Weak online fraud prevention practices continue to cost retailers dearly
Not only is this reducing their potential profitability in the UK but in many cases it is holding them back from launching in lucrative overseas markets.
For many merchants – especially those below tier one - their existing fraud prevention systems revolve around internal solutions. These frequently suffer from not only being costly to run because they involve lots of manual checking, but they are unsophisticated enough to stop many fraudulent transactions. On top of this, they also reject plenty of valid transactions.
Carl Clump, chief executive of Retail Decisions, believes the reticence from retailers to implement more advanced automated systems from fraud prevention specialists is down to internal parties exerting pressure on the decision-makers.
“IT will often say, ‘we can do this, let us have a chance to do it’. There are also some retailers who rely on MasterCard SecureCode or Verified by Visa but these don’t prevent fraud, they just transfer liability,” he explains.
In a tough economic climate, Clump is puzzled by the decision of many retailers to continue to use unsophisticated fraud prevention strategies because the business case for implementing a more advanced solution from an external party can be very compelling.
He reckons that fraud can be reduced by 50 per cent down to a typical 0.3 per cent of transactions, which can increase online revenues by 25 per cent and reduce the cost of manual interventions (to investigate suspicious trades) by 40 per cent.
These numbers are driven by the combination of reducing fraudulent transactions and cutting the number of valid transactions that are rejected. The latter (called ‘false positives’ in the industry but referred to as the ‘customer insult rate’ by Clump) can be quite shocking in magnitude.
Typically in-house fraud systems will reject eight per cent of UK transactions even though the average fraud rate is 1-2 per cent of all transactions. “So perhaps retailers are rejecting six per cent of all good transactions and no retailer can afford to do this,” says Clump.
The situation is even worse for international transactions as the rejection rate is an enormous 13 per cent. Some US-based online retailers are so draconian in their attitude to transactions from overseas customers that they will veto all non-domestic purchases.
“We reckon retailers are good at stopping fraud but what about denied [good] transactions. With the right fraud prevention products in place then there will be an increase in sales, reduced manual costs, and fraud will go down to below one per cent,” he suggests.
What Retail Decisions and other specialists offer are products that encompass a variety of fraud prevention components. These begin with basic tests like: checking cards have been lost or stolen; checking international ‘hot lists’; undertaking various velocity checks including monitoring excessive card usage and unusually large-value purchases over specific timeframes; and geographic feasibility checking for card usage in distant locations that would be impossible within certain timeframes.
These checks are typically run alongside a series of progressively complex tests that are more proprietary to the individual provider. In the case of Retail Decisions, its ReD Shield product undertakes an analysis of a retailer’s transactions against a history of its trades that helps it build up detailed knowledge and intelligence.“When we screen transactions we might say. ‘Yes it is a good transaction’, but there are suspicious elements and so we put it in the database,” says Clump.
Because specialist providers like Retail Decisions work with a variety of retailers they are able to utilise the trends observed in other merchants’ transactions and employ this knowledge across all their clients. This is particularly useful when retailers move into new markets as they will at the point of entry have little knowledge or intelligence on the fraud trends in that market.
Although cross-border transactions can be 10 times more likely to be fraudulent Clump says a sophisticated fraud prevention strategy will ensure retailers can confidently move into new overseas markets.
International expansion is a strong trend at the moment as UK retailers recognise the benefits that can be gained from leveraging their domestic infrastructure into overseas markets. Such a move is dramatically cheaper than opening-up a stores-based operation in a new territory. But because of the likelihood of being hit by a wave of fraud many UK merchants are reluctant to expand overseas.
A failure to take the plunge is regarded as a mistake by Clump who says merchants can profitability enter new markets by employing the same fraud prevention solutions they operate in their domestic market but complimented by additional checks such as IP identification and PC fingerprinting.
For small retailers with low volumes of transactions Clump says the recommenced route for better fraud prevention is to probably take a solution from their Payment Service Provider (PSP) that will aggregate the transactions from a number of different merchants.
The ability to pool knowledge from a number of clients adds greatly to the ability of any fraud prevention provider to screen out dodgy transactions and identify trends. Among the trends spotted over the last 12 months by Retail Decisions are: the shift by fraudsters to use fast overnight deliveries; the increased level of fraud on virtual products like avatars that can be sold on for cash; the high proportion of size 32 jeans and size 10 shoes being bought fraudulently; and the high demand for plasma screens by crooks.
Although Clump is too experienced to believe that online fraud can be entirely eradicated, and that it is possible to be one step ahead of the fraudsters, he does believe that with sufficiently sophisticated fraud prevention systems it is possible for retailers to be only half a step behind them.
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