers prefer digital wallets, account-to-account (A2A) and other local payment methods.

There are also examples in Europe; Blik, the A2A payment app, is Poland’s most popular payment method full stop. Meanwhile, in Norway, A2A is expected to account for more than half of ecommerce checkout volume by 2028, and non-card-linked wallets will make up about 25%.

Across the world, millions of consumers are choosing more convenient ways to pay for the things they love.

And these are big markets. For merchants, LPMs are the key that unlocks the door to a much broader addressable customer base. But getting the most out of LPMs involves more than integration at the point of sale.

Successful implementation requires strategic collaboration between merchants, payment service providers, and issuers – and is the only way to ensure the seamless payment experiences customers are searching for.

The role of PSPs in facilitating collaboration

Payment Service Providers (PSPs) have a vitally important role to play in enabling that collaboration. They have a unique level of visibility: into merchant transaction data, as well as an issuer’s fraud detection and authorization processes. This puts PSPs at something of a crow’s nest vantage point and makes them well-positioned to help bridge any communication gaps.

An example of this playing out in the day-to-day involves the issuer provision of specific, meaningful decline codes. In these cases, PSPs can work with merchants to interpret the data and identify underlying issues, so that nuanced solutions can be reached. PSPs can also assist with the navigation of regional regulations and compliance requirements.

Data sharing: the key to improved authorization rates

One of the most common challenges merchants are coming to Boku with today is the decline of authorization rates. Payment declines frustrate both merchants and consumers, inevitably leading to lost sales and higher churn.

This underscores the importance of data sharing between merchants and issuers. When both sides work together to identify issues, solutions are all the more effective. Whether boosting authorization rates, minimizing transaction failures, or improving customer experiences, collaboration of this kind leads to one destination: better results for everyone involved.

Fraud prevention: a joint effort

Merchants and issuers can also work together on fraud prevention. As local payment methods become more popular, payment networks become more fragmented and therefore complex. While alternative payment methods open new markets, they also introduce different security considerations.

By sharing transaction data and insights, merchants and issuers can maintain effective scrutiny over transactions and develop fraud prevention strategies that reflect the realities of the global commerce market.

Fraudsters often target high-liquidity goods for resale. To tackle this, merchants and issuers can establish a two-way flow of information: merchants can provide issuers insight as to the category of product being purchased, so issuers can treat higher-risk transactions with more scrutiny, and lower-risk purchases with reduced friction.

Likewise, issuers can keep merchants up to date on user payment behaviour and fraud trends. Exchanging information like this in an ongoing flow keeps transaction processes smooth – so the customer keeps the same seamless experience – but also helps prevent fraud.

Biometric verification is an emerging solution in fraud prevention. In Vietnam, for example, a new regulation requiring biometric verification for internet banking users helped an issuer reduce fraud by 60%, while maintaining high conversion rates. This success shows that consumers are willing to embrace security measures like biometrics, especially when they see how it can protect them from fraud.

Making it personal; tackling insufficient funding in subscription services

The rise of subscription-based services has introduced a few challenges – both for customers and merchants. Many customers struggle to keep track of their numerous subscriptions, with around 1 in 3 consumers worldwide losing track of how much they spend on subscriptions each month. This can lead to missed payments or unpleasant surprises when charges occur.

This challenge is compounded in markets where mobile wallets are the preferred payment method. Unlike credit cards, mobile wallets typically do not allow recurring charges when the balance is insufficient, leading to higher decline rates.

Machine learning now enables merchants to analyze historical data and optimize the timing of payment retries, improving the chances of success.

Additionally, sending regular, personalized and timely billing reminders, and issuers allowing customers to link multiple funding sources to their accounts, can improve the success rate of recurring payments. Transparency between merchants and issuers regarding subscription billing schedules can also help issuers maximise the chance of recurring payment success.

Separately, merchants, issuers and PSPs all face challenges – several of which I’ve listed here. But working as a triumvirate, many of those challenges can be overcome. The teamwork begins with data sharing, ensuring a flow of relevant information between parties that leads to better authorization rates, higher conversions, fewer declines, robust anti-fraud measures, and ultimately happier customers and business owners.

As LPMs take their seat at the top table of payments, this sort of collaboration will become increasingly key to success.