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Rethinking fraud management in a hyper growth digital economy

As the world tries to assess the pandemic’s impact on the global economy, one thing is certain: eCommerce has powered Australian retail in 2020, and shows no signs of slowdown. Six months into the pandemic, online shopping was up nearly 76% from the same period in 2019, and September online sales grew 82% YoY. 

But in business, there are no rewards without risks. Bad actors will always follow the money trail, and as fraud marks its presence in online sales channels, Australian merchants will need to implement a sustainable, foolproof program to keep fraud at bay. Advanced technology and an inclusive approach to fraud management will need to be at the heart of this strategy. 

False declines cause more damage than chargebacks 

Fear of fraud is stunting growth at a far greater pace than actual fraud. While it’s easy for merchants to monitor fraud-related losses (in the form of chargebacks), it’s difficult to assess the money left on the table. As fraud teams over decline good orders by relying on outdated rules to detect fraud, they may be patting themselves on the back for achieving low chargeback rates. They often resort to protective measures like 3D Secure and two-factor authentication, but ultimately these measures introduce friction into the shopping journey, resulting in high drop off rates and lost revenue. 

The trick is to find the right balance between approval/acceptance rates and chargeback rates. Merchants who adopt a risk-averse approach choose to focus on lowering their chargeback rates, but there is a cost. They’re often preventing good customers from completing their purchase, and sending them to the competition – a loss in revenue and a blow to brand reputation. Put simply, these customers never come back. 

Legacy fraud solutions that leverage rules to detect fraud only aggravate this problem. The problem with these rules-based decision tools is the temptation to continue adding more and more rules in the hope of preventing fraud. However, these rules end up hurting merchants, as they’re designed to reject more orders. 

Digital transformation is pointless if it’s not scalable 

In a recent conversation with a large retailer, their fraud team reported having complicated matrices of rule sets in place to prevent fraud. Since these rules are reactive, they require constant tweaking and often act as a barrier to a customer completing their purchase. Despite the increased investments that Australian businesses are making in marketing, customer acquisition, and online user experience, many companies end up with a much smaller pool of customers who can actually make a purchase. 

Another dilemma is manual review. An Australian merchant we spoke to had a surge in online sales due to their stores being closed. To complicate matters, the majority of these orders are from new customers they’ve never encountered before. Their team considered these new orders risky, and have been manually reviewing many of them. But with these volumes, they simply cannot keep up. Even though they ended up expanding their fraud review team, which now has dozens of employees, they are still playing catch up.

Unfortunately, the team is still working over weekends and at peak times, while orders sit for hours in a queue, thus delaying their fulfilment, shipping and delivery to customers. 

When shopping volumes double, fraud is likely to rise – so should merchants focus on the dangers, adding more rules and friction to keep fraud out? Or should they focus on the opportunity – an influx of new consumers, new revenue and new customer lifetime values? 

It’s time to future proof your business 

Ecommerce has become a lifeline for merchants whose offline channels have been severely impacted by the pandemic. Investing in digital makes perfect sense, but merchants need to prioritise scale to ensure that online operations can adapt quickly to volatility. 

Thankfully, Australian businesses are starting to shift away from the rules-based risk-averse fraud tools. They’re investing in technology, and adopting machine learning solutions designed to optimise performance in their place. The lockdown period and the realisation that eCommerce is not going anywhere has only accelerated the pace of change. 

An operation that lacks the ability to scale, pivot in real-time, and maximise online sales will lag behind the competition, and will fail to capitalise on opportunities as they come. That’s why the steps taken now by merchants to manage fraud are critical. Forward thinkers will leverage technology to quickly and accurately vet online orders. This will ensure that fraud management operations aren’t making matters worse, but are pushing revenue goals and brand reputation forward. By automating fraud review, merchants can ensure their business will be prepared to handle whatever changes may lay ahead, no matter how drastic or unforeseen.