Online fraud problem? What fraud problem?
Judging from the latest Benchmark Report from CyberSource, online merchants are not only doing a great job of managing fraud, they are doing it across all online channels — and across all types of businesses.
Doug Schwegman, Director of Market Intelligence at CyberSource, told MPD CEO Karen Webster that "what's interesting is that trends are positive," though Schwegman acknowledged that the study of 307 businesses was done last fall before the EMV liability shift occurred.
That trend has been one for the past five or six years. In fact, he said there's been a gradual drop in the last several years that has brought the most recent results down to a new low (80 basis points), further explained in CyberSource's report.
One particular area of interest, of course, is the mobile commerce landscape and how fraud is being managed cross-channel as new technologies are implemented by more and more merchants.
"Over the past few years merchants have really learned how to manage mobile fraud to the point where it's now slightly below Web. There is a lot of information you can leverage on a mobile device," Schwegman explained.
The 'Fraud Problem' And Conversion Impact
Of course, we all know that fraud can be managed to zero if merchants introduce fraud management techniques that make it harder for consumers to checkout. Are online fraud problems on the decline, Webster asked, because good consumers are being denied the chance to buy?
"We see some impact on conversion this year,” Schwegman admitted. “Our order rejection rates did inch up a bit. There was a period where they went down during the Great Recession when merchants were willing to take the fraud risk to keep the revenue growth going. There is also some increase in false positives," he added.
Fraud Is Even Lower In Cross-Border Commerce?
Surprisingly, Schwegman says, even online cross-border fraud is on the decline, according to the report, which, he adds, usually reports two to three times more fraud loss, on average.
"There's more risk [in cross-border commerce],” he says. “As a result, when they have fraud losses they tend to err on the side of rejecting more orders. It also had a two to three times higher rejection rate," he noted.
Cross-Border Fraud Rates
What the study does show, however, is that 55 percent of merchants are willing to accept orders outside the U.S. and Canada, and that 15 percent of order volumes are exports. This is despite research that shows that the vast majority of online merchants are not optimized to enable a cross-border shopping experience.
Which all comes back to the resources merchants are allotting.
The Budget Balancing Act
“There is certainly room to improve productivity of staff by giving them the right tools. You don't have to keep hiring more people as revenues grow. We do see a lot of upgrades there,” Schwegman said. “There are more productive ways to make them more effective at spotting fraud.
Of course, those new tools are always wanted, but for fraud managers, it’s also a balancing act between investing in new tools and hiring the right people to implement how those tools are used.
So what are businesses using to detect fraud, Webster asks, noting that there are many options for them to consider.
What Schwegman said they are seeing is, similar to technology or product cycles, tools and techniques to manage and detect fraud also runs in cycles. Merchants used to be very wary, for example, of fingerprint tech about four to five years ago.
"When new technology comes on board there were some early adopters who were willing to try it out. A lot of merchants take a wait and see attitude. When they see some merchants are actually seeing success from a new tool or technology, then you see a rapid adoption," Schwegman said.
On mobile, which is still in very early stages, he added, there is a lot of attention on the biometrics side and two-factor authentication, but merchants also worry about adding any friction to the checkout process.
"I think there are a lot of experiments going on, but I don't think anyone has cracked it yet with the solution you should be using," Schwegman said.
And biometrics and mobile, of course, aren’t the only ones.
Outside of testing new technologies, there’s also new ways merchants are interacting with consumers. This includes more merchants working to register their customers in a way that they can do one-on-one marketing, Schwegman says. But that direct interaction also gives them a clearer path to knowing if they are a good, trusting customer.
The benefit of this, he suggests, is that merchants "can kind of bypass some of the fraud checks to minimize the risk of rejecting their order."
Those are the whitelists merchants talk about. But the downside?
"If a customer account gets compromised you're almost like handing the key to the vault," Schwegman said.
Who Fraudsters Target — And Why
But this certainly isn't a one-size-fits-all approach to merchants — nor is managing fraud, since fraudsters tend to treat merchants differently based on their size.
Historically, fraudsters focus their attention on small and medium-sized merchants. as large merchants often have too sophisticated of systems in place to mess with.
Balancing Manual Vs. Automated Fraud Review
So while the numbers tell a story about how well merchants are doing at managing online fraud, their bigger challenge is managing the ability for their organization to keep up with what is an ever-increasing volume of online commerce.
The study shows that 83 percent of North American businesses conduct manual reviews and, on average, they review 29 percent of orders manually. And that's a costly process. In fact, manual review staff costs consume, on average, 46 percent of merchants’ fraud management budgets.
But, as Schwegman points out, staffing costs are high and there's certainly more room for efficiency with the right tools. Merchants may be doing a better job of managing fraud, but they’re not necessarily doing the best job of managing it to the scale they need to keep pace with the growth of their business.
Schwegman says that’s because merchants aren't quite ready, generally, to pull the trigger on trusting tech over people. The transition is happening, but Schwegman says fraud managers always have a balancing act for managing budgets.
"It's a balancing equation about balancing costs — and deploying resources in the most effective way," he said.
As Schwegman concludes: "If there’s one word that sums up the way the world is changing when it comes to managing fraud across digital channels, it’s 'more.'"
More of the right tools to keep fewer fraudsters in business.