I see more and more eCommerce merchants struggle these days to maintain the right balance between effective fraud mitigation and an optimized customer experience.
The motto of our age might as well be “I want what I want, and I want it now.” Unfortunately, the need to make online transactions as smooth and effortless as possible often clashes with merchants’ perceived needs in regard to protecting themselves from criminal fraud.
When I say “perceived” needs, I’m not suggesting that criminal fraud doesn’t exist (although, as I have often said, it’s far from being the largest fraud threat). Part of the challenge here, though, stems from merchants viewing the issue as a no-win scenario. Fraud and chargebacks cost them revenue, but any attempts at additional verification will lead to cart abandonment, which also costs them revenue.
Most merchants are hesitant to do anything that would impede a legitimate customer from making a purchase. You may feel the best option is to keep the checkout process friction-free, then raise the threshold for fraud red flags. Put another way, you reject more potentially-legitimate transactions, hoping to avoid what might be incidents of fraud.
It seems to make sense, but is it truly the most effective solution? Before you say “yes,” let’s take a look at what’s really happening here.
False Positives: A Bigger Threat Than You Think
Merchants perceive that sacrificing a few legitimate sales is a small price compared to the huge losses coming from fraud. It’s hard to say where they got that idea; research shows that less than a third—29%—of merchants even bother to track their false positives.
Again, we have a problem of perception. The harsh reality is that false positives—legitimate transactions that were declined for fear of fraud—overall cost merchants a mind-boggling $118 billion every year. That’s roughly 20% of total US eCommerce spending in 2019. But here’s the real shock: while $118 billion is an almost unbelievable figure, reports show merchants spend 10 times that much trying to prevent chargeback fraud.
Still, even faced with these facts, you might feel you have no other choice. As it is, some 70% of carts are abandoned before a purchase, for one reason or another. Why on earth would you do anything that might cause friction during the checkout process and possibly lose even more transactions due to customer frustration?
I’m glad you asked.
The Myth of “All-or-Nothing” Friction
No one likes the idea of slowing down a happily-shopping customer. That said, friction is not inherently and totally bad. In some situations, friction is the lesser of two evils; under other circumstances, the right amount of friction can work to your advantage. When you are experiencing only enough friction to help, it’s considered positive friction.
By the same token, negative friction does more harm than good. Think of brakes on a bicycle: applying too much friction could lead to a hard stop…or in the case of eCommerce, cart abandonment. That’s not what we want. So for our purposes, negative friction is any unnecessary obstacle that has more impact on customers than it does on fraud.
Positive friction is a tradeoff that works in our favor. For the eCommerce checkout experience, it’s a slight amount of friction—acceptable to customers, if they even notice it at all—in exchange for the most useful information for authenticating the user’s identity.
The friction stems from running a battery of simple checks to validate the user in near-real time. And in keeping with our idea of creating as little friction as possible, the ideal system would check only the minimum number of items necessary to be reasonably certain that the buyer is legit.
But that presents a problem: every individual user is different. A single “catch-all” set of checks that could accurately validate each customer would have to be based on the lowest common denominator. Essentially, you’d have to treat any and every transaction as a full-fledged fraud threat…and that’s what we’re trying to avoid.
The answer is to take positive friction to the next level: dynamic friction.
Dynamic Friction: Use Only What You Need
The idea of dynamic friction is relatively new to eCommerce. As such, the definition is still a little abstract.
Dynamic friction isn’t software or a platform, so much as a model. The basic concept is to weigh the impact of specific friction points, identifying which ones offer the highest amount of fraud protection while creating the least amount of negative friction. This will eliminate unproductive friction points while optimizing productive ones.
The process of authenticating an eCommerce customer is empirical, with multiple data bits that build on each other. Finding and optimizing the most efficient friction points is good, but you’re still going through every friction-creating step of the verification mechanism for each transaction. Your regular customers are bound to be frustrated by that.
A dynamic friction system, however, bases authentication on the individual user…and it learns as it goes. By archiving and analyzing information from previous interactions, it can narrow down the process to only the checks specifically needed in each instance. Proven-trustworthy users—such as those who have set up customer accounts with your store—are able to bypass additional verification steps. First-time buyers with an unclear credit history, on the other hand, may be required to go through additional layers.
Even then, a dynamic system will only check until it gathers enough information to logically assess risk and make a recommendation. Just how many hoops the user has to jump through depends on the user. In the case of previous customers, past transaction data may be enough for informed decisioning. In other cases, secondary forms of identification may be required. The idea here is to make the most relevant checks first, and only proceed to additional questions if necessary.
In simple terms, your best customers are subjected to the least amount of friction necessary for secure validation. Better yet, most of the friction points are backend-facing, meaning the legit customers seldom if ever actually encounter any obstacles. That’s the beauty of deploying dynamic friction: you make life hard for fraudsters, while legitimate customers proceed with minimal friction, blissfully unaware of the fraud detection mechanisms at play.
Dynamic friction isn’t a silver bullet that will end fraud, but it is one more powerful weapon in the fight. To take advantage of it, however, you need to be open to new ideas, and be willing to change with the emergence of new technology.
It’s time to let go of old concepts and embracing new opportunities. In other words, it’s time to be dynamic.
