We live in an era of instant gratification and one-click shopping. Customers expect results to be immediate, whether that means instant downloads, purchases approved in seconds, or credit applications processed in minutes – the message is clear, customers are saying “I need it and I need it now.” Customer experience is king and if you can’t provide the immediate results expected, your customers will go elsewhere.
Fraudsters know this and are eagerly taking advantage of loose controls designed to make the customer experience frictionless for their own profit. Retailers are facing a new challenge: how do they stop fraud without alienating customers by adding unnecessary steps to the purchase or application process?
Many merchants keep fraud prevention controls loose because they simply accept fraud as a cost of doing business. Some are afraid of the cost associated with implementing a proactive fraud prevention strategy, seeing it strictly as a loss center and believing there is no such thing as a profitable fraud management plan.
The economics of investing in risk management
Fraud prevention is a broad term fraught with misconceptions. I’ve heard every excuse in the book from fraud management is too expensive for growing businesses to all fraud prevention methods lead to more manual reviews causing increased friction for good customers. These myths may have been a reality in the past, but in this era of high-speed networks and shared data, they no longer have to be true.
Actually, a proactive fraud management strategy can improve your bottom line on multiple levels:
- Reduce losses from fraud – Fraud prevention reduces direct losses by stopping fraudulent purchases from happening, as well as indirect costs like chargeback and logistics fees.
- Reduce overhead costs – Joining a global data consortium like the one that powers the Emailage EmailRisk Score can help reduce fraud analyst headcount and improve the efficiency of your analyst team
- Increased revenue – Faster, more accurate approvals mean fewer abandoned carts and happier customers spending more money.
Zero fraud, zero sales
We often hear retailers and other online businesses express two goals when discussing fraud prevention:
- Zero fraud
- Zero friction
These are admirable goals, but ultimately bad ideas. Near-zero fraud is possible, but only if you’re willing to accept near-zero sales. After all, fraudsters can’t slip through your controls if nobody else can either.
A zero-sum fraud strategy is one that results in anything looking even remotely suspicious being automatically declined. The end result is false declines stopping legitimate customers from making purchases leaving a lot of money on the table. Additionally, good customers subjected to lengthy manual reviews or prying information requests usually do not come back. Many never complete their first purchase, preferring to find another retailer with a smoother checkout process.
Ecommerce retailers need to shift their expectations with the goal of managing fraud to an acceptable level while preserving customer experience.
Zero friction, zero profits
Likewise, the idea of completely eliminating friction and making every potential customer happy is an impossible ideal. While it’s true that eliminating friction will increase conversion rates, it will also increase the risk of fraud.
Fraudsters talk, operating in sophisticated underground networks. If you err on the side of zero customer friction, your site will become a magnet for cybercriminals and fraud will skyrocket. The inevitable result is that profits will dwindle as you struggle to cover the quantifiable costs of fraud including:
- Chargeback and processing fees
- Lost product
- Lost sales revenue
- Damage control and PR costs
- Risk of being removed from payment systems
This requires another shift in perspective. Retailers have to manage friction with the understanding that customers are accustomed to some verification requirements in order to protect their information and your business.
The new state of the art
How can retailers overcome these misconceptions and reshape their expectations? The first step is looking at the future of fraud prevention. Static data and internal blacklists are no longer enough to accurately predict risk and prevent fraud. Additionally, gone are the days where the manual review is considered the ultimate fraud preventative. In fact, over 95% of transactions sent to manual reviews are ultimately approved, making the review process ultimately a waste of time on all but the riskiest transactions.
Instead, your fraud strategy should go beyond rules and reviews to advanced analytics. Partner with a vendor that uses risk models built with machine learning that can accurately predict risk and detect attack patterns. These models should be updated regularly to account for new fraudster tactics and trends.
In lieu of static data points and prepopulated blacklists, use dynamic digitally derived data points like email addresses, IP addresses, and behavioral biometrics. The strongest data is globally sourced from multiple industries and businesses, sharing confirmed and suspected fraud from all around the world. This network effect is an incredibly powerful tool in the fight against fraud.
Fraudsters aren’t afraid of evolving and updating their tactics in order to profit, so retailers shouldn’t be either. When you bust the common myths about the cost of fraud prevention and treat it as a revenue booster instead of a cost center, the benefits of managing fraud and friction become immediately apparent.
Are you ready to step into the future of fighting fraud and friction? Check out my full presentation on the economics of fraud management below.