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Why Building an Effective Fraud Toolkit is Crucial for Merchant Success

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


In 2020 alone, fraud statistics show that 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 combating fraud.

This article uses those survey results to examine what tools businesses find effective and choose to use most in their merchant fraud strategy.

What are Fraud Detection Tools?

A fraud detection tool is a program or system that is specifically designed to identify fraudulent purchases and help merchants avoid accepting fraudulent transactions altogether.

Such merchant fraud detection tools work by using algorithms and rules to scan through data looking for patterns that may suggest traditional and ecommerce fraud activity.

From CNP fraud prevention to confirmation and rectification of false declines, strong merchant fraud tools are effective in recognizing high risk transactions and fake transactions, and are a critical part of a successful fraud strategy.

Tokenization is becoming an increasingly popular fraud strategy in retail, as it adds higher levels of security to both online transactions and face-to-face transactions. Learn more about tokenization.

Types of Fraud Tools

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

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.

Each tool within these groups approaches fraud in a different way. By combining a diverse selection of tools, companies have the option to customize their fraud toolkit to meet their merchant fraud prevention needs.

What are the Benefits of Ecommerce Fraud Prevention Tools to Online Merchants?

When it comes to online retail fraud, ecommerce fraud statistics confirm that merchants face a number of challenges.

Online fraud detection tools can help to identify fraudulent online shopping orders before they are even processed, which can save the merchant time and money in dealing with a card not present transaction.

There are a number of benefits to using fraud prevention tools for online retailers. Some of the key benefits include:

1.   Reduced Costs

By using fraud prevention tools, merchants can reduce the amount of fraudulent orders that are accepted in-store.

2.   Time Savings

Fraud prevention tools can help to speed up the order processing process by identifying potentially fraudulent orders quickly.

3.   Improved Customer Service

When fraud prevention tools are used correctly, they can help to improve the customer experience by ensuring that only legitimate orders are processed.

4.   Enhanced Security

Fraud prevention tools help to protect against online scams and identity theft, which can help to keep your customers' information safe.

5.   Better Insights

Was it CNP fraud, a debit routing error, or were they ecommerce false declines?

Fraud prevention tools provide merchants with valuable insights into their transactions, which can be used to gain clarity, improve marketing efforts, and create better customer experiences.

Are Fraud Tools Worth It?

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.

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

Moderately Effective Tools are Widely Used

There are five high-usage fraud tools that merchants rated as moderately effective (Figure 1):

  • Email Validation
  • Postal Address Validation Services
  • Negative Lists Records
  • Customer Order History
  • Address Verification Service (AVS)

Does that mean merchants should avoid these tools? Not necessarily.

Our results don’t indicate these tools have no value. Rather, they show that the tools 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 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.

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:

  • Paid for Public Service Records

  • Chargeback Notification

  • Shared Negative Lists

  • Device Fingerprinting

  • Positive Lists Records

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.

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How to Build a Merchant 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.

Your Fraud Toolkit, Made Easy

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.

For more information or for help building your fraud toolkit, get in touch with us and check out out how we can help minimize fraud.