As online and mobile payments have risen to near-ubiquitous levels, card-not-present (CNP) fraud rates have increased just as fast, with CNP fraud losses projected to increase by $3.2 billion over the next four years.
To make matters worse, fraudsters are constantly evolving their tactics – before merchants even discover they have been affected by fraud, criminals have moved on to the next target with a new scheme. And it’s not a problem merchants can forget about: fraud costs online merchants more than 7.5 percent of their annual revenue.
There are numerous considerations when it comes to fraud, including nasty side effects such as revenue losses and chargeback losses, not to mention long-term impact on customer loyalty.
Another issue is that many merchants try to prevent fraud by blocking all types of transactions from certain locations or transaction qualities, which is not effective in the long run. It prevents merchants from accepting a number of legitimate orders, and limits the ability to expand or uncover new revenue streams, all of which can dramatically affect bottom line profitability.
Merchants who don’t address their fraud problem face losses in several ways.
The more than 7.5 percent of annual revenue lost due to fraud is a significant, and avoidable, loss in revenue. In addition to revenue losses, CNP fraud results in a loss of inventory, chargeback fees (for every dollar of losses, merchants are losing $2.40 based on chargebacks, fees, and merchandise replacement), loss of shipping expenses, and loss of labor. Merchants who don’t take charge of fraud run the risk of building a reputation plagued by fraud, which can further deter customers. Without a thoughtful and thorough strategy in place, merchants assume an awful lot of financial and security risk.
So what’s important to look for when evaluating a fraud prevention vendor? There are several factors to consider:
- Smart use of AI. In order to truly capitalize on all that Artificial Intelligence (AI) and machine learning have to offer, fraud solutions must implement a combination of four pillars: patented, proprietary technology; vast amounts of data; AI to make sense of all of that data and to identify anomalies; and finally, human intelligence. AI by itself is not enough – the key is the addition of the human element to calculate specific tolerance and risk levels for each specific business to provide real intelligence for retailers
- Speed. Fraud systems need to react as quick as possible (in a matter of milliseconds, to be specific) to limit delays for the customer. Look for solutions that provide an easy-to-use interface and are friction-free during the checkout process in order to reduce manual reviews and chargebacks.
- Use of Order Linking and Personas. Ensure your provider offers capabilities like Order Linking and Personas, which use hundreds of variables to construct a definitive link to online purchase behavior—either directly or indirectly—to help reveal fraudulent activity. These technologies first assess over 200 variables before compiling and evaluating them to create a Persona, which reveals potential risks in real-time. The attributes that make up a Persona include the number of credit cards and email addresses linked to the Persona, the actual location of the individual device making the purchase, and discrepancies in the customers self-divulged information and actual information.
Fraud is evolving so rapidly that it’s not sustainable for merchants to rely on piecemeal solutions to beat it.
A comprehensive system that is specifically tailored to individual businesses is key in the battle against fraud. Merchants are not fraud experts and that’s ok – they shouldn’t be expected to be. What they do need to be is aware of the high costs associated with fraud, and the risks that come along with it. It is essential for retailers to put a comprehensive fraud system in place to protect both themselves and their customers.