For today’s merchants, the costs of payment fraud are astonishing. Recent research estimated that combined chargeback management and fraud-prevention costs account for between 14.9 percent and 23 percent of an average merchant’s overall operational budget. In other words, merchants are losing about one out of every five dollars on essential—but non-revenue generating—efforts. As high as these figures may be, however, the direct financial impact can’t measure the damages inflicted on the customer experience and brand loyalty when fraud problems spiral out of control.
Much of the rise in fraud costs can be attributed to the increasing popularity of online shopping and digital goods, such as e-books and digital gift cards. The customer expects instant fulfillment for digital goods, and these Card-Not- Present (CNP) transactions require security controls that many existing platforms, built for point-of-sale transactions, aren’t equipped to handle. The pressure on merchants is not likely to abate: as of 2015, ecommerce transactions made up 9.1 percent of the retail payment volume; it is expected to reach 12.4 percent by 2020.
"The more aggressive your growth initiatives, the more finely you’ll need to tune your risk and fraud management controls to keep abreast of new fraud technologies and attack profiles"
Today’s fraudsters are quick to take advantage of weaknesses in online and mobile commerce fraud prevention systems. Many merchants have indicated plans to increase investment (both technological and human capital) in risk and fraud management, but they need to spend that money wisely.
As they introduce new ecommerce offerings and look to scale, businesses and merchants need to weigh all costs and strike a balance between revenue generation and investment in risk management. If they don’t, the business may not generate sufficient ROI to counterbalance the overhead of managing new forms of risk. Important considerations include:
• The sophistication required to manage risk and fraud stemming from your offerings. Physical goods fraud operations are typically inadequate for managing the higher level of “fast fraud” incurred by digital goods. Used for products such as digital tickets, subscriptions, or gift cards, “fast fraud” is a payments industry term for attacks on transactions that require sub-second decisioning, approval, and instant fulfillment. As of Q4 2016, the rate of this type of fraud attack attempted on U.S. online merchants rose 62 percent just from Q3 2015 levels.
• Ability to scale with consumer demand. As digital goods transactions and sales volumes grow, merchants can expect increased demand on their internal payments and fraud support systems. They’ll need to “scale up” their operations in both size and scope to recruit, secure, train and manage the attrition of internal teams and external vendors.
• Alignment of teams feeding your risk and revenue engines. Payments and fraud teams in most merchant organizations are frequently siloed and viewed as non-core operational centers. But the best strategies to combat fast fraud depend on the alignment and integration of these two functions. Merchants will feel mounting pressure to manage and grow traditionally disconnected teams in a cost-effective manner.
• Oversight of supplier relationships. It can become complicated and costly to oversee multiple relationships with separate vendors managing fraud operations, payment processing, order review, risk management, customer service, risk system, data analytics and chargeback management functions.
• Seasonal demand fluctuations. Digital goods sales, like physical goods, are at the mercy of seasonal sales volume. It’s hard enough to secure internal support during normal time periods, but merchants can expect even more difficulty during peak periods around the holidays.
To stop potential fraud, many merchants and solution providers increase their transaction denial rate. That may prevent some fraudulent transactions, but it will also inadvertently reject legitimate consumers, and roughly one third of declined transactions do turn out to be legitimate. Customer loyalty is extremely important and retaining existing customers costs significantly less than acquiring new ones. Millennials, for example, are much more likely to shop on a mobile device, but will abandon if an online transaction isn’t instantaneous. So what can businesses and merchants do to keep customers happy and revenues flowing?
• Conduct a five-year review of costs directly related to risk management and fraud prevention initiatives. Determine costs directly related to risk management and fraud prevention initiatives. Have they stayed about the same year-over-year or increased? Benchmarking and comparing these costs over defined intervals will shed light on pain points and resource trends.
• Examine your five-year growth plan. Are you working to grow your online digital goods business quickly, conservatively, or not at all? The more aggressive your growth initiatives, the more finely you’ll need to tune your risk and fraud management controls to keep abreast of new fraud technologies and attack profiles.
• Take stock of your current and future resources. Leveraging the findings of your five-year review and growth plan, determine current and anticipated fraud-related costs. Will you need a larger budget to manage more legitimate and fraudulent chargebacks? Can you take the financial hit if a large batch of fraudulent transactions sneaks through? Project your operational budget, what cost efficiencies you’ll need and how dedicated headcount growth will impact your bottom line.
• Compare DIY processes against outsourcing. Explore the implications of continuing to build an in-house fraud prevention team versus outsourcing. In addition to the benefits of lower headcount and reduced operational costs, the best outside vendors monitor fraud patterns across numerous clients, creating a global view of fraud attacks that allows them to adapt risk strategies and quickly implement new, proactive security measures.
Turning to a third-party vendor with the expertise and personnel to manage the growing risk of fraud can shift the operational burden from a cost center to a revenue generator by minimizing fraud and increasing conversion and acceptance.
Navigating the ever-changing online sales world can be both exciting and excruciating. But tackling anticipated challenges head on can facilitate your business’ growth and make the fraud prevention and risk management processes less painful, more efficient and cost effective.