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Fraud Strategy: 4 Challenges Every Merchant Needs to Overcome

The risk of merchant fraud is higher than ever, with trillions of dollars in sales being generated over the internet. It’s imperative that every retailer have a merchant fraud strategy. Below are 4 challenges you may face in your fraud strategy – and how you can overcome them.


Well before 2020, online shopping became the “new normal.” Now, two years into the pandemic, consumer behavior has dramatically shifted towards eCommerce, with global digital sales reaching $4.2 trillion in 2021.

With so many transactions happening over the Internet, online threats are ever-increasing, and merchants are at risk of losing millions to fraud.

In fact, CMSPI estimates that U.S. retailers lost over $14 billion in 2021 alone to merchant fraud, 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 your fraud strategy.

What is eCommerce fraud?

eCommerce fraud - also called merchant fraud - is criminal deception at some point during or after the purchase phase of an item. eCommerce fraud can happen during the checkout process (i.e. using stolen credit card information to complete a fraudulent purchase) or after (i.e. deceiving the merchant or bank into issuing an unlawful refund).

The two main facets of merchant fraud are that they occur in online transactions, and that they are deceptive in nature.

Types of online retail fraud

Credit card

This term encompasses any kind of merchant fraud using a credit or debit card, also referred to as CNP fraud (‘Card Not Present’ fraud) or payment fraud. With credit card fraud, scammers make fraudulent purchases using stolen credit card information, often retrieved from the dark web that sells stolen credit card information.

While it seems like the only victim in this scenario is the person whose card details were stolen, the merchant will eventually need to pay back the unauthorized purchase – and perhaps an additional chargeback fee to the bank.

Chargeback fraud

When this type of online retail fraud occurs, it is often with malicious intent. When an online shopper purchases an item and then receives that item, then opens up a dispute through their credit card provider (stating, for example, that the “item was never received”), a chargeback to the merchant is commenced.

When a chargeback is initiated, online merchants are forced to pay back the money that was the customer paid in the first place.

Other types of fraud

Ultimately, as scams become more complex and the Internet continues to evolve, other types of fraud pop up. The two listed above are some of the most common forms of fraud, but an effective online fraud detection toolkit will be your best bet for preventing other types of fraud, including:

  • Interception fraud
  • Triangulation fraud
  • Affiliate fraud
  • Transaction laundering

Challenges for merchants and fraud prevention

1. Too many good customers are being turned away

In e Commerce, false declines are when a customer’s legitimate transaction is blocked, which often leads to them abandoning their purchase or trying again with a competitor. This can result in the loss of sales (to the tune of $682 million during Black Friday and Cyber Monday alone), and even a lifelong customer.

How can your merchant fraud strategy help to tackle these declines?

It may be that there are overly aggressive fraud rules being applied somewhere along the payment flow, which could be a result of:

  • Your 3rd-party fraud provider
  • A network-provided solution
  • Your acquirer
  • The customer’s own issuing bank

Adopt a balanced, data-driven approach which ensures checks are applied at every step in the transaction journey (and are working in tandem).

2. Only certain fraud types are being addressed

Not all fraudsters have stolen someone else’s credit card information.

Many retailers are experiencing a spike in refund fraud, and it’s a huge risk to retailers – especially because customers are often not flagged by traditional fraud checks in the busy post-holiday refund request seasons.

New solutions entering the payment industry market have the capacity to address emerging forms of fraud in new, innovative ways. Staying on top of this with a merchant fraud prevention strategy is key to keeping losses to a minimum.

Merchants need to identify these solutions, benchmark their performance and ensure 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 merchant 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 that merchants (and their payments partners) don’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 merchant fraud profile. Merchants need to fully understand their unique profile before building a business case for their arrangements, or else risk overpaying without addressing their major threats.

Many times, 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.

Completing an audit every so often can help you stay on top of disparities between what you are paying for, what you’re getting, and what you need.

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.

Overcoming the challenge of merchant fraud strategies

There is only one way to stamp out fraud entirely, and that’s to stop all customers from getting through the checkout. In truth, that means that 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 merchant 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.

How can you detect merchant fraud?

CMSPI is here to help you create or optimize your eCommerce fraud prevention strategy and minimize fraud.

From reducing fraudulent transactions without affecting your customers to helping you choose the right fraud provider for your unique business and payment ecosystem, you can count on us.

Contact us today.