A string of more than 1,200 documented data breaches exposed some 440 million records in 2018 – an incredible 14 records per second. That drove a 126% increase in stolen consumer records with personally identifiable information (PII), reports the Identity Theft Resource Center. It’s no surprise that annual online payment-fraud losses will balloon from $22 billion in 2017 to $48 billion in 2023, predicts Juniper Research.1
At the same time, retail sales grew 4.1% in 2018, with ecommerce sales leaping 15%, according to U.S. Commerce Department data. That means you’re handling more payment transactions.
Clearly, fraud protection and payments processing are mission-critical processes for your retail business. Yet merchants fail to approach these processes strategically.
Many merchants start with payments processing and then consider fraud protection as an add-on. For example, they might use one vendor for payments processing and a separate vendor for fraud protection. Or they might simply tack on the fraud services of their payments processor, even if those services are limited in functionality and effectiveness.
That’s a mistake. Applying fraud protection as an afterthought, or treating these two closely related processes individually, can result in greater friction for your customers and higher fraud levels for you.
A much more effective strategy is to begin with fraud protection and then integrate payments processing in a holistic way. Such a fraud-focused, integrated approach can deliver tangible business advantages.
Avoiding Commerce Cross-Purposes
Starting with fraud protection makes sense, because this is where your service provider can have the greatest impact on your customers and your business. An effective fraud-management solution is fast and precise, it minimizes fraudulent orders while maximizing order conversions, and it completely indemnifies you against fraud and chargebacks.
Once you’ve implemented such a state-of-the-art fraud solution, it’s wise to use the same vendor for payments processing. If that isn’t feasible, given your specific needs, at least find a provider that has experience with both payments and fraud protection.
There’s a logical reason for this: Separate vendors will be at cross-purposes. One will be concerned with preventing bad transactions from happening. The other will be focused on making sure transactions go through. The result can be friction in the checkout process, a less-than-optimal customer experience, lower sales conversions and unacceptably high chargebacks. Choosing a vendor that understands both payments and fraud will help you avoid these pitfalls.
Of course, chargebacks are something every merchant wants to avoid. And you may believe that because your fraud-protection vendor offers indemnification, there’s no need to change the way you manage fraud. But chargeback indemnification that occurs separate from payments processing can lead to unexpected – and far more significant – costs.
If your business is associated with a high number of chargebacks – typically 1% of transactions, though that threshold will likely soon be lowered – a merchant-processing bank could add you to the Terminated Merchant File (TMF) or Member Alert to Control High Risk (MATCH) list. Once that happens, you could find it very difficult to obtain a new merchant account from another bank. And your entire business could be placed in serious jeopardy.
With separate vendors, you may have no idea that fraud is about to affect payments processing. But with effective fraud protection integrated with payments processing, your provider is incentivized to share information and optimize both processes in your favor.
Just as important, this fraud-and-payments approach makes chargeback processing faster and easier. With separate vendors, first you’re alerted by your payments processor of a chargeback. Then you need to challenge the chargeback to avoid unnecessary outlays, and file a claim to be reimbursed for the chargeback losses. But if fraud protection and payments are handled by the same provider, the process is seamless and conflict-free. In fact, you don’t even need to get involved.
Another advantage of combined services is the ability to assess fraud risk both before and after payment authorization. Running a quick check before authorization can lower authorization costs and increase authorization rates. If your fraud provider has already determined the transaction is fraudulent, why send it on for authorization? And if the pre-authorization check is successful, you can feel better about paying the authorization fee.
Fraud and Payments Analysis
Finally, a single provider can perform analytics on both fraud and payments to optimize both processes. That can especially have a positive impact on fraud protection.
When a payments processor handles a credit card, it converts the number into a cyber-protected token, which is then difficult to analyze from a fraud perspective. Because a combined fraud-protection and payments provider has access to the universal consumer profile, analysis and understanding of fraud patterns and trends become easier and can be leveraged across the provider’s ecosystem. So if a credit-card number was used to commit fraud on one site, it doesn’t need to be decrypted to detect fraud on another different site.
Such analytics cross-pollination extends to your business. An effective provider should be able to deliver a single report that shows all fraud and payments activity, so you get a single point of visibility into your own operations.
Smart retailers recognize that fraud protection and payments processing have become mission-critical. By approaching them strategically, you can simultaneously improve both customer experience and revenue creation.
Senior Vice President of Radial Technology Services
1 “Future Fraud: 3 Dynamics Changing Fraud in 2019,” Juniper Research, November 2018