Fraud prevention. It plays a crucial role in an eCommerce company’s success or failure, and as eCommerce continues to grow, it will only become more important to retail as a whole.
Actually excelling at fraud prevention, however, is a lot easier said than done. For starters, fraudsters are constantly adapting their tactics, finding out what gets past fraud filters and manual reviews in an almost real-time evolution. Secondly, it’s hard to find an optimal balance between rejecting fraudulent orders and accepting legitimate ones when the losses from chargebacks are so visible and easily quantifiable, yet the losses from false declines are much harder to quantify.
By tallying up all the chargeback refunds, costs to replace merchandise, and chargeback fees over a time period, online merchants can quickly produce an accurate estimate for the losses due to fraudulent orders. This, incidentally, is why it’s relatively easy to build the business case for getting chargeback protection from a third party order review vendor.
Generating a similiar metric for false declines, however, is much harder, mainly because etailers don’t receive a “false decline” fee after they turn away a good customer. Secondly, in order to get an accurate total, the merchant would have to identify how many legitimate shoppers they turned away, but if that merchant could accurately identify all those consumers, they wouldn’t have declined them to begin with.
And that’s a real problem, since the losses from each false decline go well beyond that particular order. All the money that was expended to draw that shopper into your funnel and to get that order becomes wasted. There are longer-term consequences too: a consumer who has been falsely identified as a fraudster by a merchant is unlikely to ever do business with that merchant again, and there goes the customer’s lifetime value. Lastly, each customer you reject becomes a potential customer for your competition, thus hampering your future growth.
Given all this impact on short-term and long-term revenue and losses, you’d think that fraud prevention would be the responsibility of an eCommerce company’s senior management. You’d also think that since false declines are a major obstacle to growth, the C-suite would make it a higher priority.
For too many online merchants, that simply isn’t the case.
Fraud prevention is undervalued by senior management
Why? Well, part of the problem is the thinking that since chargebacks are due to fraudulent transactions, and fraud management’s main goal is to reduce chargebacks, fraud prevention thus should fall under the payments or customer service teams. Fraud prevention gets seen as an operational detail of order processing, not a C-level concern.
Another problem is a mindset which views fraud prevention as merely a cost center, unrelated to protecting revenue, which is seen as the purview of the sales and marketing departments.
Why the C-Suite needs to focus on fraud prevention
When fraud prevention gets undervalued in an eCommerce company, upper management’s natural risk aversion combined with the chargeback/false decline imbalance explained above results in a strong preference for for strict, simple solutions which minimize chargebacks at the expense of turning away lots of revenue, customers, and future growth.
There are secondary effects too: inadequate funding for talented and experienced fraud analysts, hesistancy to partner with 3rd party solution providers (because they don’t see the added value), and no access for the order review team to outside data sources. These in turn create bottlenecks from the high manual review workload, long turnaround times, delayed shipments, and unhappy customers. The there’s all those losses from false declines caused by unsophisticated tools and policies which give quick and safe, but inaccurate accept/decline decisions.
It doesn’t have to be this way. When senior management understands fraud prevention as more of an opportunity than an obligation, it can take ownership and invest resources. Unlike chargebacks, those investments would never come back to haunt them.