Voice of the Industry

Emerging markets present unique fraud challenges compared to mature regions

Wednesday 9 March 2022 10:25 CET | Editor: Irina Ionescu | Voice of the industry

Carlos Palma, Lead Product Manager at dLocal, shares the challenges of fraud detection in emerging markets. He recommends companies partnering with payment service providers to roll out strong fraud prevention technologies

Today, online merchants have a golden opportunity before them to expand their presence to emerging markets where consumers are spending millions of dollars on goods and services. In 2020, the total addressable market for payins (funds received by a merchant for a sale of a good or service) was USD 445 billion across 31 emerging markets tracked by Americas Market Intelligence and dLocal. But for as much revenue opportunity as there is for merchants in these countries, so too is the risk for fraud. 

Identifying fraud in mature markets is simpler because of the payment methods used by consumers in Canada, Western Europe, the UK, and the US. For example, credit and debit card payment methods are typically the most popular payment methods in developed markets, with Americans using card solutions for 55% of all payments in 2020, according to the Federal Reserve Bank of San Francisco. However, the use of alternative payment methods dominates the world’s fastest-growing markets, such as Africa, Asia, and Latin America. As such, it can be more difficult to identify fraudulent behaviour in those markets. 

Merchants are most familiar with credit/debit card fraud because card networks and processors penalise companies for high chargeback rates. That is not the case with most alternative payment methods in emerging markets. Merchants wishing to gain access to these countries should first determine if their current fraud defences are equipped to identify anomalies in emerging markets. While fraud is less prevalent with alternative payments, there are some extreme examples to keep in mind.

Latin America 

Latin America, particularly countries such as Mexico and Brazil, has emerged as a fertile region for fraud growth. This region’s susceptibility to fraud is due to various factors, such as a wide social disparity and loose anti-fraud laws. 

One recent scheme targeting advertisement platforms involved the popular Brazilian alternative payment method Boleto Bancário. How does it work? Fraudsters create an account on a platform and sell goods like kitchenware, for example. A consumer sees the ad for a set of pots and pans being sold for USD 69.99, clicks to buy it, and a Boleto is sent to complete the transaction. 

The invoice itself appears legit since it displays the ad platform’s name. However, when the consumer pays the Boleto, they never receive the items. Instead, the funds are credited to a fraudster’s account. Such schemes are often difficult to identify because, in most cases, the consumer doesn’t report the incident. This is why it’s important for merchants to work with trusted third parties to identify fraud trends. 


APAC is another region brimming with opportunities for merchants, but fraud challenges are also ripe, especially with digital payments. 

In India, for example, the cost of fraud for the industries surveyed by LexisNexis is 3.84 times the lost transaction value on average. In a separate report about Hong Kong, LexisNexis shares that the cost of fraud is 3.61 times the lost transaction value on average. In both instances, the COVID-19 pandemic had an impact on rising fraud levels in the region. Many consumers conducting more remote purchases via digital payment methods have only contributed to a fraud increase in that area.

For example, online/web browsers in India account for the largest source of fraud, according to the survey of 108 risk and fraud executives operating in the country. Mobile browsers and apps also are significant sources of overall fraud. In Hong Kong, identity-related fraud is top-of-mind for financial institutions as they represent just under half (42%) of fraud losses. 

Sub-Saharan Africa 

Africa has a longstanding reputation for being one of the fastest-growing ecommerce markets in the world, particularly for countries in the Sub-Saharan region. As a whole, Sub-Saharan Africa has 157 active mobile money services and 548 million active accounts, according to the GSMA. With so many active accounts, mobile money fraud is a given. 

Because mobile money services grew in popularity during the pandemic, so too did the agent networks that operators use to help scale their business. In some cases, a mobile network operator will hire new agents with a minimum background check. Those agents are then compensated based on the number of registered new clients that lead to active accounts. Such an incentive could lead agents to open fraudulent accounts while skirting KYC laws. In fact, according to software company Subex, one such incident involving the swapping of SIM cards in Uganda saw fraudsters drain a total of USD 3.2 million from accounts. 

Going forward 

The payins opportunity in emerging markets is certainly growing, and this trend will only continue to accelerate in the coming years. dLocal and Americas Market Intelligence predict that these regions will grow 27% annually through 2024, driven largely by ecommerce growth in areas such as grocery, delivery services, and online gaming. As merchants think about entering these markets, they need to ensure their fraud configurations are up to the task of identifying new types of fraud as they do business in new countries.

The answers might be in the data. Analysing transaction data to find anomalies is an effective way to identify threats. A combination of internal and external data sources is key in helping to identify and stop fraud before it becomes a long-term problem in emerging markets. Therefore, it is recommended to partner with payment service providers with expertise in processing high volumes of local data from those specific markets. 

For instance, dLocal rolled out its fraud prevention technology, powered by artificial intelligence, with machine learning algorithms such as XGBoost and deep neural networks. dLocal Defense checks in real time and under 100 milliseconds for potentially fraudulent transactions. Each merchant and industry have tailor-made machine learning models that are retrained almost on a daily basis with petabytes of information on millions of transactions from emerging markets. That enables merchants to grow their business, stop fraud, and create more revenue from legitimate transactions.

This editorial was first published in our Cross-Border Payments and Ecommerce Report 2021–2022, which taps into the fast-growing cross-border market and provides a comprehensive overview of trends and developments that are pivotal in this space, being the ultimate source of information for ecommerce businesses interested in expanding globally. 

About Carlos Palma

Carlos Palma is a Lead Product Manager at dLocal. As a Software Engineer by training with an MBA from Oxford University, Carlos has extensive experience developing and delivering products and solutions for tech startups in LATAM, within the Agribusiness, Real Estate, and Payments industries. Carlos is currently leading the development of new Fraud Prevention solutions for merchants.

About dLocal

dLocal powers local payments in emerging markets, connecting global enterprise merchants with billions of emerging market consumers across Africa, Asia, Latin America, and the Middle East. Through the ‘One dLocal’ concept (one API, one platform, one contract), global companies can accept payments, send payouts, and settle funds globally without the need to manage separate payin and payout processors, set up numerous local entities, and integrate multiple acquirers and payment methods in each market. Learn more on dLocal’s website.

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Keywords: fraud detection, fraud management, dLocal, online shopping, online payments, payment methods, local payment method, KYC, eKYC
Categories: Fraud & Financial Crime
Companies: dLocal
Countries: World
This article is part of category

Fraud & Financial Crime


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