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February 01st 2022

Are Merchants Building Effective Fraud Toolkits?

As global commerce continues to migrate from traditional brick-and-mortar to the wilds of the digital channels, a merchant’s expenditure on detecting, preventing, and mitigating fraud becomes business critical.


In 2020 alone, merchants and acquirers experienced gross fraud losses of $28.58 billion globally, amounting to 6.8¢ of loss per $100 of total volume spent (Nilson Report, Issue #1209).

As part of a recent joint MAG and CMSPI survey, some of the largest merchants in the United States were screened as to their strategy for combatting fraud. This article utilizes those survey results to examine what tools merchants find effective and use the most.

Building your Fraud Toolkit

When surveyed, merchants, as expected, reported that Fraud Tool Usage comprised the largest portion of their fraud prevention expense. Fraud tools can typically be broken into three primary categories: transaction tools, identity tools, and address tools. Each tool within these groups approaches fraud in a different way, and by combining a diverse selection of tools, merchants have the option to customize their fraud toolkit to meet their needs.

  • Transaction Tools verify the payment method using the data that is entered during the transaction, such as card verification numbers.
  • Identity Tools confirm the identity of the consumer by tracking the consumer’s behavior and location.
  • Address Tools verify the authenticity of an order by confirming the consumer’s address through lookup services.

How Efficient Are Your Fraud Tools?

As part of our survey, we asked respondents which fraud tools they currently use, and how effective they find them to be. The results were surprising; not only did merchants underutilize some of the fraud tools that were seen as most effective, but some of the most popular tools were considered least effective by the merchants using them.

Moderately Effective Tools are Widely Used

Figure 1: Fraud Tools for Which Usage Outranks Perceived Effectiveness, CMSPI-MAG Survey

There are five high-usage fraud tools that merchants rated as moderately effective (Figure 1). Does that mean merchants should avoid these tools? Not necessarily; our results don’t indicate these tools have no value, but rather show that they could be better optimized for preventing fraud.

For example, we found that AVS is the most used tool, currently implemented by nearly 100% of respondents. Despite this high usage, AVS is considered effective by only 60% of respondents. While address tools provide a means for detecting fraud and may play an important role in every merchant’s fraud prevention strategy, the results suggest that merchants looking to optimize their fraud solution may want to consider a mix of address tools to complement their pre-existing AVS set-up. Other tools that fit this profile include postal address validation services and email validation.

Highly Effective Tools are Often Unused

The survey results also indicate that some of the most effective tools, as described by merchants, are some of the least likely to be found in their fraud toolkit. Although this might be the result of other constraints such as cost, the high effectiveness of these tools makes it crucial that merchants consider a mix of solutions when building their strategy, utilizing data and analytics.

Figure 2: Fraud Tools for Which Perceived Effectiveness Outranks Usage, CMSPI-MAG Survey

** These observations are by no means an endorsement of a particular tool, but rather measure the current market interpretation of usefulness, as each tool may or may not be more useful for a particular vertical, business size, or organization.

Five tools are ranked as highly effective according to the survey, but are not utilized as much as other solutions (Figure 2), potentially due to factors such as substantial cost of integration or maintenance.

For example, chargeback notification was found to be used by only 36% of merchants despite being perceived as the most effective tool overall. In the case of chargeback notification, there are significant costs associated with monitoring and investigating each chargeback, which could explain the disparity between utilization and perceived effectiveness. In addition, device fingerprinting, often a more costly solution to implement and maintain, is considered effective by more than 70% of respondents, yet used by only 50% of respondents.

How Should Merchants Build Out Their Fraud Toolkit?

Fraud is an unfortunate reality that all merchants must face. Among all fraud tools, there are some that are widely used despite not being rated highly, such as AVS and postal address validation services. These tools can have a place within a merchant’s fraud toolkit but need to be monitored closely to ensure they stay relevant in a fast-changing environment. Similarly, as the fraud landscape shifts, merchants may find that some of the tools they currently use least are the most effective at preventing fraud.

CMSPI works with many merchants to personalize and optimize their fraud suite, utilizing data-driven insights that often reveal significant inefficiencies that balance risk with cost savings. When building out their suite, merchants therefore need to understand their unique fraud profile, maintain awareness of the strengths and vulnerabilities of current arrangements, and stay aware of alternatives in the market that may better meet their needs in a rapidly-evolving fraud landscape.