Making the most of e-commerce fraud prevention

Payment fraud continues to be a pressing challenge around the world. Many merchants experienced a rise in payment fraud, compounding unprecedented logistical, safety and regulatory challenges due to the pandemic. As commerce shifted from physical stores to online and away from cash and physical cards, fraudsters stepped in to take advantage of new routines and distracted consumers.

Fraud prevention requires urgent attention from every business due to the significant impacts it can have on a merchant’s bottom line. Legacy fraud detection and prevention methods are proving insufficient to match the advanced technical prowess of today’s fraudsters. Protecting your revenue requires best practices, flexible tools that leverage advanced technologies like multi-factor authentication and machine learning and automated chargeback management solutions.

The good news is that e-commerce retailers have tools at their disposal to fight back. Merchants are looking to gain more control over their revenue, and they’re finding solutions in the form of dynamic end-to-end payment protection that extends throughout the consumer payment lifecycle.

Here, we’ll look at the payment fraud challenges merchants faced, outline existing payment fraud detection solutions and provide a roadmap with best practices and key takeaways for merchants looking to protect their revenue today and in the future.

The costly state of payment fraud

Business owners and managers who accept consumer payments already understand the destructive power of fraud, especially in a card-not-present environment. The most recent statistics confirm what you already know: payment fraud is real and represents a growing threat to your bottom line.

Almost nine in 10 (89%) of merchants surveyed in the Worldpay Global Payment Risk Mitigation Report lost revenue to payment fraud in 2020. The breadth of payment fraud’s impact is compounded by its depth – nearly 38% of merchants lost more than 6% of their revenue to payment fraud. Payment fraud can be devastating for low-margin businesses – an additional 51% of merchants reported losing between 1% and 5% of revenues in 2020.

The operational costs of defending against payment fraud pose significant challenges. Over half (52%) of merchants surveyed report that they spend between 1% and 5% of annual profits on fraud detection and prevention efforts. Though a real headwind against revenue, that’s the better-performing half of merchants. Fraud imposed even deeper costs on 36% of merchants spending between 6% and 10% of profits fighting fraud. At the most challenging end, 8% of merchants report fraud prevention efforts accounting for 11% or more of profits.

The direct costs of e-commerce fraud, including losses and the costs of prevention, motivates merchants to seek solutions that help them gain better control of their revenues.

Customer experience is the other primary driver behind efforts to reduce e-commerce payment fraud. Merchants who are building for a successful future are placing increasing emphasis on customer experience. Merchant investments in fraud detection do more than help protect revenue from fraudsters – they help protect their investments in the customer experience.

Consumers are understandably concerned about fraud, and merchants know this. 82% of merchants surveyed in the report believe their customers are significantly concerned about fraud. Great effort goes into fraud prevention because it’s such a poor experience for the consumer, even when fraud cases are ultimately resolved to prevent consumer losses.

The singular focus on e-commerce fraud prevention alone can be harmful to the customer experience. Fraud prevention is often approached as a matter of absolutes. We expect our locks to protect us and our alarms to warn us of intruders. No exceptions. It’s tempting to consider security measures that combat fraud in a similar way. We want to protect our business so that no fraud takes place.

Yet absolutist approaches aren’t effective for merchants in today’s threat environments. You want to keep out fraudulent transactions, but it is sometimes more important not to impact good transactions with overly strict fraud prevention measures, known as false positives. False positives can be more costly than fraud in the long run due to loss of revenue combined with the long-term customer value implications of producing poor experiences for trusted customers. Balancing fraud prevention with efforts to reduce impacts on customer experience is key to successful fraud mitigation solutions.

Moving beyond legacy solutions for fraud detection

Legacy fraud detection solutions are increasingly insufficient in today’s more advanced fraud-threat environment. Basic fraud filters such as address verification, CVV matching and other legacy fraud-fighting tools have proved effective in the past, but the solutions don’t scale and can’t withstand increasingly sophisticated fraudsters.

Legacy fraud detection solutions are effective in mitigating basic fraud events. However, investing in more robust fraud detection and prevention solutions, such as those that use advanced machine learning technology, will help mitigate sophisticated fraud events with greater accuracy. Adaptive machine learning algorithms hold the promise of being able to manage incredible amounts of diverse and complex digital data. These solutions scaled with the rise of e-commerce during the pandemic and offer great promise for a safer future of commerce.

Our survey found more than two-thirds of merchants (69%) are using machine learning models as part of their fraud management solutions, including 23% using primarily machine-based models, while 46% use a hybrid mix of machine learning and legacy rule-based filters. That’s good news for that majority while being a matter of concern for the merchants still reliant on legacy fraud prevention strategies.

To learn more about the landscape of fraud merchants face today and how they’re fighting back with dynamic end-to-end payment protection solutions, contact us today. We offer comprehensive fraud prevention solutions for a variety of business types and industries, including e-commerce operations of every size. Our dedicated teams of payment experts will work with you to craft the right balance of people, best practices and advanced technologies to protect what you’ve worked so hard to earn.