Fraud is widespread these days and not going away anytime soon. According to a recent industry report, 38% of UK retail sales will be done online by 2026. Moreover, by 2026 almost 40% of all retail chain sales will be online. Whilst this is good news for eCommerce businesses, it is also good news for online fraudsters, with payment fraud being an ongoing problem worldwide. According to TechRadar, e-commerce fraud has reached $20 billion a year.
As technology advances, the challenges around fraud continue to grow and evolve. How online payments are made (and how secure they are) are critical concerns for consumers. A recent survey showed that although credit and debit cards were the most popular payment methods accepted by businesses, alternatives such as digital wallets or bank transfers were also on the rise. Notably, 44% of consumers said security was the most crucial factor they considered when choosing how to pay for online purchases.
So, with the risk of fraud not disappearing, it is essential to have the right tools to prevent it. Payment platforms need to assist companies in safeguarding their revenue against fraud by flagging high-risk payments while still ensuring the best possible customer experience.
What is fraud, and how does it happen?
When we talk about financial fraud, it often refers to someone making unauthorised payments and purchases. This can affect any business dealing with any payment transaction. There are two types of fraud when it comes to payments – “false negative” (when an act of fraud goes undetected and through the payment system) and “false positive” (when a faulty fraud detection system blocks a legitimate transaction).
Being able to detect fraudsters whilst avoiding blocking real customers is undoubtedly a tricky balancing act for businesses. If a business focuses too much on detecting false negatives, it increases the risk of blocking good customers. However, if a business prioritises reducing false positives, it risks more actual fraud going undetected.
Both issues can be equally costly, leading to financial loss and reputational damage. For instance, it was found that 33% of US consumers would not shop again with a retailer after a false decline. This represents a hit on a business’s revenues, both short-term and long-term. Worryingly, analysts and fraud experts estimate that between 30% and 65% of all rejected online orders are legitimate and not fraudulent.
What can payment platforms do to prevent fraud?
Advanced payment platforms can protect businesses by reducing potential risks and costs related to fraudulent activity. This simultaneously reduces the friction that might cause customers to leave and a business’s reputation to be damaged.
Tackling fraud can be a daunting prospect for businesses, which is why payment platforms are equipped with the necessary technology to help tackle these issues. For example, they often have built-in machine learning expertise that enables them to isolate high-risk payment transactions, helping to boost company revenue. In addition, these machine learning models use predictive analytics to block any suspicious activity automatically.
Stripe, for example, a global leader in payments infrastructure, has this capability amongst many others. Its overall fraud-prevention system keeps businesses safer and reduces the risks and costs associated with fraudulent activity, helping businesses save money automatically. In addition, the platform lets businesses customise their risk thresholds to fit their specific business needs and help them solve their most relevant issues.
For example, for a low-margin company selling T-shirts, fraud is often costly, so it might want to block more transactions even if it occasionally blocks a good customer. On the other hand, for a high-margin software business, the profit margin on a good charge may far outweigh the cost of one fraudulent transaction, so it may want to optimise for conversion. In the case of each company, customised rules can help the business better meet its particular goals.
The bottom line
Fraud is constantly evolving and an ever-present risk for online businesses. Implementing the right tools to fight fraud is essential to defend against costly attacks and minimise the chances of blocking good customers. Furthermore, these tools are crucial to protect a company’s reputation and ensure a seamless checkout experience.