Australian Online Card Fraud Losses Hit $452 Million: How Merchants Can Fight Back

Part 1 of CMSPI's analysis on how merchants can fight back against online card fraud losses.

With over $450 million in card fraud conducted online last year (Figure 1)¹ , it’s more important than ever that Australian merchants are equipped with effective tools to protect themselves and their customers in the ecommerce space.

But with Card Not Present fraud now taking the lion’s share of card fraud, and growing at a rate of 7.6%, are Australian merchants – even those with fraud tools already in place – ready to weather the storm?

Figure 1. Online Card Fraud 2019-2021²

The Rise of Online Fraud

Since the Covid-19 pandemic, many Australian merchants have opened their businesses to digital revenue streams and seen unprecedented growth in online spend – with ecommerce becoming a $50 billion market in 2021.³

Unfortunately, ecommerce has also become a target for bad actors, accounting for more than 90% of Australian card fraud committed in 2021 (Figure 2). It can be extremely difficult for a merchant’s supply chain to verify the true identity of a person online, giving way to more fraud attacks and, in tandem, more stringent fraud rules imposed by the payments supply chain.

Figure 2. Value Lost to Fraud in 2021 (in millions)⁴

As ecommerce volumes continue to grow, Australian merchants are utilising increasingly-sophisticated tools to intelligently identify fraudulent behavior while still maintaining the customer experience.

Getting Your Fraud Approach Right: What are the Options?

CMSPI works with some of Australia’s largest merchants to optimise their fraud prevention strategy and reduce the cost of fraud, but building these strategies can be a complex balance between protecting customers and creating friction in the checkout process. Here’s what you need to know about the three main strategies merchants use today.

In-House Fraud Tools

To prevent fraud, some merchants use in-house fraud rules to detect risky transactions. These tools may rely on indicators like card verification value (CVV), address verification service (AVS), or average transaction value (ATV) to make decisions over whether to accept a transaction. Whilst many smaller merchants still manage fraud in-house, these tools are typically reliant on internal data and provide no visibility over customer behavior with other merchants, making them vulnerable to errors and more likely to incorrectly flag transactions as fraudulent. This can lead to ‘false declines’ – a phenomenon estimated to have cost Australian merchants $3.5 billion in lost revenue last year.⁵ That’s without considering the cost of managing chargebacks, which can generate losses of 250% the value of the initial transaction.⁶ So whilst in-house management may limit headline rates, a holistic view of their fraud costs has left many merchants in search of efficient alternatives. Learn more about False Declines in Part 2 of our Fraud Series.

Supplier-Owned Fraud Tools

To remedy some of these costs and access broader industry benchmarks, many merchants use fraud solutions owned by their acquiring or gateway partners – which can supply additional data points, screening measures, and chargeback protections. These options can be effective for merchants and can help them improve the accuracy of decisions compared to in-house prevention tools. However, they are often rules-based and may not be reviewed for long periods of time, which means they can very easily become inefficient and contribute to incorrectly blocking too many transactions or approving fraudulent ones.

Learn more about False Declines in Part 2 of our Fraud Series.

Third-Party Fraud Providers

As Australia’s fraud mix shifts rapidly, many enterprise merchants are looking to innovations in the third-party fraud provider market to access insights over customer behaviour with multiple merchants. These specialised providers can offer tools to detect less apparent forms of fraud like account takeovers or refund abuse, as well as identify new types of emerging fraud from similar merchants. In CMSPI’s experience, they may also lead the market in options such as machine learning, as well as pre-authorisation screening that allows merchants to make dynamic decisions about the type of information submitted with a transaction request before it is sent. However, with these solutions often carrying a larger price tag than other tools on the market, building a business case for implementation relies on transaction-level data to identify a merchant’s current chargeback levels, the accuracy of transaction declines, and their unique fraud mix.

Work Smarter, Not Harder

Since fraud tools are mostly preventative of the worst outcome, fighting fraud can quickly become costly without clear direction and expert review. With the added cost of fraud tools, various add-value considerations, and a saturation of market options, merchants need to ensure all fraud solutions work efficiently within their existing supply chain before implementation and ensure that the costs don’t outweigh the expected benefits. As merchants’ payment strategies continue to evolve with growing online volumes, ensuring neither a customer’s safety – nor their experience – are sacrificed is core to every ecommerce merchant’s strategy.

Economist, APAC

Athena Zhang

Connect with Athena on LinkedIn

Sources:

AusPayNet Fraud Report 2022.
Ibid.
WorldPay Report 2022.
AusPayNet Fraud Report 2022.[1] CMSPI Estimates and Analysis.
CMSPI Estimates and Analysis
Ibid