Fraud is like gluten. It’s in almost everything, and it often goes completely unnoticed. Most organizations have resigned themselves to the fact that, despite their defenses, fraud is just a part of doing business. But fraud costs an average of 7.5 percent of revenue, and the numbers for e-tailers — who never handle a physical payment card — are much higher. There’s got to be a better way.
Tom Byrnes, chief marketing officer at Vesta Corporation, has a simple answer, but many CFOs won’t like it: Don’t try this at home.
“On one hand,” said Byrnes, “we’re really in a golden age now. eCommerce is absolutely exploding. One of the upsides of that, for everybody who’s involved in that space, is you’ve got unprecedented levels of year-over-year growth. There’s a lot of opportunity, and the tide is clearly rising. But alongside all of that opportunity comes risk of fraud.”
Vesta Corporation recently conducted a study interviewing 155 CFOs in a variety of industries across the United States, all with revenues between $10 million and $100 million and sales up to $1 billion per year.
It found that 76 percent of eCommerce players who generated 90 percent of their revenue online used only internal resources to fight fraud. At the outset of the survey, nearly 90 percent felt good about the work they were doing. It’s worth noting that most had changed their minds by the end of it.
While fraud and risk managers are certainly tasked with handling these issues, they ultimately report to the CFO, said Byrnes. The buck stops with the CFO to keep fraud from eating into the company’s bottom line. That’s why Vesta went straight to the top when conducting the survey.
The survey found one of the most destructive attitudes was the perception that fighting risk and fraud is a single-point enterprise. In fact, Byrnes said, there are at least six different operational areas that must be assembled to fight online card-not-present (CNP) fraud, from IT and engineering to finance and sales.
Many CFOs surveyed believed they were in a better position to control their fraud and risk programs — as well as associated expenses — if they owned the process in-house.
“There was an eternal perception about the way to approach fraud,” said Byrnes. “Some of it was default assumptions — things like, ‘We’re going to run this in-house so I can control those costs easier.’ But once you took a lens into creating a holistic view of what it takes to run a fraud system, most of these CFOs were seeing a very different landscape than they were when we asked them the first two or three questions. Although this is in their remit, this is not necessarily their domain expertise.”
Even though eCommerce is still in its infancy, with online sales comprising just below 12 percent of all retail sales, fraud jumped 20 percent globally from 2015 to 2016 and is only continuing along that upward trajectory as eCommerce volume continues to grow. It’s also gaining traction in geographic areas where retail and the general economy are suffering, such as Mexico, Brazil and Argentina.
That means there’s a lot of room to grow — both for merchants and for fraudsters. As criminals get smarter and more creative, retailers must follow suit by ramping up their defenses or risk even greater losses. “Firefighting mode” isn’t going to cut it anymore.
Byrnes said the majority of retailers he’s talked to have seen an uptick in the number and dollar amount of chargebacks, with nearly a third of them as false positives — that is, the company’s fraud filter snared a non-fraudulent customer. Those experiences discourage customers from coming back and hurt the vendor’s reputation.
Byrnes wasn’t surprised at the increase in chargebacks.
“Now that liability has shifted to the merchant, you’ve got people whose trigger fingers are a little itchier on those fraud filters because they’re concerned,” said Byrnes. “If people see anything amiss, they’ll tighten their filters down, and that’s what drives the chargebacks.”
Ultimately, said Byrnes, retailers didn’t go into retail because they wanted to spend their time and resources fighting fraud. He predicts that more and more are going to reach the breaking point where the ROI just doesn’t justify the dollars, people and technology they keep throwing at the problem. That point, according to Byrnes, will be different for every business.
“When most people got into retail, they got into it to make money, sell goods and services, satisfy customers, build a brand — they didn’t necessarily get into it to fight criminals,” said Byrnes. “Unfortunately, that’s just part of the landscape.”