Fraud is as old as the existence of monetary transactions. Wherever business goes, fraud follows. Most businesses expect to encounter elevated rates of fraudulent activity around holidays, sales and promotions. However, the seasonality of fraud is quietly disappearing. The pandemic induced in-person shopping restrictions and lingering fear of physical contact sent a virtual tsunami of inexperienced digital users into the eCommerce marketplace ripe for exploitation by fraudsters. Fraud is more sophisticated and prevalent now more than ever, it has evolved into a perennial issue, and no business is too small or niche to be safe from its reach.
According to Juniper Research, retailers are expected to lose $130 billion in revenue on fraudulent card-not-present (CNP) transactions by 2023. In my own company’s research, we’ve found that fraudulent attempts between Q1 of 2021 and Q1 of 2022 rose from 1.13 million to 2.4 million, that’s a 112% increase. Juniper’s findings also indicate that while merchants are aware of rising fraud rates, most eCommerce businesses are undereducated and oblivious to the significant losses in revenue that the rejection of legitimate business due to suspicions of fraud is costing their businesses. HelpNetSecurity estimates that false declines could cost businesses as much as $230 billion this year.
The fraud problems
Being inundated with fraud is costly, not only in terms of lost merchandise, lost revenue and chargebacks fees, but also due to imprecise fraud prevention. The fear of fraud causes businesses to reject 15% of legitimate orders and review too many suspicious orders, slowing down operations and siphoning resources, such as customer service reps, from their primary responsibilities. This also causes order processing backlogs and fulfillment delays.
Many businesses are tackling fraud prevention in-house, relying entirely on rudimentary tools, such as Address Verification Systems (AVS), fraud prevention solutions built into their payment gateways, and manually reviewing risky transactions. Such an approach does not deliver strategic business value as it is inherently inflexible, time-consuming, and causes conflicting priorities, such as choosing between accepting more orders at a higher fraud risk, or reducing fraud risks but increasing false declines.
Falsely declining a customer due to suspicions of fraud, such as an AVS mismatch, will result in an immediate loss of the sale, loss of the customer acquisition costs, and loss of the customer’s lifetime value. 40% of declined customers will likely never return to your website and may also leave a negative review deterring other potential customers. A staggering 92% of customers surveyed by Baymard Institute reported abandoning a cart due to negative customer reviews. It is no wonder that Emplifi predicts that $641 billion will be spent on improving customer experiences in 2022.
The key to effective CNP fraud detection and prevention is the ability to identify your customers and differentiate between a legitimate shopper and a fraudster. The more information you have on the shopper, the easier it will be to legitimize their identity. However, collecting that data directly from the customer adds layers of friction to every transaction and causes customers to abandon their checkouts at alarming rates. Research collected by Finance Online reveals that 27% of customers will abandon their carts if the checkout process is lengthy or complicated, while 35% of consumers will not even initiate a checkout if a store account is required.
Effective fraud solutions
The first step in cutting fraud costs is identifying the sources of revenue loss. The more calculable expenses are the value of your chargeback losses, chargeback fees, and costs of the labor spent manually reviewing orders for fraud. The less quantifiable sources are the rate of false declines and checkout abandonments due to excess friction during the fraud review process. It is common to assume customer satisfaction due to a lack of negative feedback, however, research indicates that only 1/26 dissatisfied customers will reach out to the company and report the negative experience. Unless you are prioritizing your customer experience in your fraud prevention approach, you are likely losing customers.
Decreasing overall fraud costs involves a two-prong approach, eliminating fraud and improving customer experiences.
To eliminate fraud, businesses need to learn about common fraud tactics. The first thing to look out for is any sign of deception or disguise. Fraudsters will attempt to mask their true identity, so the use of a proxy, a burner phone, creating a new email address, or shipping to a freight forwarding company are often telltale signs of fraud and those orders should be carefully scrutinized.
Fraudsters will attempt to mimic the real cardholder, while retaining control of where the order confirmation is sent and to where the product is shipped. Therefore, changing an email address on an existing account or requesting an address change on an approved order could indicate an account takeover (ATO). In this scenario the fraudster gains access to the customer’s login and payment credentials and just needs to hide the order from the cardholder (hence the email change), and redirect the merchandise (hence the address change request). Identifying ATO fraud is challenging and any change to an account should be analyzed, particularly an address change that is requested post approval but prior to fulfillment.
Another area of concern is identifying fraudulent chargeback claims. Dissatisfied customers may dispute a charge out of disregard for the merchant, out of spite in response to a negative experience with a business, or as an easier alternative to returning an unwanted item. I have observed a 54% year-over-year increase in fraudulent chargebacks at my company. Good customer service and an easy to follow return policy is a good defense against this type of fraud. Repeat offenders should be put on a customer block list and effort should be invested in gathering evidence and composing compelling chargeback representments to win fraudulent chargeback disputes.
The second objective in effectively reducing fraud related costs is ensuring that your fraud prevention solution is not rejecting legitimate customers or causing shoppers excess friction. An easy way to improve customer satisfaction is by offering a guest checkout for new customers and autofill options for returning customers. This will save customers time and effort at checkout. Not burdening your customers with unnecessary data collection or necessitating the registration of a store account can increase conversions by 54%. However, ensuring that your fraud prevention solution is not blocking legitimate customers is complex and may necessitate a more advanced solution.
A good full service fraud detection and prevention solution is one that combines machine learning with expert oversight, to allow for human insight and system flexibility to be applied on a scenario to scenario basis. Decisions on transaction, as opposed to risk scores, will remove the burden of manually reviewing orders from your internal resources. A full service solution may also offer a financial guarantee for chargebacks and a chargeback management service to dispute chargeback claims using proven techniques and industry best practices. Ease of use and multiple integration options are very important to eliminate losses during the transition. When all is said and done, a fraud prevention solution should decrease your fraud costs, increase conversions, and relieve you of all your fraud related manual tasks.