Fraud Risk: What's the Global Impact?

Enterprising online retailers are always looking for the next big growth opportunity, and the global marketplace just may be it: Targeting international customers can grow sales by as much as 15%. But expanding into these new markets isn’t without its risks, and one of the biggest is card-not-present (CNP) fraud.

CNP transactions themselves are legitimate, occurring when the cardholder doesn’t physically present a credit card to a merchant — most often during online or telephone sales. But with CNP fraud, people take advantage of not having to present a physical card by obtaining credit card details through illicit means like the dark net, skimming or hacking and then using that data to place fraudulent orders.

So while selling internationally opens e-commerce retailers up to a world of opportunities, it also subjects them to new threats to their profits. Going global requires merchants to become familiar with new business rules and regulations, payment method preferences, language and culture barriers, and more. Failing to do so simply puts online retailers at increased risk of being taken advantage of by fraudsters. So to reap the benefits of global expansion, smart merchants must educate themselves on the varying fraud risks by country and the steps they can take to mitigate them.

Why CNP Fraud Is on the Rise

Merchants had hoped that the adoption of EMV, or chip, technology in credit cards would help reduce the risk of retail fraud, but the results haven’t been as expected. While this technology has been effective in lowering in-person fraud, it’s caused fraudsters to turn their sights on more vulnerable targets — like CNP transactions placed online or over the phone. Without having that card in hand, online merchants are putting their trust and financial faith in a customer who might not have the most honest of intentions. This new focus on CNP fraud is predicted to result in an estimated $14.8 billion in fraudulent sales in 2022 alone and $71 billion in global losses during the next five years.

Other reasons for the dramatic rise in CNP fraud include:

- The increasing frequency and magnitude of data breaches and subsequent sale of personal data on the dark web;

- Fraudsters taking advantage of lax identification requirements for the pickup of click-and-collect orders at brick-and-mortar stores;

- The delayed rollout of 3-D Secure 2.0, which would shift the fraud burden from the retailer to the card issuer
But these aren’t the only reasons CNP is on the rise for global merchants.

Why Going Global Increases Your CNP Fraud Risk

One of the biggest drivers of CNP fraud risk is the “fraud triangle”: each country’s unique interaction of personal circumstances, economic settings and societal expectations that determine the fraud rate. Certain countries, like those listed below, often have a higher incidence of CNP fraud simply due to pressure and opportunity.

• - Indonesia: This country has such trouble with CNP fraud that many consumers use any payment method other than credit cards.
• - South Africa: CNP fraud, which contributed 42% of the country’s 2014 total credit card gross fraud losses, continues to be a growing concern.
• - Brazil: Brazilian credit card fraud levels are among the highest in the world, and 49% of Brazilian cardholders experienced card fraud in the past five years (compared with 30% globally).
• - Romania: Cybercriminals steal an estimated $1 billion yearly just from Americans and their businesses.
• - Europe: CNP fraud accounted for 66% of total fraud losses in 2013, compared with 60% in 2012.
• - United Kingdom: Due to the rapid growth of e-commerce and the reduced use of 3-D Secure because of cardholder friction, CNP fraud accounted for 69% of total card fraud in 2014.
• - Canada: CNP fraud increased by 205% from December 2010 to December 2015; it accounted for 76% of all fraud in 2015.
• - Australia: In 2014, CNP fraud made up 77% of credit card fraud.

But these countries aren’t the only ones experiencing an increased CNP fraud risk. The 2015 Merchant Risk Council Global Fraud Survey reports the current average global fraud rate to be 0.53%, with these countries also facing significant CNP fraud:

• United States — 0.72%
• Belgium — 0.71%
• France — 0.65%
• Germany — 0.58%

It’s this prevalence of CNP fraud that’s making merchants nervous — and rightfully so. Merchants worldwide have reacted by automatically declining up to 18% of foreign e-commerce transactions, thinking this is the best way to minimize fraud exposure. But rejecting these transactions without verifying their legitimacy is causing other problems, like frustrated customers and lost profits.

What Retailers Can Do to Thwart International Fraudsters

By leveraging the opportunity presented by the global marketplace, e-commerce merchants can experience rapid growth. But they must also remember that there are fraudsters lurking behind their keyboards, ready to take advantage of unprotected retailers. To safeguard profits and ensure an order’s legitimacy, online retailers should implement strategies like:

• Authenticating online transactions.
• While traditional methods of authenticating online transactions — like using card verification numbers and blacklists — are helpful, merchants must take a more robust approach to securing transactions. This includes using AVS, social networking device fingerprinting and customer behavior analysis.
• Inspecting IP addresses.
• These addresses tell merchants exactly where a customer was located when an order was placed. IP addresses from high-risk countries, or a disconnect between the IP and shipping address, may warrant a manual review of the transaction.
• Understanding each country’s risk factors.
• Not every transaction in a high-risk country will be fraudulent, and making sweeping generalizations can cause a merchant to reject a disproportionate number of legitimate transactions.

A robust fraud management solution is more important than ever to retailers looking to grow their international customer base. While some online merchants believe fraud protection to be too expensive, it’s not nearly as costly as the results from a fraud attack. To take full advantage of the international market, e-commerce retailers must implement cutting-edge fraud protection strategies that will help them stop fraudsters in their tracks while allowing valid international purchases. Contact a ClearSale analyst today to learn how our Fraud Protection Solution can simplify your transition into the global marketplace and make it safer and more profitable.