Recap of the Fifth-Annual Operations Summit Event
Last week, Cincinnati welcomed the Fifth-Annual Operations Summit, a great international conference for the omnichannel ecommerce ecosystem.
Event organizers invited me to answer a series of questions, contributing my thoughts to the Preventing Fraud in a Global Ecommerce World panel.
Here is a sampling of our insight and analysis.
Q: What are the current fraud trends that Chargebacks911 has identified?
A: The problem with fraud is that it is evolving and morphing into unmanageable threats. The variety of fraud types is one of the contributors to the industry’s inability to control it.
Just as the internet and ecommerce have evolved, fraud has changed too. There are constantly new types of fraud that we’ve never known before.
Q: Is friendly fraud less of a problem outside the US?
A: This depends upon the region. The international landscape for fraud is very different and dependent upon cardholder adoption. We have identified the UK and Germany as countries where friendly fraud is outreaching the US in terms of growth rates. Part of this reason is due to the fact that in these regions, the chargeback issue is still relatively new and rules are blurred between good customer service and friendly fraud attempts. Traditionally, the customer is always right and the majority of transactions do not stem from online activity.
Online retailers are leveraging these markets, and in the wake of increasing online transaction growth, the side effect of chargebacks is mounting. Increased credit card use provides issuers new revenue vehicles, which has invited competition among banks. Unfortunately, we are seeing much of Europe follow in the same footsteps as the US. Banks are promoting use by advertising zero liability—and inadvertently advocating friendly fraud.
That being said, friendly fraud is a growing problem universally. The rate of chargebacks has increased 20% in the last year alone. Of that, probably 80% is attributed to friendly fraud.
The reason friendly fraud is increasing is because most merchants haven’t been able to implement a counter measure. If you think about it, a single friendly fraud chargeback is technically equivalent to 1.5 legitimate chargebacks. Cardholders who successfully complete a friendly fraud chargeback will file another within the next 90 days.
Since merchants aren’t providing a consequence to friendly fraud, they are training this new behavior. And it is a vicious cycle because if a single chargeback is actually worth 1.5, the rate is growing exponentially.
Q: What are the most effective strategies for reducing false positives?
A: Unfortunately, when merchants rely solely on automated solutions like fraud filters to identify fraud, false positives are unavoidable. The rate of false positives reported by some merchants is in excess of 70%. What merchants really need to do is implement a manual review process.
Let’s look at a hypothetical example of how a fraud filter could lead to a false positive. A customer wants to make a purchase. The cardholder’s zip code is from Florida, but the purchase is being conducted from an IP address in New York. A fraud filter would likely flag this as suspicious and decline the transaction.
However, things are rarely so black-and-white.
Take that hypothetical example and add a manual review. You check the customer’s Facebook and notice that she is on vacation in New York. The item she ordered in shipping to her home address in Florida.
With automated fraud filters, that would have been a lost sale and a potentially aggravated customer who will be taking her business elsewhere in the future. Thanks to manual review, however, we can verify that it is actually a legitimate purchase.
Without manual reviews, the only options left to merchants are to simply accept the realities of false positives or approve every transaction. With both of those options, the merchant will negatively impact the bottom line with either rejected transactions or excessive chargebacks.
Q: Which geographic region presents the greatest risk for credit card fraud?
A: Credit card fraud has always been a problem in West, Central and Southern Africa. Besides this region, France, Mexico and Central America have also seen some problems with credit card fraud as of late.
Q: What is the best way to profile fraud?
A: We believe you can get a lot more information by analyzing your chargebacks than you can by analyzing the good sales. Like in most things, you get more rich information by learning from your mistakes.
This is human nature and the reason why businesses grow—because every business learns from trial and error.
We encourage everyone to analyze their chargebacks. What is causing them? How can you learn from your mistakes? What do your mistakes tell you about how you can run your business better?
These are things that we are experts at.
Q: What fraud prevention tools do you recommend?
A: There is a lot of good fraud filter technology out there, like CyberSource and ACI. Your best bet is to have a fraud filter, but layer this with other methods such as manual review policies and internal analysis. Constantly refine and change to keep pace with developing and trending fraud threats.
It was an honor for Chargebacks911 to be involved with the Operations Summit and we look forward to attending again next year.
