Why a Zero-Fraud Approach Problem Won’t Work
You may see some fraud prevention companies talk about eliminating fraud from your ecommerce business. It’s a lofty goal and one to be wary of. Any company with zero fraud may in fact have a bigger problem that can threaten their bottom line. That’s not to say you should open the floodgates to fraudsters. The best fraud prevention strategy involves a balance between fighting fraud attacks and maintaining a healthy approval rate.
Unfortunately, Fraud Is Here to Stay
Ecommerce traffic exploded during the pandemic, primarily because it provided the only way for consumers to shop. It’s no surprise that fraud incidents rose as well. Fraudsters saw the opportunity to hone their skills and take advantage of novice online consumers who could be easily fooled into a variety of schemes.
While ecommerce growth has stabilized to some degree, the same can’t be said for fraud attempts. And the cost to consumers and businesses is increasing rapidly. In the first six months of 2022, Americans lost $3.56 billion to online fraud, which is 50% more than during the same time period in 2021. Experts project that ecommerce fraud will cost companies more than $48 billion globally in 2023.
A number of factors are contributing to this trend. One of the biggest contributors is a marked increase in data hacks.
Today’s fraudsters are tech savvy
Fraudsters have gotten clever. They understand that data is the key to perpetrating fraud, which has led to an increase in cybersecurity attacks. A Verizon Data Breach Investigations Report highlighted a whopping 241 confirmed retail data breaches in 2021, giving criminals access to 1.1 billion personal records.
Stolen data from those hacks was sold on the dark web and used by fraudsters to commit account takeovers (ATOs), where criminals assume control of consumers’ bank and credit card accounts. By changing credentials and address information, they can make virtually any purchases undetected. In 2021, every fifth login attempt was related to ATO fraud.
Aside from ATO fraud, criminals have become experts at card-not-present fraud, chargeback fraud, friendly fraud, and a host of other tactics that cost online businesses big dollars.
And that’s why the promise of “zero fraud” is so appealing. Why deal with any fraud at all when you can eliminate it altogether? But it’s not that easy.
What Happens When Businesses Try to Get to “Zero Fraud”
So, you want “zero fraud”? As the saying goes, be careful what you ask for. That goal can get your business into real trouble. Here’s why.
Denying everything suspicious can wreak havoc
Ecommerce companies often lean on solutions that basically employ a collection of fraud filters – the set of rules that are intended to prevent potentially fraudulent orders from processing in your store. Fraud filters aren’t inherently bad. In fact, there is a definite need to use fraud filters to make sure customers are providing the most accurate and complete information at the time of purchase so your fraud prevention tactics are most effective. HOWEVER, fraud filters can present issues.
Too many fraud filters (a common mistake) can create a layering effect where they end up cancelling each other out. Another issue is that fraud filters don’t account for reasonable human behavior and can mistake a perfectly good order for fraud. For example:
- Mismatch filters won’t approve an order that is being sent to another person as a gift.
- Velocity filters might decline a customer sending the same product to their whole family.
- Purchase threshold filters will consider large holiday-related purchases suspicious.
Without context, fraud filters can increase false declines, which are more costly than fraud.
Strict rules can lead to false declines and reputation management issues
False declines have become an issue within the industry. In some regions, such as Latin America, false declines are as big an issue as fraud – and both are costly. False declines are expected to reach a total cost to businesses of about $230 billion by the end of 2022. And that’s not where it ends.
A reputation for false declines does nothing good for your brand image. Our original research has shown year after year that customers expect their purchases to be approved (especially millennials and Gen Z customers). When declined, about 40% of consumers simply won’t shop with your company again, and 34% will take their grievances to social media. We’ve all seen the snowball effect of one consumer posting a TikTok or Facebook post about a bad experience where other consumers pile on. The damage can be significant.
Despite all the efforts companies put forth to eliminate fraud, there’s a reality that every ecommerce business has to face: There’s no such thing as “zero fraud.”
Fraud filters aren’t perfect
Regardless of what any company promises, there will always be an element of fraud. Why? Because in the same way fraud filters can’t contextualize for good transactions, they also won’t identify every bad transaction. For example, a fraud filter can’t identify ATO fraud — it will look like a valid order.
A better goal for companies is to identify and prevent as much fraud as possible. At the same time, they need to focus on developing trust among their consumers.
“At ClearSale, we generate, create, and nurture trust. The best we can do to enhance trust is deliver a frictionless process. Our process only applies contextual review to the 2%-3% of orders that need to be looked at. By helping companies identify where they need to apply the right tools, we can decrease friction and increase trust.”
Sarah Elizabeth, ClearSale Senior Director, Growth Strategy
Focus on Prevention & Trust
Your customers rely on you to protect them from fraud. They see fraud prevention as a business responsibility. So much so, our research revealed that 82% of consumers stop shopping on a site that allowed a fraudster to use their credit card information to make an unauthorized transaction.
You need a solution that prevents fraud and fosters consumer trust.
Our hybrid solution does both
At ClearSale, our hybrid solution includes multiple strategies to offer one of the most comprehensive fraud and chargeback prevention solutions on the market.
It starts with an AI-enabled algorithm that leverages trends, intelligence and data gathered from decades of fighting fraud in the most high-risk regions of the world. Using this technology, we can automatically approve most orders quickly.
Suspicious orders are flagged for contextual secondary reviews performed by our more than 2,000 fraud analysts who have the experience to recognize some of the hardest-to-spot fraud patterns. If necessary, our analysts may reach out to customers, but they do so in a way that demonstrates why consumers can trust your business to protect their information.
We then leverage the data gathered from those contextual reviews to help our system better distinguish valid transactions from fraud. That means our system can more easily recognize “good” transactions as we process more for the client, which increases their approval rates and revenue.
We also offer end-to-end chargeback management.
Comprehensive chargeback management
For every possibility, ClearSale has a range of chargeback solutions:
- Total Chargeback Protectionallows businesses to recoup a portion of losses due to fraudulent transactions.
- Chargeback Guaranteereimburses the transaction amount plus the chargeback amount for any unauthorized transaction that’s approved.
- End-to-End Chargeback Managementdelivers comprehensive chargeback mitigation and resolution services, including team training, data audits and timely responses to issuers.
Near-Zero Fraud Is Possible With the Right Strategy
A truly successful approach will balance fraud prevention and false declines so companies can approve the most transactions with the least risk and financial exposure. By implementing a strategy that leverages fraud filters, machine learning and contextual reviews, ecommerce businesses have the best chance of getting as close to “zero fraud” as possible.
To learn more about how ClearSale has helped other companies fight fraud and maximize revenue, our team is available.