Deep Dive: Using Positive Friction And A Multi-Pronged Approach To Fraud Decisioning

Merchants can find themselves fighting with one hand tied behind their backs in their battle against fraud.

They must not only implement innovative technologies to ward off evolving and aggressive cyberattacks but also make sure not to turn off legitimate customers and lose revenue with restrictive fraud prevention solutions.

Merchants seem to fear adding payment or onboarding process pain points more than they worry about fraudsters, but forward-thinking sellers know that friction does not have to be negative. Many argue that it might reinforce their relationships with customers and suppliers if it is sensibly placed in the payment or fraud prevention processes.

Strategic positive friction can help companies achieve the delicate and critical balance between providing robust security and seamless customer experiences.

Balancing Security and Customer Experience Pays Dividends

Recent research illustrates the conundrum retailers encounter when fighting fraud. One survey found that 20 percent prioritize fraud prevention over smooth checkout experiences, for example — and for good reason. The most seamless checkout processes on the web will not keep customers loyal if the tradeoff is risking their hard-earned funds.

Fraud prevention costs can significantly eat into merchants’ bottom lines, however. The average retailer will spend an estimated 8 percent of its annual revenues combating online fraud, and some projections suggest that eCommerce fraud losses could increase to approximately $5.2 billion this year. Recovering fraud losses — both stolen funds and customers’ and suppliers’ broken trust — is thus daunting.

Many retailers are trying to balance enhanced safety measures with smooth customer experiences, with 26 percent of those considering fraud protections as a top priority also putting the need to provide friction-free checkouts at the top of their lists. Merchants in this category seem to be putting positive friction to use.

Negative friction creates bottlenecks in payment or authentication processes without adding customer benefits, often resulting in churn and lost revenues. False positives can also occur, which is a pricey mistake for both customers and merchants. Incorrectly rejecting legitimate consumers’ transactions costs U.S. merchants $118 billion per year. Even the fear of fraud causes the average online seller to reject a fair amount of incoming orders that might turn out to be legitimate. The result is that false positives are a real and growing possibility.

The Benefits of Positive Friction

Industry analysts argue that positive friction can help mitigate fraud and prevent false positives while also minimally disrupting legitimate customers. Many shoppers regard requests to authenticate their accounts on several devices or to give their card verification value (CVV) codes at checkout as reasonable, for example — such steps show added security layers for their payment and personal details.

A recent survey found that most consumers do not mind measures like two-factor authentication (2FA) being added to checkout or other processes if they help fight fraud. Customers take comfort in businesses’ focuses on security, and being known as a safe and secure seller will burnish merchants’ reputations with suppliers.

Matching the right amount of positive friction to the type of business and customers’ tolerance levels is also important. However, positive friction should not be applied unilaterally. Merchants could use data or other analytical tools to track users’ behaviors and apply positive friction to those deemed suspicious, for example. This does not inconvenience legitimate customers and will keep them coming back for future business while preventing bad actors from perpetrating their schemes.

Evolving Technology Creates Dynamic Fraud-Busting Strategies

Online retailers and other firms are augmenting positive friction’s strategic use and continuing to spend heavily on the newest fraud-busting technologies, such as multilayered solutions that minimize frictions. Systems powered by artificial intelligence (AI) and machine learning (ML) with predictive capabilities are being employed to counter fraudsters who are also using ML but are doing so to elude fraud-detection systems.

Overall business spending on both technologies is expected to triple by 2021, and the share of organizations using AI and ML will grow sharply over the next year or two. Many of those firms will likely be online merchants, which are facing skyrocketing costs — especially from chargeback fraud. Implementation costs might give some pause, but smart retailers see the benefits of technologies that accurately detect evolving fraud attacks in real time.

Multilayered approaches that involve deploying several tools and technologies can enable merchants to keep pace with the ever-changing face of fraud, and such strategies move beyond the static, rules-based legacy systems that cannot detect new fraud patterns in real time. This is exemplified by how supervised and unsupervised ML models are used to power fraud analytics. The former requires continual human monitoring and input to learn new rules, while the latter can automatically adjust and adapt its responses based on the patterns it learns.

Device fingerprinting is another tool that allows merchants to analyze shoppers’ computer operating systems, browsers and even installed language options when they place their orders, adding more data points for deeper customer analysis. Combining risky IP addresses with bank identification numbers (BINs) might provide dynamic and accurate prediction when layered into an anti-fraud system. Any sudden uptick in activity that contains both factors would signal fraud, raising the combination’s risk level across all systems that use anti-fraud models with this feature and giving merchants the ability to continually manage emerging fraud schemes’ risks.

Fraud attempts and threat levels are increasing despite these investments, though, and even the most sophisticated digital barriers cannot entirely block them. Savvy merchants know adding positive frictions to their toolboxes gives them another weapon in a layered anti-fraud strategy — one that just might give them a leg up in their ongoing fight against digital crooks.