How to do business online in Mexico

You want to do business in Mexico and figured that among the tens of millions of online shoppers, your product or service is prime for the Spanish speaking market. All you need now is to set up payments in pesos, do a little translation and you’re set, right? Yes, in theory, but in reality there are a lot of big and small things to consider regarding everything from payments, fraud, consumer dynamics, and marketing mechanisms. Done right, Mexico can be a fantastic market for you, but if you are not careful or just ignorant, consumers won’t buy your products or worse, criminals will straight up steal from you through fraud schemes. I have learned about fraud the hard way, but also learned how to make products or services appealing and easy to buy for Mexican consumers.

In this three part series, I will guide you through what you need to know, including:

• Part 1: Fraud. How to avoid it and how to deal with it when it happens.
• Part 2: Consumers. How to adapt your business to the cultural dynamics of Mexico.
• Part 3: How to pick the best providers and what to consider if you are selling B2B.

Who am I?

My name is Jess; for the past two years, I have been co-founder of Simplii, a Mexican mobile operator with exclusively online sign up and payments. Part of my responsibilities have been setting up and managing our billing and payment systems.

I moved from Denmark to Mexico in 2016 to build Simplii - a consumer focused mobile operator where customers could sign up online, pay with credit card for a pre-paid subscription to get unlimited data on their phone; a well known from Netflix and Spotify, but new for mobile telephony in Mexico.

In this series of posts, I will share my experiences and learnings with doing online business in Mexico. Some, but not all, can be applied throughout LATAM; just like Canada and the U.S., language might be the same, but the closer you look, you will notice the differences in culture, expression, and habits.

My goal is to pass on some of what I have learned and to give you the head start I wish I had back when I was planning my entry into Mexico. We will cover many important topics but let’s start with probably your biggest concern: fraud.

Part one — Fraud is very real and you should take it seriously!

In close competition with Brazil, Mexico is among the world champions in credit card fraud. Google a bit and you will find all the stats, like this 2016 VISA fraud report stating that LATAM has a 1.7% chargeback rate and Mexico is leading with a whopping 2.2%! According to that same report, the amount of payments getting rejected for suspicion of fraud in LATAM is 9.2%, and Mexico tops that list with 14.3%. Compare those numbers to 2.9% rejection in US and Canada and you begin to see the challenges you might be facing when entering the latin market.

From personal experience in Simplii, we have had months with chargeback rates as high as 10% and we ended up losing 100% of those disputes. That meant 10% of credit card revenue going down the drain right back to the sewage where rat fraudsters just looking for cracks and exploiting any weakness for their shortsighted personal gain. Fuck you guys!

Wow, that sounds pretty bad. So, should you just stay out of Mexico entirely? No, but you should take the risk of fraud seriously, know what to look for, and prepare on how to deal with the risks, both preventive and reactive.

How credit card fraud works in Mexico

Online credit card fraud is typically done by a person paying for something, using another person’s credit or debit card without consent. Typically, the card information will be taken from a stolen card, but it can also just be stolen card information: someone taking photos of a card or writing down the information on the card. Stealing card information and using it online has always been quite easy.

To protect consumers in case of fraud and to ensure trust in the credit card system, an owner of a card can dispute a charge on their card, telling their bank that the charge was not made by them and that they would like that money back. In case of a dispute, you, the merchant, will receive what’s called a “chargeback” handled by your payment provider eg. Stripe, PayPal, Conekta, or whoever you might be using. Besides paying a fee for getting that chargeback, you will also have to provide proof of delivery and/or usage.

The submitted proof will then be evaluated and, if you win the dispute, you get to keep the earnings and the fee is waived. But if you lose the dispute, you lose the earnings, the product and, on top, you get to pay a fee for your loss. That sucks!

The sad truth about a broken system

Now, you probably know all of that already; so why am I telling you this? Because chargebacks is the most used form of credit card fraud in Mexico and you are very likely to lose all of your disputes, which make disputes suck even more.

I cannot say for sure that you will lose all of your disputes, but it is likely to happen, due to the amount of disputes the banks have to handle and the manual nature of the dispute process. Unless you sell very high priced items or you are a very high grossing retailer, the processing of your dispute proof will go to the bottom of the pile and you will eventually lose your case and your money.

To make matters worse, you might have been selling a subscription service to the “customer” for months and suddenly you get hit with a dispute for the entire customer lifetime. And because each of the charges is seen as separate amounts, you won’t have a high value case and you will most likely lose all of the earnings. Good news here is that you only pay one chargeback fee. Yay!

You might feel like going to the Police, reporting these swindling customers for abuse and credit card fraud, but the reality is that the identities they used are probably fake and “real crimes” take precedence. The sad truth is, that in Mexico, fraud by chargeback is practically a free crime to commit.

In Mexico, the dispute system that was supposed to protect customers from bad merchants and merchants from fraudulent customers is broken and fraudsters know it and they use it to steal from merchants. Your best option is to avoid having fraudulent customers.

How to avoid fraudsters

You best way to avoid getting swindled is to avoid online payments from potential fraudsters. I say avoid online payments specifically because you have other ways of selling to people. Especially in Mexico, many consumers prefer paying in cash or doing a bank transfer.

What you want to do is set up multiple lines of defences to protect your business:

1. Work with a payment provider that has knowledge of the market and good anti-fraud tools to prevent bad people from making transactions.
2. Design internal procedures for manual review of orders.
3. Offer alternative payment methods that are safer for you as a merchants.

And while accepting new forms of payment might seem complicated for you, both cash payments and bank transfers actually come with a 100% guarantee for you to keep your earnings, as neither have customer dispute mechanisms that can force you to return money to fraudulent customers.

How a good Mexican payment provider views chargebacks

As I mentioned a number of times, disputes or chargebacks are a very common fraud method in Mexico. You just go to your bank and deny having any knowledge of a transaction, wait a few weeks and get all your money back. Easy!

Because chargebacks are so widely used for fraud, making a chargeback will most likely flag you as fraudulent customer with that payment provider; it doesn’t matter if your dispute was legit or not. You disputed a charge, so now you are a fraudster and you go in that provider’s black book: good luck buying anything else from a merchant using that provider. You should get a new card, use a different email, and maybe even a different computer with a different device fingerprint.

Providers, of course, work on not blocking legitimate customers, but since disputes and chargebacks are such a broken system, a previous dispute is a big red flag that will weigh heavily in the fraud indicator algorithm. For that same reason, you should expect to see acceptance rates much lower than what you are seeing in your current western markets. If you have an acceptance rate above 70% and a chargeback rate under 2%, you are doing well in Mexico. Even though a low acceptance rate feels like you are turning away customers, believe me, you will rather have that than a high chargeback rate. Your conversion rate optimisation person might not be thrilled with seeing 30% of customers getting turned away at the checkout, but at the end of the day, your conversion rate is only as optimised as the legitimacy of your customers.

Setting up your own post-purchase fraud prevention flow

Okay, so you turn away maybe ~30% depending on what type of business you are running and what payment provider you are using. Let’s turn away some more; in Mexico, it’s common to have internal manual review processes if:

• The order placed is high value and, therefore, high risk.
• The order is placed, or to be delivered, in a high risk area like Morelia, Acapulco, or anywhere in Sinaloa.
• Your payment provider has let the payment through, but has given it an imperfect fraud score, making you want to do a manual confirmation.

At Simplii, we also conduct manual reviews of orders before sending out SIM-cards and, according to that fraud report from VISA that I mentioned in the beginning, 86% of merchant do manual reviews of their Mexican orders.

Before shipping your order, here is what your review process could look like:

1. Contact your customer via email or WhatsApp and ask for proof of identity. Typically, you can get customers to send a photo of their “IFE” or “INE” (voter registration card) which most people have.
2. Ask for proof of payment, by having the buyer send a photo of their credit or debit card, but instruct them to cover part of the card numbers. You mainly want to see that the last four digits and expiration date match; you do not want to have complete photos of credit cards! If you don’t want to handle the technical side of this procedure, you could consider using a service like Mati that makes the verifications process more automated.
3. Look up the billing -and shipping- addresses on Google Streetview to see if the place exist, and maybe also what it looks like. If the place doesn’t exist, the shipping company might try to deliver, but fail and then offer the customer to pick up the package at a nearby store, making it easy for the fraudster to pick up the package and then get the money back through a chargeback! If you are selling a very high value item, like a $2000 USD TV or and expensive watch, it might raise a red flag if the house you are shipping to looks like it’s worth less than the item you’re selling. You can potentially ask the customer to send a photo of themselves in front the house and match the photo with the id photo.
4. Consider using a third party anti fraud network tool, like Bayonet, that uses device fingerprinting to identify website visitors and compares those device IDs with a large database of known fraudsters.
5. Finally, if you don’t trust the buyer, you can ask them to pay in cash (typically done in Oxxo or 7-Eleven), or make a bank transfer. Both of these payment methods are 100% safe for you as a merchant, as the buyer has no automatic way of getting the payment refunded. No cards, no chargebacks!

I know that you are thinking about how much business you are going to lose by hauling customers through manual reviews before shipping items to them. Are they going to be so annoyed that good customers cancel their orders? Are the processes going to eat up too much time for your CS staff? Maybe.

You are probably going to lose a couple of good customers, but generally Mexican online shoppers are used to some kind of review process because of all the fraud going on. At Simplii, we lose about 5% of customers who signed up and paid for their SIM card, due to review processes. We don’t like that number, but we like losing 6 months of subscription payments in a single dispute even less, so those 5% are just part of the overall CAC calculation.

You need to get your business going and then continuously work on your internal rules and processes in order to figure out what works for you.

Round up

Mexico has the potential to be a big market for your business and you will probably do very well, but if you don’t look out for yourself, you are at risk of losing large parts of your revenue to nasty fraudsters who will use weaknesses in the credit card dispute system to swindle you. If you end up selling to the wrong people, you could end up losing both your product, your revenue, and pay a fee for getting hustled by some low life. But if you take your precautions, work with the right providers, and set up internal processes for reviewing order, you can minimize your risks and run a successful business.

I hope that you find my series on doing business online in Mexico useful. If you made it all the way through but still want to know more, feel free to contact me. I’m “dkjess” on most platforms including Twitter, Facebook, and LinkedIn.

Part two — Consumers

In the next part of “How to do business online in Mexico”, I will guide you through the cultural dynamics of Mexican retail.

If you think that all you had to do was translate your website into Spanish, be prepared to lose out on a lot of business, you might be missing something; Mexico is not super complicated to understand, but it’s different than the U.S. and a lot different from western Europe. Don’t worry, I will tell you everything you need to know to get started, how not to lose business by being ignorant, and how to design deals that consumers will love.

Read part two.