In a recent survey conducted by 451 Research of more than 260 payments and fraud managers across North America, Europe, LATAM and Asia, 64% strongly agreed that e-commerce fraud is becoming an increasing problem in their industries. Our research depicts a challenging state of affairs, with three primary forces that continue make effective fraud management difficult:
- Increasing volume and sophistication. More than two-thirds of the respondents in 451 Research’s Voice of the Enterprise: Customer Experience & Commerce, Merchant Study 2021 noted a year-over-year increase in fraud volume for their businesses. More than one-third (37%) said the increase has been significant. One retailer we spoke with discussed how fraudsters had become increasingly sophisticated in using techniques that avoided detection by its rules-based system. In one example, criminals were adding decoy items (e.g., diapers, food) along with high-value electronics in curbside pickup orders to avoid triggering the retailer’s fraud flags.
- Diversification of fraud threats. Among the biggest fraud concerns on the minds of merchants is the diversification of attacks. Fraud is migrating beyond traditional payment fraud into other vectors across the shopping journey. Customer touchpoints running the gamut from online account creation to product returns have emerged as growing vectors for fraudulent activity and, consequentially, financial losses and customer friction. Consider that, among merchants that have seen fraud volumes increase, 41% cited growth in new account fraud, while 35% cited a spike in policy abuse and friendly fraud. The latter two areas are particularly challenging to address, given that they are often committed by otherwise ‘good’ customers who are attempting to game the system by abusing both merchant and issuer business policies.
- Customer experience impact of prevention. The fundamental challenge merchants face with fraud is balancing preventive measures with the best-in-class customer experience they strive to deliver. We find more than half (53%) of e-commerce-centric merchants say they often prioritize fraud prevention over user experience. Some take this to an extreme, such as sending all transactions through EMV 3DS to comply with the SCA mandate in Europe. Encouragingly, there is recognition of the problem at hand, with 62% of merchants in strong agreement that their approach to fraud prevention makes it challenging to provide a smooth customer experience. With this in mind, it was no surprise to see ‘customer experience impact’ outpace fraud losses and fraud management costs in our survey as the number one concern merchants have about fraud today.
Many merchants have seen the shortcomings of their fraud management strategies exposed since the start of 2020, helping to put these challenges into focus. Common (and often interrelated) issues we have observed include lack of automation and scalability, high instances of false declines, and overreliance on manual reviews. One department store chain we heard from noted that staff shortages and sick leave among analysts meant it could no longer manage its order review queue. The chain simply could not hire fast enough, and therefore had to make compromises on its order review criteria. For this merchant and many others, challenges like this have sparked an increased realization of the drag that ineffective fraud management can have on business performance and operations.
Growing and diversifying fraud threats against the backdrop of accelerated e-commerce growth continue to expose the inefficiencies of manual and unscalable fraud management processes. This is driving a greater emphasis on implementing advanced fraud-prevention tools that can streamline operations and enhance business performance. Vendors that operate with a partnership-oriented approach and offer capabilities that help merchants optimize costs, growth and the customer experience should be best positioned to capitalize.
Principal Analyst, 451 Research, part of S&P Global Market Intelligence
Jordan McKee is a Principal Analyst at 451 Research, the technology research arm of S&P Global Market Intelligence. Jordan has spent the past decade in market research and advisory roles serving global clients in the financial services, technology and telecommunications sectors. He is a trusted advisor on payments industry trends with extensive experience leading primary research engagements and consulting senior executives on business strategy. Jordan is listed on the Electronic Transaction Association’s Forty Under 40 list and is a regular commenter on digital commerce and payments, having been quoted in the Wall Street Journal, New York Times, Businessweek and American Banker. He is a frequent speaker at client and industry events, moderating panels and delivering keynotes at SXSW, Money20/20 and ETA TRANSACT. Additionally, Jordan maintains a regular fintech column for Forbes.