Small business owners often say they need to focus on growth and don’t have time to invest in fraud prevention. The reality is that when a business has its fraud prevention strategy handled, that frees up time to focus on growth without losing money to fraud. When business leaders don’t recognize that connection, they can get into trouble and face painful consequences.
For ecommerce companies, fraud is always a concern – even more so since the pandemic. Almost nine in 10 (89%) businesses surveyed in the Worldpay from FIS® Global Payment Risk Mitigation Report lost revenue to payment fraud in 2020. Statista reports that 75% of ecommerce businesses worldwide saw an increase in fraud attempts in 2021 compared to fraud attempts before the pandemic’s onset.
Small and mid-size businesses lost 2.7% of ecommerce revenue to payment fraud globally in 2022, and 2.8% of ecommerce revenue was lost to payment fraud from domestic orders, according to Verifi’s 2023 Global Payments and Fraud Report.
In light of the increasing frequency and financial impact of ecommerce fraud, the ecommerce fraud detection and prevention market is forecast by Statista to grow to nearly $70 billion by 2025.
It’s hard to focus on growth when your company is losing revenue.
That means companies need to be more vigilant about fraud prevention. Unfortunately, we often don’t hear from small and mid-size businesses until they have a fraud problem that needs urgent attention.
The methods of payment fraud are almost as diverse as the types of online businesses they target:
Phishing scams. Deceit goes high tech with phishing, the practice of criminals lying to victims in a text message, in an e-mail or over the phone and posing as a figure of authority to get the victims' personal data.
Account takeover (ATO) fraud. A type of CNP fraud, ATO fraud, is one of the fastest-growing fraud risks in the ecommerce industry. ATO fraud happens when fraudsters purchase stolen customer data on the dark web and use it to make fraudulent purchases.
Card testing. Fraudsters test stolen credit card numbers with small, incremental online purchases to see if their stolen card numbers are valid, to match the numbers to their card verification values (which fraudsters often can't obtain along with the card number), and to try to get an idea of what the card's credit limit and purchasing power may be.
Triangulation fraud. Triangulation fraud happens when an innocent customer makes a purchase on a third-party marketplace, except the item they receive was fraudulently purchased from another retailer’s website.
Chargeback fraud. Fraudsters intentionally file fraudulent chargebacks with the goal of keeping the product or service they ordered while also receiving a refund of the full transaction amount.
As companies grow, they may see more policy abuse, such as wardrobing and other types of return fraud.
Ecommerce businesses may also assume their online store is covered by strict fraud filters and rules. That can lead to an even more concerning issue.
False declines — sometimes called “false positives” — happen when a legitimate order is declined because it appears to be fraudulent. And unfortunately for customers and businesses, they’re pretty common. Digital River estimates that as many as seven in 10 transactions rejected by businesses may be false declines.
What causes a false decline? Every online transaction must pass through several gateways before it’s approved, with filters at each step configured to spot the indicators of fraud. Sometimes, one of these filters will “catch” and block an entirely legitimate transaction. There are two types of declines:
For every $1 in losses due to credit card fraud, merchants lose $13 to false declines. The overall cost of false declines is forecast to reach $429 billion this year, an amount much higher than the actual cost of credit card fraud. fraud.
But that’s not the only cost businesses need to worry about. The reputational cost with customers is also high. Consumers shop with the expectation their transaction will be approved. When it isn’t, they hold the ecommerce company responsible for the rejection.
Our State of Consumer Attitudes on Ecommerce, Fraud & CX 2021 Survey of online shoppers in the United States, Canada, Mexico, Australia and the United Kingdom found that 40% of consumers would forever boycott an ecommerce company over a false decline. When looking at consumers under the age of 40, the percentage of them that would swear off a store over a false decline jumps to 45%.
Such lasting boycotts mean the business isn’t just losing out on one sale — they’re losing out on the lifetime value of that customer. On top of that, 33% of under-40s would complain on social media. Given that so many consumers in that cohort live on social media — and rely on it for reviews of online stores and their products — that 33% can be especially damaging to a store’s reputation and future revenue.
Another consumer expectation when shopping on your site is that they will be protected from fraud. Eighty-five percent of surveyed consumers strongly or moderately agreed that they feel more secure shopping on a site when the fraud prevention and data privacy tools used are clearly stated.
Having a fraud prevention strategy not only protects your business, but it also actually creates opportunities for growth.
First and foremost, ecommerce businesses should think of fraud prevention like a utility — a necessary part of doing business, but not the focus of the business. In fact, having the right fraud prevention strategy and/or partner in place can free a company to pursue new growth opportunities.
Companies may hold off expanding into new regions and markets because of the fear of, or initial experience with, chargebacks. Or they may feel they don’t have a secure-enough grasp of the local ecommerce landscape, like shipping challenges in countries like Australia or GDPR requirements in European countries such as Spain, France, Germany and the United Kingdom. A fraud management partner that has international experience will know the ins and outs of cross-border fraud, for instance, by detecting the use of a VPN.
Fraudsters target companies that sell high-risk products that are easily resold. A business may see expanding the product line into higher-value categories as inviting more attention from fraudsters. Luxury ecommerce businesses process fewer transactions, so the opportunity to identify and screen for fraudulent behavior is much trickier. A fraud management partner with expertise in those categories will already have proven methods of detecting and combatting high-value product fraud.
Younger shoppers like those in Gen Z are hungry for alternate payment methods when buying online, like digital wallets, QR codes and especially Buy Now Pay Later (BNPL). For instance, BNPL is driving identity theft claims as fraudsters use stolen consumer data to open BNPL accounts and make purchases. Businesses who offer alternate payment methods will need a fraud program advanced enough to prevent each new type of fraud as it emerges.
No matter which avenues for growth an ecommerce business is pursuing, it is likely there will be the potential for fraud. The important thing to know is that fraud prevention experts can mitigate the risk so business growth isn’t impacted.
The key to protecting your online store from ecommerce fraud is taking steps to prevent it in the first place. Fraud prevention strategies fall on a spectrum from most to least rigorous, and from most to least impactful on the customer experience. Your choice of strategy should align with your business growth objectives.
For ecommerce businesses looking to expand into industries or markets where there’s a higher fraud risk, the approach of reviewing every order offers the highest level of protection for the business but can negatively impact the customer experience.
Secondary fraud review is just that: a team of individuals reviewing each transaction (or a selection of transactions) to detect fraud. This can be done in-house through a fraud-review team that analyzes orders, or through a third party, where the business sends orders that seem “iffy” to a vendor for them to analyze.
On one hand, people tend to be better at understanding context than automated fraud filters are. Trained fraud experts can look at each situation individually instead of blindly adhering to preset rules. On the other hand, secondary reviews can be very time- and resource-intensive. Even the best secondary reviewer can’t work as quickly as a computer program, so customers may have to wait slightly longer to be approved for their orders and that will impact their opinion of your store.
Outsourcing your secondary fraud review may solve these issues. ClearSale’s advanced technology quickly runs every incoming transaction through our proprietary statistical model to give each transaction a fraud score. If the fraud score identifies that the order is legitimate, we instantly approve the order.
If the fraud score suggests the order might be fraudulent, our secondary review team quickly analyzes the order to validate whether the order is truly fraudulent or whether it can, in fact, be approved.
Customers may visit an ecommerce retailer’s website, a retailer’s app or a PWA on their smartphones. Giving customers more ways to see a business’s products and transact a sale is a recipe for growth. However, this omnichannel ecommerce puts online businesses at risk for omnichannel fraud.
ClearSale offers a multilayered, hybrid approach to fraud prevention to combat sophisticated fraud. It starts with an AI-enabled algorithm that leverages trends, intelligence and data gathered from decades of fighting fraud in the most high-risk regions of the world. Using this technology, we can automatically approve most orders quickly.
Suspicious orders are flagged for contextual secondary reviews performed by our more than 2,000 fraud analysts who have the experience to recognize some of the hardest-to-spot fraud patterns. If necessary, our analysts may reach out to customers, but they do so in a way that demonstrates why consumers can trust your business to protect their information.
We then leverage the data gathered from those contextual reviews to help our system better distinguish valid transactions from fraud. That means our system can more easily recognize “good” transactions as we process more for the client, which increases their approval rates and revenue.
Businesses can pair hybrid fraud prevention with one of ClearSale’s chargeback solutions:
Holidays and sale events offer online stores big opportunities for revenue. First-time shoppers, common during these peaks, may trigger a fraud flag with a big purchase. Velocity analysis will usually raise flags if a shopper has made multiple purchases from the same store in a short period of time. Of course, fraud attempts also increase during sales peaks. The combination of these factors can potentially overwhelm in-house fraud review staff.
When using in-house staff for reviews, the effectiveness is only as good as the expertise of the individual staff members performing the review. And if you have a high turnover of employees, your results with secondary review may be inconsistent. At times of high order volume, it makes sense to augment in-house teams with resources during peak transaction times and when staffing levels are low.
At ClearSale, our fraud prevention resources stay abreast of trends so in-house teams can focus on operations other than fraud. For example, if a large-value transaction comes through and our client needs support, ClearSale’s team conducts reviews, makes phone calls and puts the fraud puzzle together to determine if it’s a valid transaction.
Augmentation has several benefits: It can offer insight and training, it’s a way for companies to leverage an analytics team they don’t have, and it can help upskill internal fraud prevention teams. The ClearSale team shares explanations of the actions taken and walks the in-house team through the steps used to verify a transaction, including phone calls with the customer, machine learning and secondary review.
Any strategy an ecommerce company pursues to grow the business will inevitably intersect with online fraud. Yet, with the right partner, businesses can keep their focus on projects that will contribute to growth and delegate fraud prevention to trusted experts. ClearSale makes that delegation easier with the rigor of our processes and the quality of our experts.