Looking Beyond the Stats to Understand the True Fraud Situation

Analyzing Recent Data: What Fraud Trends Really Mean

Merchants beware: there’s a super-storm of stats, facts and figures coming your way! We predict a chance of rampant hyperbole, followed by a recurring flood of good, solid numbers… followed again by rampant hyperbole.

Every single day, the eCommerce environment is inundated with fear-inducing fraud trends, cringeworthy statistics, and an oversized list of all the unavoidable dangers associated with running an online business. They pop up in our inbox or get parroted ad nauseam by the “armchair experts” who are long on advice… and short on accomplishments.

Tragically, too many merchants simply accept these stats at face value. This causes them to adopt aggressive risk management methods that damage their revenue models so significantly, the relationship between managing risk and revenue becomes a cannibalizing affair.

Fraud is a serious topic, gaining momentum with every technological innovation.

Despite the ever-present threat, context matters; not every statistic should be taken at face value. As the imitable Mark Twain wrote in 1906, “There are three kinds of lies: lies, damned lies, and statistics.”

Let me show you what I mean.

Reading Between the Lines of Recent Fraud Statistics

Looking beyond the headlines, how have criminals been behaving lately, and what impact has that had on merchants’ risk exposure?  Here’s what we know for sure:

However, criminal activity is actually the least of merchants’ concerns. There’s an exponentially deadlier threat to your business’ bottom line – one that is far harder to detect and mitigate: friendly fraud.

Consider the results of cardholder surveys conducted by eConsumer Services and other industry findings:

It’s obvious that merchants are unware of the true source of their risk exposure, as evident by the fact that they’ve taken such an aggressive approach to criminal fraud prevention—even though it fails to yield results.

The reality is that merchants are suffering an increase in exposure each year. Faulty fraud management techniques—coupled with evolving consumer behavior trends and technological innovation—are only adding to this multiple.

New breeds of fraud are capitalizing on the industry’s ignorance and leveraging current loopholes, while merchants remain focused on traditional detection methods that are proving to be more effective at the bank or issuer level.

Fraud filter technology has come a long way in criminal fraud detection. Thanks to the enhanced collaboration of issuers and the card networks, the majority of stolen card fraud is intercepted before the cardholder is subjected to transaction settlements. But even with this side of the equation working overtime to proactively resolve this type of traditional fraud, merchants are not in the clear.

Friendly fraud is growing at a relentless rate, with no reduction foreshadowed.

• Fraud is constantly evolving. Criminals and unethical consumers identify new fraud tactics every day—far quicker than mitigation technology can be developed.
• Merchants are unable to recognize emerging tactics. The 2016 LexisNexis® Risk Solutions True Cost of Fraud study revealed merchants think just 28% of total fraud attacks are cases of friendly fraud. In reality, Chargebacks911 has determined friendly fraud accounts for as much as 86% of chargebacks. That’s a threefold difference between perception and reality.
• Merchants are tempted to use old technologies to solve new problems. Fraud filters can successfully detect and prevent credit card fraud. However, they are not designed to manage other modern threats—like affiliate fraud or friendly fraud. Using these tools in a way they weren’t intended will simply increase false positives without mitigating the risk. Like the proverb says, “If all you have is a hammer, everything looks like a nail.”

The face of fraud is changing and will continue to evolve with unchecked behaviors.

It’s not just a merchant’s right to learn the facts behind these figures and understand the underlying issues, it’s their responsibility. Until the industry as a whole is able to better assess true threat sources, merchants must bear the responsibility of extra due diligence.

How Can Merchants Identify and Address the Real Threats?

If merchants only look at part of the picture, they’re not going to be able to form clear and accurate assessments about their overall performance. Merchants need to take a holistic approach to preventing fraud losses and ensuring profitability, or else their efforts will not be successful.

Safeguarding eCommerce profitability involves:

• Identifying criminal fraud threats, implementing appropriate tools to defend against them, and reducing unnecessary costs and revenue loss (think fraud filters, AVS settings and best practice checkout methods).
• Detecting seemingly-minor internal oversights and merchant errors that can expose friendly fraud loopholes.
• Identifying friendly fraudsters and challenging illegitimate chargebacks to recover revenue.
• Improving industry relations and collaboration.
• Optimizing fraud identification technology in accordance with mobile technology and newer data attributes, like device fingerprint.
• Creating and monitoring custom KPIs in order to establish baseline standards (test and control method).

Reducing Payments Risk—It’s Everyone’s Responsibility

Long-term and sustainable results are dependent on collaboration and cooperation.

Comprehensive solutions will ensure profitability for merchants and banks, while protecting consumers from otherwise-inevitable fraud exposure. Each party has a role to play in this regard:

• Merchants: Examine available information and attempt to draw connections between divergent threat sources.
• Banks: Engage in cross-border collaboration efforts and exercise greater due diligence in examining cardholder disputes
• Card Networks: Reexamine industry policies and develop the dynamic strategies that can accommodate evolving realities.
• Cardholders: Adapt to behaviors which are more conducive of online security and which avoid abuse of industry regulation.

We need to make an in-depth, objective, educated analysis that goes beyond the base impression offered by stats to identify the realities of eCommerce. Otherwise, the serious problems hiding behind those impressions will go on unchallenged, hurting everyone involved.

Yes, there IS a super-storm coming.  And for thousands of online merchants, the best way to stay safe is to recognize exactly what the storm is – and just as importantly, what it isn’t.

 

 

Image sources:

Javelin Strategy & Research, FICO, ThreatMetrix, Business Insider, and Business Insider