Much has changed in just the past 10 years. Technologies that seemed fanciful or downright impossible in 2009 are now commonplace. Whole new ways of communicating, working, and socializing are part of our everyday experiences.
One of the most seismic and irreversible shifts of the last decade has taken place in the retail sector. In the first quarter of 2010, e-commerce sales accounted for around 4% of total retail sales (according to the U.S. Census Bureau). In the first quarter of 2019, e-commerce sales represented over 10% of total retail sales, exceeding 11% by the end of the third quarter. And this decade-long growth trend shows no signs of slowing.
As consumers migrate from shopping malls to mobile apps, from storefronts to websites, an alarming spike in credit card fraud has come along for the ride.
The irony is that physical fraud-prevention measures, like EMV cards in the United States, have taken a bite out of fraud in situations where the card is present. So, the fraudsters have simply taken their efforts online, and with great success. In just one year, between 2015 and 2016, card-not-present fraud climbed 33%.
That same year, while the cost of card-present fraud declined from $3.68 billion to $2.91 billion in the U.S., the cost of card-not-present fraud skyrocketed from $3.4 billion to $4.57 billion. Indeed, an expert told the Washington Post, “over 80 percent of credit cards currently in people’s wallets have already been compromised.”
Fraud will be an inevitable consequence of online retail in the 2020s, affecting large and small businesses equally. In this environment, e-commerce merchants can’t afford to take transactions at face value. Doing so risks not only the value of the stolen merchandise but hefty chargeback fees – not to mention a loss of customer trust.
Need more convincing? Every dollar of fraud can cost merchants nearly three times that amount.
What’s the best way to protect your online store from card-not-present fraud and reduce chargeback fees? In this guide, we’ll explore your fraud protection options and explain why a fraud managed services solution may be your best choice.
Fraud Protection Options in 2020
There is no single “standard” approach to fraud protection. Different solutions draw on techniques ranging from simple device fingerprinting to comprehensive, 360-degree analysis using a combination of advanced machine learning and human expertise.
Five Types of Fraud Protection
Fraud protection solutions can be located along two axes. One axis represents the extent to which a solution decides to approve or decline a transaction – from not at all to making a final call. The second axis represents the amount of non-human automation built into the solution.
From this dual-axis perspective, we can break fraud protection solutions into five broad categories:
- Fraud tools, such as IP geolocation, email checking, external data sources, device fingerprinting, and AVS check, provide insights into transactions. Still, they do not themselves make decisions to approve or decline.
- Fully integrated solutions are operation platforms that take on several functions, including screening, rules management, integration with third parties, and case management application. These solutions also do not offer final decisions and require operation by an in-house team.
- Automated managed services solutions make final decisions based on sorting and filters. They automatically reject high-risk orders (including those that may be legitimate).
- Hybrid managed services solutions automatically reject high-risk offers, but make other decisions based on manual review.
- Full managed services solutions combine insights from automatic systems with manual review. They approve safe transactions automatically, but never automatically decline orders.
What Is a Fraud Managed Services Solution?
The last three solutions listed above are managed services. What does that term mean?
“Managed services” generally refers to an outsourced program with a third party that provides a full fraud protection strategy, chargeback management, and a team of experienced experts working on the merchant’s behalf.
It’s important to recognize, however, that not every company operating under the label of managed services offers true managed services. Some providers employ the term to make an incomplete solution sound more comprehensive than it is.
True managed services can be virtually hands-free for the merchant, requiring little input or actions other than setting and adjusting KPIs, such as chargeback rates, analysis time, and approval rates.
The Benefits of Fraud Managed Services
Here are four good reasons to outsource fraud protection:
- Fewer resources needed. Your team can focus on what they do best – serving your customers and growing your business – while the experts handle fraud for you, making fast final decisions on each transaction.
- Comprehensive coverage. A single managed services program can cover all types of transactions, including web, mobile, and telephone sales. (This is especially important as mobile commerce grows by leaps and bounds.)
- One-stop-shopping, 24/7 services. A fraud managed services provider can take on multiple functions 24 hours a day, year-round: supplier, integration, payout settlement, agreement, and customer support.
- Trained expertise. A highly trained team of fraud analysts will maintain an optimal balance among critical fraud KPIs.
Who Should Consider Fraud Managed Services?
The sheer number of choices available for fraud protection makes it difficult to consider every option side-by-side and make an educated decision. Start instead by developing an understanding of your business’s specific fraud protection needs. This will give you the proper context to narrow down your choices and evaluate the options that will meet your requirements.
Here are some business characteristics for which managed services is a good fit:
Customized Fulfillment Times
Handling multiple fulfillment schedules across varying products, customer segments, and countries is complicated enough. When you’re already juggling logistics, finance forecasting, and customer service, fraud management may seem like one task too many.
Fraud managed services can lessen the burden on your team while adjusting your fraud protection strategy to the many variations involved with customized fulfillment times.
Market Share Driven
When growing your company’s market share is paramount, you may have a higher tolerance for risk. With a solid fraud strategy – guided by experienced third-party experts – you can protect your company from large-scale attacks and gain the confidence to make high-risk high-profit decisions.
If your business sells products worth hundreds or thousands of dollars, you’ve got a massive target on your back. Fraudsters love big-ticket items. And since you likely deal in lower transaction volumes with higher prices, one fraudulent order can make a significant dent in your profits.
A fraud managed services provider can help you stop criminals from making off with your most valuable merchandise.
Selling around the world invites complexities such as managing multiple languages and time zones and dealing with tools and data sources in different countries. Fraud managed services can help you keep it all straight.
When sales are light, a full fraud protection team may not fit your budget. Fraud managed services can help you rein in costs by matching the size of the team to your needs in the moment.
Customers are (understandably) impatient and often reluctant to retry their purchases after their payment has been rejected. With each false decline, you risk driving a customer into the hands of your competitor, never to return.
A managed services solution can help you minimize false declines and maximize customer satisfaction.
Low Profit Margin
When your margins are low, no penny can go to waste. A high-quality managed services provider can give you the most “bang for your buck” while protecting against future losses from fraud and chargeback fees.
Why Choose Fraud Managed Services
Fraud managed services differ from other approaches to fraud protection in one crucial aspect: Determining whether the focus is on being proactive rather than reactive. While other solutions seek to mitigate the damage that fraud causes, fraud managed services aim to stop fraud from happening in the first place.
But fraud managed services shine in other ways, as well. Let’s take a deeper dive into fraud managed services and explore why, for many companies, this may be the ideal fraud protection solution.
A Comprehensive, Multilayered Approach
The most effective fraud managed services draw on extensive, insightful data to recognize fraudulent patterns, spot suspicious transactions, and stop them before they’re complete. Decisions are made in real-time, resulting in a seamless experience for customers while transferring the full liability of fraud away from your business.
A Dedicated Team
A fraud managed services team does one thing: fraud protection for your business. Fraud techniques evolve quickly, but a good team moves faster, staying on top of the latest attack methods to keep customers safe. When you know you have a thoroughly trained, highly experienced staff of experts working on your behalf, you can relax and let your in-house team focus on more profitable tasks.
No Need to Establish SOPs
Drafting standard operating procedures (SOPs) for preventing and responding to fraud takes time and money. A managed services solution, on the other hand, will already have SOPs in place, allowing it to get to work immediately protecting your business and your customers.
A Complement to Your Existing Fraud Prevention Teams
A fraud managed services provider can take on everything fraud-related for you. But should you choose to maintain an in-house fraud team as well, a managed services team can work right alongside your people. For example, you could dedicate your team to a target brand, business area, or geographic area, while letting your fraud managed services solution handle the rest.
This can be a boon to bigger companies that prefer to contribute some of their own resources to keeping tabs on fraud. While the outsourced provider brings global fraud expertise, your internal team will deliver insights into your products, your company, and your market.
Indirect Cost Savings
High-quality fraud prevention pays for itself. We have already mentioned the high cost of chargebacks, lost merchandise, and unhappy customers. There are additional savings to consider in terms of money, time, and resources.
A fraud managed services provider can take all the following activities off your company’s plate:
- Reviewing suspect transactions. This will be handled by an outsourced team of experts, freeing up your employees for other tasks.
- Recruiting and training a fraud management team. With their 100% focus on fraud, fraud managed services providers know exactly what to look for in team members, and they understand the best way to get new hires up to speed.
- Managing unpredictable fraud prevention costs. Peaks in orders won’t result in peaks in expenses. You’ll have a level cost structure that will allow you to accurately track the relationship between your fraud management costs and sales volume.
- Making neutral decisions. Sales and internal fraud departments always seem to disagree about how much risk is too much risk. Sales, naturally, likes to go big, while fraud teams tend to advocate prudence. A managed services team can offer an unbiased opinion based on objective data. The result is more approvals of legitimate transactions, fewer approvals of fraudulent transactions, and less strife within your organization.
- Keeping pace with changing sales levels. It can be a headache to try to maintain the optimal level of fraud protection throughout the peaks and valleys of the sales year. A fraud managed services provider will make sure you have just the right amount of protection in place, even during major sales events such as Black Friday and Cyber Monday.
- Alerting you in real-time. A high-quality fraud managed services solution will give you access to an online dashboard where you can monitor transactions every minute of the day. Details about rejected orders will be available on demand.
What to Look for in Fraud Managed Services
No two fraud managed service solutions are the same. As we discussed above, some solutions are entirely automatic, while others employ a human team to make decisions. Some fraud solutions automatically reject high-risk transactions, while some prioritize approving all legitimate orders.
Every business will have different needs for fraud protection, but we believe the best managed services share some common characteristics. When comparing fraud managed services providers, ask the providers (and yourself) these questions:
- Does the solution take a multifaceted approach to fraud detection? Does the service follow a human-based, technology-based, or blended strategy? Computer algorithms have come a long way in their ability to process data and pick out fraud. And with machine learning, computers are getting smarter every day. But there’s still a place for the intuition and expertise of well-trained human beings. The ideal approach is a mix of both, with humans providing a check on the work of the machines. (Read about how this “best of both worlds” approach works at ClearSale.)
- Does the solution integrate with your current fraud protection and shopping cart platforms? You may also need support from the provider for more in-depth integrations. Full back-office automation will save your IT team time and effort implementing and maintaining the solution.
- How comprehensive is the solution? Your fraud protection solution should offer a holistic range of features and support to match your business operations.
- Does the solution rely on good data? Regardless of the channel or use case, the solution should be able to draw on data from a variety of sources. A wide range of merchant data is fuel for a machine learning engine.
- Is the solution easy to understand? You and your team are, after all, online merchants, not experts on artificial intelligence. Your fraud protection dashboard should provide clear explanations behind its decision-making process.
- Is the solution scalable? The whole idea is to increase revenue and grow your online store. Your fraud service should be ready to grow with you, adapting to new payment types, channels, and sales trends.
- Does the provider offer chargeback protection? The best fraud managed services offer 100% reimbursement of any fraud-related chargebacks.
- What does the provider’s history tell you about its stability and commitment to customer service? Look for an established market presence, a proven track record, and many successful long-term client relationships.
- Will the provider customize the solution to your needs? For example, you may be looking to increase market share quickly and are willing to take on some extra risk. Quality solutions will target prices and KPIs to meet your requirements.
- Will the solution “learn” from you? With each transaction, a machine-learning system gains valuable information it can use to improve its capabilities and accuracy. The longer you stay with a solution, the better it will get. (Automatic declines, on the other hand, yield no useful data.)
Is Fraud Managed Services Right for Your Online Store?
We believe the managed services model is the most comprehensive, cost-effective, and efficient strategy for reducing or even eliminating the damaging costs of card-not-present fraud to e-commerce merchants. But it may not be the right approach for every company.
The best way to make an informed decision is to learn as much as you can about fraud protection, including more about fraud managed services. We, of course, would be happy to talk about it with you. Or, you can find out everything you need to know with our comprehensive ebook on fraud managed services.