While dealing with fraud has always been a cost of doing business for merchants, the digital age has changed the game in terms of fighting off fraudsters. No matter where one goes, and no matter what goods or services they sell, Kount's Chief Customer Experience Officer Rich Stuppy told PYMNTS in a recent conversation, the transition to digital will inevitably involve running headlong into the loving embrace of fraudsters.
“For folks we work with who have implemented mobile order-ahead or eGift cards, or loyalty, or any other element of an app-based business, I can guarantee they have all felt the sting of fraud,” he said. “I would say they are, at this point, almost woefully aware of it.”
In fact, Stuppy continued, the only merchants not aware of the situation are probably those who haven’t begun making efforts toward a robust expansion into digital and multichannel commerce. While some have speculated that fear of fraud is keeping some merchants out of the game, Stuppy noted that this wasn’t as big of a concern as some might think. Most merchants are simply unaware of how quickly fraudsters will appear, how numerous they are or how efficient they are in their undertakings.
However, that blissful ignorance has a short shelf life. Over the last decade or so, the trend in both brick-and-mortar retail and quick-service restaurants (QSRs) has been toward digitizing operations, and opening up for more omnichannel servicing. As Stuppy pointed out, that is a non-optional transition for any player that wants to stay in business, which means getting a fast-yet-comprehensive lesson in fraud is mostly a fait accompli for merchants at this point.
What they are facing in terms of fraud-related challenges aren’t new, Stuppy noted. In fact, many of these issues have plagued eCommerce retailers since the dawn of digital commerce. The challenge going forward is for merchants to find a comprehensive security platform that can anticipate the troubles before they arrive, and learn to protect themselves better in the future.
“That means taking a very holistic approach that involves combining data, artificial intelligence (AI) [and] machine learning to leverage a platform that can provide comprehensive protection at scale,” Stuppy said.
Easy To Underestimate
For brick-and-mortar and QSR firms that are early in the process of digitizing their businesses, it can be hard to imagine how quickly they will feel the pain when it comes to an influx of fraud. The troubles, Stuppy noted, will start the moment a business comes out of pilot mode — and sometimes even before that.
“We have had firms come to us because of things that have happened to them during soft launches, where they haven’t advertised to the general consumer yet, but have maybe opened up some functionality,” he said. “And what we’ve seen over and over again in these situations is that the first adopters are often fraudsters — with 10 percent, 15 percent and, in some cases, even 30 percent of those early transactions coming in hot from fraud.”
Fraudsters: the world's worst category of early adopters. The silver lining to this rather ominous-looking cloud, however, is that these merchants are joining a fight that has long been in progress, with tools that have evolved tremendously over the last two or so decades. Kount combines AI and machine learning with data from billions of transactions and devices to render risk scores in real time for their partners.
“It is now very possible to gauge the relative risk and safety of any specific, individual engagement,” he said.
That data-enriched view is a starting point, but not a finishing point. Individual merchants must still determine how to manage the issue, particularly in light of the fact that fraud comes in many flavors, some more expected than others.
A Complex Field Of Factors
eGift cards offer an interesting instructional case for a fraud-fighting strategy. Consumers love them, hence the $32 billion annual business. However, fraudsters love them, too. They have the highest fraud attempt rates of all products sold, and nearly $1 billion is stolen annually via eGift cards.
The reason that fraudsters like eGift cards is obvious, noted Stuppy: These folks are looking for economic gain, and eGift cards are a fast way to monetize fraud. They can be easily transferred and sold online, and they can be traded for goods — and once they are authorized, they can’t be easily clawed back. Yet, he added, when merchants are faced with these facts, the majority aren’t looking to close down eGift cards, or make the purchase of them significantly harder or more time-consuming.
“In the eGift card space, they are instead evolving toward accepting a little more risk,” he explained. “They know fraudsters are going to target them, but consumers are incredibly partial to them. They can be very profitable, and no one is willing to miss out on the volume that goes along with them, especially during the holiday shopping season.”
The point of fighting fraud isn’t necessarily to get to zero fraud, but to better understand the sources and risks, and mitigate those down to levels that the merchant finds acceptable. Having a fraud prevention provider like Kount in place can help the merchant get a much clearer picture of those sources and risks, and access the right tools to tailor its approach. That means differentiating particularly vulnerable points — like eGift cards.
It can also mean differentiating between professional criminal fraud — hackers who make thousands of purchases from thousands of purloined card accounts — and so-called “friendly fraud,” where a customer either intentionally or inadvertently triggers a chargeback and seeks a refund on a purchase they legitimately made.
With knowledge in hand, there is no definitive guidebook on what to do next. Different merchants should, and will, have different responses — depending on what they sell, and the identity of their core customers. Yet, for most businesses, having a plan based on a data-driven view of the landscape will mean the difference between a successful transition into the great sea of digital commerce and one where merchants are immediately pulled under by the tidal wave of fraud.