Yes, you read the headline correctly. A bit of fraud can actually be good for your business.
This is because if you don’t see any fraud happening, it is very likely that you are just not aware of it.
We all know that fraud screening is a very complex process which runs in the background. What is interesting though is that the process dates as far back as the first ever recorded fraud (around 360 BC).Through the centuries, the ways in which fraud is perpetrated have changed and fraud screening has adapted as a consequence.
Most recently fraud has migrated from in-store to online and from chip and pin. While it is down overall, fraud is still a threat to business. Indeed, the true annual cost of online fraud is now many times the $100bn that was estimated a few years back. This is supported by RSA’s recent figures predicting that fraud was set to result in losses of £2.1m per hour on Cyber Monday.
All the industry can do is to continually try to stay one step ahead by devising new anti-fraud methods and optimising the way fraud screening looks for patterns in the data. In an ideal world, retailers need a detailed and tailored behind-the-scenes approach, where their back-end systems are able to spot anomalies in purchasing patterns.
But, fraud and e-commmerce go hand-in-hand. In Africa, it is estimated that 7 per cent of online transactions are fraudulent and the continent is not alone in its troubles (5 per cent in Asia, 4 per cent in South America, 2 per cent in Europe and 1 per cent in America). These are staggering numbers when extended across millions of transactions all around the world.
It is up to each individual merchant to find the parameters for fraud screening. The balance will differ between each retailer, but they need to remember that every step of the customer journey counts. For every action a customer is asked to take, the merchant prolongs the customer journey – and therefore increase the risk of them dropping off which can lead to losing a sale.
What is interesting is that when they suspect fraud, 40 per cent of businesses void the transaction immediately. And with 46 per cent having lost up to £5,000 in the last 12 months to fraudulent activity, it’s easy to see why they aren’t taking any chances. But knowing how fraudsters work and what to look out for can help you strike a happy medium between protecting your business and not turning away genuine customers.
The very nature of online commerce means you don’t really know who you are dealing with – but there has to be an element of trust. Otherwise there is a danger that a company will end up accusing a genuine customer of fraud, simply because there is a slightly unusual pattern in their buying practice. This might eventually lead to losing the customer for good and damaging the merchant’s reputation.
Many organisations do not approach the issue in the right way – it is not about the total elimination of fraud. Having no fraud means controls are too tight and legitimate transactions are being turned down, losing significant revenue. At the other end, too much fraud suggests controls are not stringent enough. Either way, having ineffective controls in place also means data generated that might be used to tackle fraud in future is actually providing a misleading picture of the overall problem, hampering efforts to tackle it.
Balance is key.
Chris Wade is head of strategy and product management at Sage Pay Europe.
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