The initial reaction to fraud is often to obsess over financial losses. This mentality fails to recognize its overall impact. Fraud has far-reaching consequences that inevitably jeopardize all areas of a merchant’s business.
To effectively mitigate the direct and indirect financial burden of fraud, it’s imperative to understand the totality of the diverse implications that stem from it. Beyond losses, merchants must also take into account the customer/reputational, operational and revenue implications caused by fraud.
Fraud – and more specifically, the measures put in place to prevent it – can have an extensive impact on the customer experience. Fraud-prevention measures that burden legitimate customers impede their path to purchase and often result in cart abandonment. Similarly, fraud controls that are too restrictive can result in false-positive transaction declines, putting the most critical moment of the shopping journey in jeopardy. Finding the right balance between security and usability continues to prove problematic for online merchants. Less than one in four respondents to a Q2 2020 merchant survey conducted by 451 Research, part of S&P Global Market Intelligence, stated that their approach to fraud effectively balances prevention with the customer experience.
On the other end of the spectrum, merchants that fail to take the necessary steps to protect their customers can face difficultly in establishing trust. Consider that 51% of respondents to 451’s Q4 2019 consumer survey indicated that ‘trust in the merchant’s reputation’ influences their decision to save their payment information with an online merchant. At worst, failure to establish trust can result in irreparable damage to a merchant’s brand and reputation. The same survey revealed that ‘avoiding organizations or services I don’t trust’ is the top way consumers say they protect the privacy and security of their personal data online.
The operational impact associated with mitigating and addressing fraud can be extensive. At the top of the list are the costs associated with antifraud technology. The traditional approach to addressing fraud has been to layer an array of independent fraud-prevention tools and systems on top of one other, each with its own set of capabilities. The result is a disjointed fraud stack, often characterized by redundancies and cost inefficiencies. Platform approaches that have come into the market in recent years have sought to address this.
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The operational burden stemming from fraud also includes compliance requirements. The Strong Customer Authentication requirements necessitated by PSD2 in Europe, for instance, have resulted in a complete upheaval of the checkout flow for most online merchants. Underpinning each of these concerns are the resources that must be committed to fight fraud. Merchants have historically employed sizeable teams of risk analysts to write and adjust fraud rules and investigate chargebacks. Fraud platforms rooted in AI and machine learning, along with chargeback automation offerings, can help alleviate headcount requirements or allow staff to be reallocated toward more strategic initiatives.
Topline revenue impact
Fraud is often viewed in the context of the bottom line. However, among the most underrecognized consequences is the near- and long-term impact it can have on topline revenue. There is often an opportunity cost associated with fraud prevention. Approaches that burden legitimate shoppers can be a conversion killer and put customer lifetime value in jeopardy. Consider that 30% of respondents to 451’s Q2 consumer survey said that a transaction being mistakenly declined would significantly influence their likelihood to stop shopping with a preferred brand or retailer. Similarly, dialing back return policies and new customer promotions as a result of fraud inevitably harms relationships with the good shoppers that those policies were first intended for. Merchants may also avoid new revenue opportunities, such as entering a new geographical market, due to concerns over fraud risk.
Another long-term, topline impact is the prolonged increase that merchants may experience in their decline rates if their chargeback ratio begins to spike, even temporarily. This occurs as card issuers raise their guard and become increasingly conservative about the transactions they approve. Merchants with high chargeback rates may also see an increasing percentage of their overall sales held in reserve by their acquiring bank as a security deposit to cover potential fraud disputes.
Fraud is most often associated with losses. While losses are a major consequence, they’re only part of the overall impact that fraud has on a business. Successful fraud-prevention strategies require a holistic approach targeting not only losses but also customer experience, operational and topline impacts.
Source: Forbes – Money