The New Economics of Fraud

July 2, 2021

By: Laura Jorgens, Director of Strategic Partnerships , Forter

Economics of Fraud

When most merchants think of fraud prevention, they concentrate on managing risk and minimizing costs. They don’t consider how fraud prevention can serve as a driver for growth. Fraud prevention is about far more than minimizing risk and cutting costs. It’s also about finding opportunities to deliver new services and seamless shopping experiences to your customers, which boosts revenue.

Thinking about fraud prevention as a growth driver begins by considering these four main components:

1) Reduce friction in the customer experience

Friction at any point in the purchasing journey can lead to frustrated customers and abandoned carts. Added friction at checkout is especially problematic for merchants. While many shoppers may spend a lot of time on your site—browsing through your catalog, reading product reviews, adding items to their cart— they don’t want to spend much time or effort going through checkout. In fact, buyers tend to bail out of purchases if they have to complete more than three steps at the point of transaction. 

To increase conversions and decrease cart abandonment, online stores must reduce, or better yet eliminate, friction in the shopping journey. Unfortunately, many merchants use legacy fraud prevention tools that rely on rules and manual reviews, adding friction to the checkout flow. Friction comes in many forms, such as unnecessary verification steps, unwarranted credit card declines, and lengthy manual reviews. 

Online merchants must provide good customers with the shopping experience they deserve and expect while also identifying and stopping fraudsters, which requires modern technologies like AI and machine learning.

2) Decrease false declines, especially for new customers

False declines can cause up to 75x more lost revenue for merchants than fraud. You need a fraud solution that eliminates this unnecessary friction and allows you to provide convenient features like one-click checkout.

A false decline means a legitimate shopper has been incorrectly flagged as a fraudster and blocked from checking out. If the customer receives a false decline from a legacy fraud prevention system, they typically have to wait for the transaction to go through manual review, which sometimes takes days. After that, the customer service team will request that the customer re-enter their payment information. Having an automated fraud prevention solution with real-time decisioning minimizes false declines and removes barriers to the fast, convenient checkout experiences your customers expect.

False declines hit new shoppers the hardest—new shoppers are 5–7x more likely to be declined by current fraud tools than returning customers. At Forter, we call this phenomenon New User Missed Opportunity (NUMO). NUMO costs ecommerce businesses millions in lost opportunities, and hundreds of millions more in lost lifetime customer value (CLTV). Forty percent of customers who are falsely declined will purchase from a competitor instead.

Legacy systems often decline legitimate new users because they have little to no data to make an accurate assessment about their identity and trustworthiness. You need a fraud prevention solution that can accurately identify and assess the risk of new and existing customers by leveraging a global network of merchant data.

3) Offer new services so customers can shop when and how they want

An accurate and automated fraud prevention solution not only allows you to reduce the risk of processing transactions but also the opportunity to offer new services—services that customers expect to see when they shop at an e-commerce site, such as:

  • Buy online pickup in store (BOPIS) – The ability to buy items online and pick them up in the store or curbside has become a popular option with consumers. Research by Adobe conducted during the 2020 holiday shopping season found that retailers who offer curbside pickup for online orders saw a 31% increase in conversions. 
  • Same-day delivery – Merchants must deliver orders fast or risk losing customers. For many consumers, fast delivery means receiving their order the same day they place it. According to a PWC study, 42% of consumers consider fast and reliable delivery as the most important factor when they shop online.

BOPIS and same-day delivery are prime targets for fraudsters, but real-time fraud decisioning allows you to provide these services to legitimate customers while blocking fraudsters from taking advantage of them. These services also uniquely require operational speed and efficiency, making the automation of fraud decisioning a new requirement. 

4) Expand your business into new markets

Some merchants are hesitant to expand their businesses internationally or into new product categories because they think the risk of fraud is too great. However, merchants can safely expand into new countries and launch new products to grow revenue—as long as they have a global and automated fraud solution in place first, minimizing the risk. 

For example, if you want to expand your business into China, you need fraud models that understand location-related differences and the subtleties of regional behavior. Many Chinese shoppers use package forwarders for their orders instead of shipping directly to home addresses, something fraudsters often do as well. 

Maybe your expansion plans include launching a new product and promoting it with a huge flash sale. Your system must be capable of assessing the risk of hundreds, thousands, even millions of transactions without error or added friction.

Merchants must strive for operational excellence

Winning in the new normal requires that merchants achieve operational excellence and create the best omnichannel customer experience possible. Customers want to shop when and how they want without encountering friction like unnecessary verification steps and false declines. They want personalized shopping experiences and convenient service options like BOPIS and same-day delivery. If you can exceed their expectations, you’ll see many more returning customers and greater brand loyalty. However, exceeding the expectations of your customers is an impossible task without a modern and effective fraud prevention solution.

Forter is the leader in e-commerce fraud prevention, processing over $250 billion in online commerce transactions and protecting more than a billion consumers globally from credit card fraud, account takeover, identity theft and more. The company’s identity-based fraud prevention solution detects fraudulent activity in real-time, throughout all online consumer experiences.

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