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January 10th 2022

Fraud Strategy: 4 Challenges Every Merchant Needs to Overcome

Online shopping was becoming the new normal well before 2020. But two years into the pandemic consumer behavior has dramatically shifted towards ecommerce, with global digital sales reaching $4.2 trillion in 2021. As the in-store and online environments become more interlinked than ever, one rising threat is at the forefront of merchants’ minds: fraud.

With each passing day, merchants are at risk of losing millions to fraud.

In fact, CMSPI estimates that U.S. retailers lost over $14 billion in 2021 alone, affecting not only their bottom line but also their customers’ shopping experience and long-term loyalty. For retailers looking to buck the trend, CMSPI has identified the four challenges to overcome and boost the performance of their fraud strategy.

1 | Too many good customers are being turned away

Preventing fraudulent purchases from being approved is the most important goal of any merchant’s fraud strategy, but it also poses a dilemma when a good customer’s legitimate transaction is blocked. These ‘false declines’ often lead customers to abandon the sale altogether, or try again with a competitor, leaving a merchant to lose out on rejected sales and a lifelong customer.

False declines need to be number one on every retailer’s list to counteract, as they mean billions of dollars in lost revenue.  Incorrectly rejected transactions wreaked havoc during the holiday shopping period, with CMSPI estimating U.S merchants lost $682 million to these declines on Black Friday and Cyber Monday alone. In 2022, it is predicted that global losses could reach $230 billion (CMSPI estimates and analysis), representing a 6% increase from 2021.

But how can your fraud strategy help to tackle these declines? If your supply chain is falsely declining more good customers than other, similar retailers, then it could be that overly aggressive fraud rules are being applied somewhere along the payment flow. That may be with your third-party fraud provider, a network-provided solution, your acquirer, or even the customer’s own issuing bank. Adopting a balanced, data driven approach which ensures checks are applied at every step in the transactions journey are working in tandem is crucial for retailers in combatting false declines. 

2 | Only certain fraud types are being addressed

Not all fraudsters have stolen someone else’s credit card information. As most retailers invest in digital channels to make shopping more convenient and streamline the process of returning unwanted items, many are experiencing a spike in refund fraud. From claiming the package never arrived or was stolen from a front porch, to purchasing an item with the intent to only use it once, to even returning the original packaging with no item at all, this form of fraud is a huge risk to retailers. It’s also one of the hardest to spot, as customers often aren’t flagged by traditional fraud checks as we head into the post-holiday refund requests in January.

And it’s not just refunds; as the digital and in-store environments merge, threats like click-and-collect fraud become a staple concern for omnichannel retailers. That’s alongside friendly fraud, where chargebacks are incorrectly raised for valid sales. In fact, in a recent survey, nearly 1 in 5 consumers admitted to falsely submitting chargeback claims over legitimate purchases.

As fraudsters change, so too has the payments industry; new solutions entering the market have the capacity to address emerging forms of fraud in new, innovative ways. In the chargeback space, we consistently see leading merchants either over-paying to process chargebacks or there are significant inefficiencies in how they deal with them. For enterprise retailers, this is often a multi-million-dollar issue. Merchants need to identify these solutions, benchmark their performance, and ensure that they are seeing the threat reductions they are paying for.

3 | Solutions are too expensive

In Europe, we estimate that merchants spent nearly €7 billion on fraud detection and prevention in 2021 alone – more than three times the value lost to fraud in the same year. CMSPI works with many merchants to personalize and optimize their fraud suite, utilizing data-driven insights that may reveal inefficiencies a merchant (and their payments partners) didn’t expect. We often find that retailers are paying for a range of ancillary services that aren’t always the most effective in tackling their current fraud profile. Merchants need to fully understand this unique profile before building a business case for their arrangements, or else risk overpaying without addressing their major threats. Lots of the time, the network or acquirer is providing an overlapping service to the fraud solution. Retailers are also investing in additional tools they think they need when many of the issues can be solved by engaging directly with the payments supply chain and issuing bank.

4 | When, and how, to screen depends on your unique profile

Given that every merchant’s profile is different, the best fraud solution for one might not match that of their competitor. When to fraud check, for example – pre-authorization, post-authorization, or both – is a decision that can only be made with an understanding of the transaction decline data you’re seeing at every point in the transaction flow. Without a data driven strategy, you may see good customers declined that were found non-fraudulent elsewhere in the authorization process. It is therefore crucial that merchants balance their auth, approval, and fraud rates.

The Balancing Act of Preventing Fraud

There is only one way to stamp out fraud entirely, and that’s to stop all customers from getting through the checkout. That means that, in truth, minimizing fraud in retail is a balancing act. This reality has seen many merchants’ mindsets shift away from focusing on the cost of fraud, and towards the revenue impacts of a sub-optimal fraud strategy on the experience of good customers. Making sure you’re not paying too much and turning too many good customers away means tackling the right types of fraud, targeting screening at the correct points in the transaction flow, and keeping on top of the latest solutions to build a strategy fit for the long run.