Merchants globally will suffer fraud losses exceeding $343 billion over the next five years as the volume and sophistication of ecommerce fraud increases. Businesses face tough choices about how to respond, balancing the tradeoffs between customer experience, transaction conversion, and security of ecommerce payments. Online transactions expand markets, customer bases, and economic gains for businesses of all sizes, but we need to leverage new tools to increase trust between merchants and customers who will never seal a transaction with a physical handshake.
Types of payment fraud
Ecommerce fraud can take many forms, but it is most commonly committed via a combination of chargebacks, friendly fraud, and data theft.
Chargebacks are customer claims that a purchase was made fraudulently after the good or service was delivered. Customers file a dispute with the card company, and banks make the business refund the transaction. For every $1 of fraud from chargebacks, ecommerce businesses lose an extra $2.94.
Friendly fraud is when a customer disputes a legitimate purchase with their credit or debit card after initiating the transaction. This fraud method accounts for approximately 30 percent of the fraud in the US.
Data theft occurs when customer payment information (card numbers and personal information) is collected by malicious third parties and used to pay for unauthorized goods or services. This type of fraud is decreasing as financial technology, and payment companies utilize tokenization and data encryption to protect customer data, as well as machine learning and transaction pattern recognition.
The economic impact of ecommerce fraud
Between 2020 and 2021, online fraud grew by 14 percent globally, topping over $20B. As commerce has more rapidly moved online over the past two years, fraud has also increased over pre-pandemic levels, affecting over 75 percent of businesses. This activity undercuts critical growth for the American economy and hurts consumers, small businesses, and entrepreneurs.
As businesses beef up security to combat fraud, they may inadvertently block legitimate charges from consumers–known as a false decline–and risk losing further business. Thirty-three percent of falsely-declined new shoppers abandon the transaction and retailer and never try again, causing a significant drag on the economy.
And, the impact of fraud goes beyond financial losses: nearly three out of four businesses have diverted engineering resources — and more than half have curtailed expansion plans — due to fraud concerns. More than 60 percent of global business leaders say that since the onset of the pandemic, it has become harder for their businesses to fight fraud.
How banks and businesses partner through fintech to solve it
Financial technology companies — in collaboration with the payments ecosystem– are combating the increasingly refined techniques of criminals and ensuring fraud prevention doesn’t come at the expense of customer conversion by deploying new techniques to safeguard transactions, including:
- Strong authentication and authorization techniques. Expanded use of security technology that confirms customers are who they say they are can enable businesses to better allow or block transactions. Security technologies like two-factor or multi-factor authentication and identity verification add an extra layer of security and can detect suspicious activity. These convenient approaches meet the consumer where they are most empowered, on a mobile device.
- Smarter, more responsible approaches to data. Machine learning and automation reduce laborious manual fraud checks, making it easier to separate legitimate transactions from fraudulent ones. This is now table stakes in fraud prevention. Newer techniques involve holistic approaches that comport with data protection regimes to separate legitimate transactions from fraudulent ones more quickly and efficiently, saving time and resources for businesses to use elsewhere within their operations.
- Sharing fraud signals with banks and processors. Today, only a small portion of businesses have existing partnerships with processors and banks to share signals from a transaction journey that can help fight fraud. Each entity individually facilitating a transaction calculates risk throughout the purchase process, but these fraud detection capabilities are limited when siloed. By using fintech services as collaboration platforms, businesses can partner with payment card issuers to improve authorization rates and reduce fraud.
- Detecting fraud earlier in the customer journey. As consumer trends continue to shift toward digital payments, including new options like buy now pay later, ACH payments, and digital wallets, businesses are deploying fraud prevention strategies earlier in the customer journey. Patterns and information are identified before the transaction period to preempt fraud and facilitate efficient transactions.
Businesses can depend on financial technology to minimize fraud
The financial technology industry is helping businesses maintain a safe and secure marketplace as fraud prevention complexity increases. Continuing and enhancing partnerships across the payments ecosystem, with governments, and support for evolving technology tools benefit consumers and drive economic growth.