The advent of the digital age has sped transformation of the retail industry from physical stores to digital storefronts. At the same time, the risk of fraud has never been higher and is still increasing — and the true costs of card-not-present fraud hit both the top and bottom lines of retailers simultaneously, while doing damage to reputations as well.
In an interview with Karen Webster, Tom Byrnes, Vesta’s chief marketing officer, stated that a recent study it conducted found a trifecta of retail pressures that were tied to managing costs, while, at the same time, merchants were losing sales to false positives and chargebacks. The points that need to be brought forward now, said Byrnes, include that “merchants are facing a rising tide effect,” with EMV spurring attempts by fraudsters to ply their trades beyond the points of sale that utilize physical cards.
“But the bigger thing,” he added, “is that eCommerce is just growing.” Since eCommerce currently makes up about 9–10 percent of retail sales overall — more in key segments — it is claiming more of that pie, Byrnes added. Along with that swelling tide, CNP fraud is growing in tandem, with growth on an annual compounded basis of 10 percent.
Perhaps the burden on retailers’ internal defenses against fraud scales, even geometrically, should come as no surprise. The pain point varies by the product mix, Byrnes said. In one example, a retailer that is focused on physical goods — for example, for shipping a water bottle — still allows for a few hours before fulfillment so that card information and other attributes of the transaction can be verified.
But with digital transactions, he added, “now you’re talking about sub-second decisions and fulfillment.” In the time it takes to do an approval — should that timeframe take too long — a retailer will lose a customer.
Hybrid merchants also work with physical and digital transactions and fulfillment, and problems arise as many merchants’ “internal operations tend to become a little siloed,” Byrnes said. Within that context, a firm may have a risk group and a separate group of people who deal with chargebacks. “If you’re a physical goods merchant, it’s costing you right around 6 percent of your total net revenue to fight fraud,” Byrnes said. “And if you’re completely digital, it’s 8.6 percent.”
And in terms of the percentage of operational budget spent battling fraud, the respective percentages across physical goods and digital models stand at 14.9 percent and 23 percent, respectively, he said. That sky-high percentage for digital merchants comes through an examination of 500 eCommerce merchants, said Byrnes. Further, of that 8.6 percent of digitally derived revenues going to fight fraud, nearly 3 percent come from false positives that were, in fact, legitimate transactions, and another finding is that 34 percent of declined transactions were also valid.
“In the act of tightening your filters to clamp down on the fraudster, you are inevitably aggravating and alienating potentially good customers and driving them away,” said Byrnes. He cited a statistic that 66 percent of customers will not do business with a company again after having been denied due to a false positive.
One additional challenge, said Byrnes, comes along with a whole new set of digital wallets coming into the marketplace, alongside Apple Pay and Samsung Pay — including platforms being rolled out by banks. The crooks are loading cards onto their phones and bypassing the chip readers, he said, or they are ordering goods online and then picking up fraudulent merchandise in person.
When it comes to fighting fraud, there is a two-tiered model that is emerging. One model, per Byrnes, tends to invest more heavily in people and is used by about 40 percent of merchants. Here, the costs are significant and ongoing, tied to training and consistent fraud monitoring. The other model is one that embraces technology more than people, with about 48 percent of firms. The issues here are varied as fraud can be viewed only after it has happened as through a rearview mirror, yet the costs are continuous, spanning picking the right technology in the first place, then integrating and optimizing all the systems to track fraud, a challenge that is never static. Marshaling disparate technology is a hard task in the fight against fraud, Byrnes said. Regardless of the model, “the costs of fighting fraud from an in-house perspective … is inevitably going to lead merchants to ask themselves: ‘What business am I in?’” he added.
That question embraces everything from marketing to satisfying customer demand to driving revenues. This means that merchants are going to have to wrestle with just how much time, money and effort they must spend in working to stanch the impacts of fraud — which may not lie within the domain of their expertise as retailers.
“That’s the fork in the road that they are really looking at here,” Byrnes said.