When US-based eCommerce businesses look to expand internationally, Canada is the logical next. For any eCommerce merchant interested in growing its footprint in North America, we’re the significant option.

ECommerce was growing rapidly there even before the COVID-19 pandemic. But the pandemic and its associated stay-at-home orders triggered an eCommerce explosion which is converting millions of Canadians into permanent and enthusiastic online shoppers. What does that mean for your business?

Canada has close cultural and economic ties to the U.S., the Canadian eCommerce market varies in typical Canadian consumers’ buying habits, as well as key opportunities for eCommerce merchants.

Internet and eCommerce penetration in Canada
As is true in the U.S. and other developed countries, Canada has become an online culture. Eighty-seven percent of the population — nearly 30 million people — are internet users. Seventy-nine percent of the population uses a mobile device. A little more than half of the Canadian population (52.7 percent) are eCommerce customers.

Compared to eCommerce shoppers in the U.S., Canadians are equally as likely to buy fashion, electronics and technology, and books online. But Canadians are less likely to purchase sporting goods, pet supplies, and beauty supplies online.

ECommerce growth in Canada
The eCommerce market in Canada has been growing steadily for the past half-decade or more. Total retail eCommerce revenue in Canada grew from about $22 billion in 2017 to $28.4 billion in 2020. By 2024, eCommerce revenue is projected to exceed $36.5 billion.

How COVID-19 has affected the eCommerce market in Canada
Like most of the world, Canada went into lockdown in the spring of 2020 in an effort to arrest the spread of the coronavirus that causes the disease COVID-19. Brick-and-mortar retail shopping came to a halt throughout most of the country, inspiring more consumers than ever before to try eCommerce.

The result was a massive surge in online sales that one observer called a “digital tipping point” for the country. Online revenue doubled between March 11 and the beginning of April 2020, with all sectors seeing a combined uptick of 99 percent.
During the coronavirus pandemic, online sales increased in the following categories:
• Sporting goods (+105 percent)
• Furniture and home décor (+106 percent)
• Food and restaurants (+160 percent)
• Appliances, electronics, building materials, and DIY (+161 percent)

Meanwhile, the apparel category grew by a mere 21 percent, perhaps because that category already saw a significant amount of online sales.

As late as June 2019, Canada’s eCommerce market was considered “developing.” With the explosive growth in sales and customers brought on by COVID-19, however, it appears as if the Canadian eCommerce market has fully arrived. More and more Canadians, it seems, have experienced the ease of online shopping; many of them have become eCommerce customers for life.

ECommerce shopping habits and demographics in Canada
A Canada Post survey of 5,000 eCommerce shoppers in Canada revealed some interesting trends.

Broken down by age group:
• 37 percent of Canadian online shoppers are baby boomers (between the ages of 53 and 72).
• 25 percent are members of Generation X (between 38 and 52).
• 28 percent are millennials (between 24 and 37).

The average annual household income for online shoppers in Canada is $102,306 (in Canadian dollars). According to the Canada Post survey, online shoppers in Canada are:
• 49 percent male and 51 percent female.
• 41 percent urban, 38 percent suburban, and 21 percent rural.

Canada Post also reported on the online shopping frequency of its survey participants.
• 37 percent said they shop online occasionally, two to six times per year.
• 24 percent said they shop online frequently, seven to 12 times per year.
• 16 percent considered themselves “power” shoppers, making 13 to 24 online purchases per year.
• 10 percent qualified for the “hyper” category, reporting 25 to 40 purchases per year.
• 8 percent were “hyper-elite,” having made 41 or more online purchases per year.

The hyper and hyper-elite segments represent only 18 percent of all Canadian online shoppers, but they account for 60 percent of purchases. However, Canada Post found that 32 percent of Canadians say they’ll shop online more in the coming year.

In March 2020, ClearSale commissioned Sapio Research to survey over 1,000 Canadian consumers who shop online at least once every few months. Among other things, the study discovered that:
• 49 percent of Canadian online shoppers spend less than $65 (U.S. dollars) online per month.
• 44 percent spend between $65 and $259 each month.
• 7 percent spend more than $260 (compared to 20 percent of Americans).

The most common comment from Canadian consumers says they shop online because of the wider selection. The next most popular reason for shopping online is because it saves time.

Key Benefits
With its high internet penetration rate and technology adoption, the benefits of doing business in Canada are similar to the benefits of selling in the U.S. or any other developed country. The customers are online; it is simply a matter of understanding their preferences and shopping habits.

Companies based outside of Canada can be buoyed by the fact that a major portion of eCommerce spending by Canadian consumers — 45 percent — goes toward non-Canadian websites. One-third of the total is spent in the U.S., with most of the rest going to Asia and Europe.

When asked why they shop from foreign merchants, a plurality of Canadians (41 percent) cited lower prices. Other reasons included:
• Selection (23 percent)
• Free or discounted shipping (17 percent)
• Ease of shopping (7 percent)
• Brand name recognition (7 percent)

Data from a 2018 survey conducted by the Canadian Internet Registration Authority and reported on by eMarketer indicates that Canadians prefer to shop across borders for less expensive items and shop domestically for big-ticket purchases. When the order value is less than $100 (Canadian dollars), 42 percent of survey respondents say they buy from U.S. sites, and 15 percent say they buy from Canadian merchants. When the value exceeds $500, almost the exact opposite is true; 15 percent say they buy from the U.S., and 39 percent say they buy from Canada.

The challenges of eCommerce in Canada
As we noted above, merchants can’t expect to directly transpose their eCommerce operations from the U.S. or other markets to Canada. Selling profitably in Canada requires overcoming some unique challenges, such as competition with Amazon.

As have consumers in the U.S., Canadians have fallen hard for the ease, selection, and low cost of shopping on Amazon sites. Amazon.ca is the most popular online store in Canada by a wide margin.

Interestingly, Amazon competes with itself in Canada. Amazon.com (the company’s U.S.-based site) is the second-most popular online shopping destination for Canadian consumers.

Internet shopping and research habits
Canadians tend to use the internet more to learn about products and brands than for actually purchasing products. As of January 2018, 73 percent of Canadian internet users said they had looked online for details about stores or businesses. Only 46 percent said they had bought a product or service online on a weekly or monthly basis.

The impact of COVID-19 on spending
Canadians are buying more online due to COVID-19, but overall, they are spending less on retail shopping. According to a recent Deloitte report, Canadian consumers are focused on the essentials.

“Looking ahead, 21 percent of Canadians expect to spend more on groceries,” the Deloitte analysts wrote. “A whopping 69 percent say they’ll make up for that by reducing spending on entertainment, while 44 percent will cut their spending on apparel and footwear — though perhaps this isn’t entirely surprising as an entire nation is asked to stay at home unless absolutely necessary.”

Canadian consumers expect low-cost or free home delivery for eCommerce purchases, and most merchants oblige. However, in a country as large and as sparsely populated as Canada, getting purchases to consumers quickly and affordably isn’t always easy. And the notoriously inclement weather of Canada doesn’t help.

ECommerce fraud in Canada
The explosive growth in eCommerce activity in Canada we discussed earlier will undoubtedly be accompanied by a similar increase in eCommerce fraud. We already see some signs of it.

Between 2010 and 2015, the cost of card-not-present (CNP) fraud on Canadian cards skyrocketed from $176 million (Canadian dollars) to $537 million (according to the Canadian Bankers Association Payment Card Partners Working Group). Visa reported in 2017 that 74 percent of all fraud perpetrated on Canadian accounts was CNP fraud.

Consumer attitudes about CNP fraud
Compared to 13 percent of Americans, 26 percent of Canadians say online shopping is somewhat or much less safe than brick-and-mortar retail (according to the ClearSale survey).

This level of caution may reflect the slower rates at which Canadians have adopted online shopping. Still, it underscores the need for any business entering Canadian eCommerce to provide an overtly safe and secure experience. Canadians, in general, appreciate fraud prevention efforts. Seventy-seven percent of survey respondents told Sapio Research they would be more likely to shop online from vendors that offer fraud protection. When CNP fraud occurs, merchants (in Canada and everywhere else) are typically subject to chargebacks. A chargeback is initiated when a cardholder notices an unauthorized payment on their account. The cardholder will notify their card-issuing bank. If the bank determines the claim is legitimate, the bank will refund the payment and debit the merchant — usually with an additional fee.

Chargeback fees can range from $50 to $100 or more per transaction. The more chargebacks a merchant incurs, the higher their fees will be. In some cases, banks will remove a merchant’s ability to accept credit card payments entirely.

To prevent chargebacks and other fraud-related damages — such as harm to their reputation — eCommerce merchants doing business in Canada have four basic options for fraud protection:
1. Fraud Filters
Fraud filters are provided by eCommerce platforms and are designed to identify potentially fraudulent orders and stop them from being processed. Fraud filters can function a number of ways, such as by: Limiting how many sales can be submitted to a website during a given time period; using an address verification service (AVS) to ensure shipping and billing addresses line up; flagging or blocking transactions that occur during specified timeframes; checking for errors with the card verification value (CVV) submitted; flagging high-dollar sales that fall outside the merchant’s typical range. Looking for IP address mismatches is also vital.

While these common filters can prevent a high amount of fraud, they may also stop even more legitimate transactions. When a fraud prevention measure denies a legitimate transaction, it is called a false decline. We explain the risk of false declines in Canada below.

2. Manual Review
An alternative to automatic fraud filters is manual review, which is just what it sounds like: a team of individuals reviewing each transaction (or a selection of transactions) to detect fraud. Human fraud experts tend to be better than machines at understanding context. Trained fraud experts can look at each situation individually instead of blindly adhering to preset rules. However, manual review is very time-consuming and resource intensive. A drawn-out manual review process can annoy customers who are eager to complete their orders.

3. Machine Learning/Artificial Intelligence
Software that relies on machine learning or artificial intelligence (AI) can provide a fast and reliable way to screen out fraud. These applications rely on mathematical algorithms and data to identify fraud trends and patterns. Because no humans are involved, machine learning is scalable and consistent, applying the same level of scrutiny to every transaction. Unfortunately, like “unintelligent” fraud filters, machine learning can be inflexible. Algorithms can also miss new types of fraud that haven’t yet made it into the algorithm’s database.

4. Fraud Managed Services
Fraud managed services is a “best of all worlds” approach that combines cutting-edge automated technology (including advanced fraud filters and machine learning) with expert manual analysis. At no point is an order automatically declined. Instead, when the automated system flags an order, the order is passed on to the team of experts who use their knowledge of human behaviour and the latest fraud trends to make a final call. The human analysts can flag new trends for insertion into the AI’s algorithm, thereby helping the machine learn faster.

The risk of false declines in Canada
False declines are a risk anywhere merchants use automated fraud-protection rules. In fact, false declines can be much more costly to businesses than fraud — up to 13 times as much. This is largely because false declines tend to drive customers away from shopping sites, into the hands of competitors, sometimes never to return. In high-risk industries, merchants may tighten up their fraud rules, only to lose even more money to false declines.

In the ClearSale survey of 1,000+ Canadian online shoppers:
• 38 percent of respondents said that they would never order from that merchant again if a merchant declined their payment. (Compared to 33 percent of Americans, who appear to be slightly more forgiving.);
• 38 percent of respondents said that they would never order from that merchant again if a merchant declined their payment;
• 25 percent said that would likely post a negative comment on social media after having a transaction denied by a merchant; and
• 46 percent said they would not even try one more time if a merchant declined their payment. Instead, they would move on to another merchant.

While Canadian consumers are wary of fraud and dislike false declines, they still expect a smooth and easy checkout process. Eighty-one percent of Canadians said they would not proceed with a purchase if they were asked to send copies of documents to confirm an order. Sixty percent said they would not proceed with an order if they were asked to call customer service to confirm, and forty percent of Canadians said they have abandoned a purchase online because of a checkout process that was too long or too complicated.

What fraud analysts look for in Canada
In markets like Canada, fraud analysts typically see the same fraud trends over and over again. The fraud experts at ClearSale tell us that account takeovers — the unauthorized use of someone else’s personal information online — appear to represent most of the eCommerce fraud in Canada. Typical indications of an account takeover include the use of anonymous proxy servers and mismatches between the country and area of the IP address and the billing address.

Fraud analysts also keep their eyes out for high-risk email addresses and high-velocity patterns between transactions. Analysts report a clear increase in cases of “friendly fraud” in Canada. Friendly fraud occurs when the customer makes an online purchase with their own credit card and then requests a chargeback from the bank or financial institution after receiving the item or service in question.

Another trend analysts have noticed in Canada (and now spreading to the United States) is that companies may experience extremely high volumes of suspicious transactions under the same billing customer but with different receivers and shipping information. In some markets, cases like these might be seen as clear fraud, but they may also indicate authentic resellers.

These are the kinds of cases in which human observation and active analysis of the different variables and the visualization of patterns is necessary. Otherwise, many of these legitimate transactions could be categorized as fraud attempts.

To be successful in the Canadian market, merchants need a fraud prevention solution that stays one step ahead of the most sophisticated fraudsters while eliminating false declines and giving customers a seamless shopping experience.

Source: ClearSale Special Report on Canada 2021

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