E-commerce

Three signs your online business needs better fraud management

Illustration of a fraudster with a fishing hook
Payvision
Payvision

Technology is seriously a double-edged sword. Just as digital advancement has revolutionized global commerce to no end, so too have the tactics that cybercriminals use to defraud honest merchants and their customers.

The arms race between fraudsters and fraud systems show no signs of slowing down either. PwC’s recent Global Economic Crime and Fraud Survey 2020 found that 47% of respondent companies experienced some form of fraud in the last 24 months, resulting in US$42B of losses[1]. In e-commerce land specifically, research has put the value of online fraudulent transactions up to $25.6 billion in 2020[2].

And with recent global events becoming the crucible for a boom in online retail, there’s just no other way to put it – businesses need to be vigilant and adopt preventative measures, or suffer the losses, both financially and reputationally.

If your business relies heavily on online transactions, chances are you’ve already got a fraud management system in place. But is it enough? Here’s how to tell if your fraud prevention and detection solutions need an upgrade for the future.

1. You’re getting more chargebacks

Chargeback fraud is one of the most common issues merchants will experience and can be costly and take excessive amounts of time to resolve.

Of course, some of your chargeback claims might in fact be valid or accidental, also known as “friendly fraud”, however both criminal and friendly fraud will escalate as you generate more online revenue, and can account for between 40–80% of all fraud losses in your business[3].

What’s most important to note here is that card schemes like Mastercard and Visa have measures in place to protect the integrity of their payment systems and cardholders against fraud. Here’s a look at what they entail.

Mastercard

Mastercard’s preventative initiatives include two programs, Excessive Fraud Merchant (EFM) compliance program and the Excessive Chargeback Program (ECP):

  • The EFM program monitors the total amounts of fraud and the number of transactions authenticated through 3D Secure (3DS) for every merchant and will be effective as of 1 October 2020
  • The ECP program monitors merchants that experience high levels of chargebacks monthly and comprises two categories – Excessive Chargeback Merchant (ECM) and High Excessive Chargeback Merchant (HECM). It became effective as of 1 April 2020

Learn more about the thresholds for each Mastercard program, including what fees and fines are involved for non-compliance, with our handy resources:

Visa

Similar to Mastercard, Visa has two programs that were created to monitor merchant fraud and chargeback risk[4], including the Visa Fraud Monitoring Program (VFMP) and the Visa Dispute Management program (VDMP).

Both programs were effective as of 1 October 2019, and each have Standard and Excessive threshold levels for merchants to observe.

Program Merchant threshold criteria
VDMP Standard level
  • where merchants have 100 more disputes, and
  • a ratio of 0.9% or higher of dispute counts to sales counts
VDMP Excessive level
  • where merchants have 1,000 or more disputes, and
  • a ratio of 1.8% or higher of dispute counts to sales counts
VFMP Standard level
  • where merchants accumulate USD 75,000 or more in fraudulent amounts, and
  • have 0.9% or higher ratio of fraud dollar to sales dollar amounts
VFMP Excessive level
  • where merchants accumulate USD 250,000 or more in fraudulent amounts, and
  • have 1.8% or higher ratio of fraud dollar to sales dollar amounts

Simply put, you need to keep chargebacks and fraud at an acceptable level, or your business gets put into one of the abovementioned monitoring programs, which can include hefty fees and fines, not to mention damaging your integrity as a seller.

So if you’re experiencing more payment disputes than you think is normal for your business – even if you’re just slightly suspicious – trust us, it’s a good idea to re-examine your existing fraud detection solution and make sure it’s helping you keep high chargeback levels at bay.

2. Your business lacks a dedicated fraud team or internal payments expert

Maybe you thought building a fraud management team was unnecessary before, or perhaps it was low on the priority list. No matter the reason, the need to fight fraud can’t be ignored today, no matter your business size.

To battle fraud effectively, the European Payments Council[5] recommends that merchants use a responsive, real-time fraud system that can identify suspicious behavioral patterns based on custom scenarios and rules. They also recommend performing an annual risk assessment to check if all mitigating measures are updated and functioning well – and this is where having experts in your team can really add value.

Studies have shown[6] that investing in a payment and fraud function will result in some amazing benefits for a fast-growing business that’s optimizing or expanding its payments network, including:

  • Reducing fraud by a few basis points, which translates into over 10% increase in profits
  • Reducing base costs by hundreds of thousands of Euros
  • Improving revenue by 10% or more
Illustration of a magnifying glass viewing a credit card with a fishing hook.

3. You’re using outdated fraud solutions

Once upon a time, traditional fraud management methods used binary statements (also known as rules) to block fraudulent payments. And while this was effective in the past, the rigidity in rule-based fraud management led to inaccuracies in fraud detection, creating false positives or false negatives.

False positives are when a transaction from a legitimate customer making a valid purchase is incorrectly flagged as fraudulent. Conversely, false negatives are when fraudulent transactions are mistakenly let through.

What’s alarming is that, according to a Card Not Present study, 42% of e-commerce merchants have no visibility into their false positive rate[7] – or the number of valid orders they unwittingly block, as well as subsequent revenue losses from these lost orders. It’s also worth noting that approximately 25% of falsely declined shoppers will take their business to a competitor[8].

It’s clear that fraud has become more sophisticated over the years. And with the multitude of tactics savvy fraudsters have in their arsenal today, the consequences of insufficient fraud management are nothing to sneeze at.

If your current fraud management solution isn’t helping your business to manage these occurrences properly, it could likely frustrate customers and lower retention (which as we all know, is difficult to obtain in the first place), diminish employee morale, and even cause bankruptcy in the long run.

How to move forward to improve fraud detection, management and prevention

If you find that one or more of these issues apply to your business, you’re certainly not alone. Only 40% of businesses are confident in their ability to detect fraudulent activity[9].

Collaborating with a payments expert can help to address the aforementioned issues and take your fraud management strategies into the future. This includes using machine learning – which is regarded as the most powerful fraud-fighting technology available today – to improve your current set up.

At Payvision we use a fraud management solution that is based on a highly customizable machine learning model to analyze vast datasets and signals in real time to calculate a fraud score. This helps to determine the next steps for each transaction – if they should be accepted, rejected, escalated for manual review or require 3D Secure.

The outcomes of these decisions are fed back into our machine learning models so they continuously learn and adapt to your customer’s profiles.

Proactive action is your first line of defense against fraud

Fraud can present itself in various forms and can attack your business from almost every angle imaginable. The good news is, we’re here to help.

To find out how your business can constantly (and effectively) be on guard against fraud scenarios without compromising your customer experience, speak to one of our payment experts today.


[1] (PwC Economic Crime Survey)

[2] (Juniper Research Online Transaction Fraud)

[3] (Forbes eCommerce Fraud)

[4] (Visa Dispute Monitoring Program)

[5] (European Payments Council Fraud Trends Report)

[6] (The Paypers Data Driven Fraud Prevention)

[7] (Card Not Present Fraud Study)

[8] (The Paypers Understanding Fraud False Positive Rate)

[9] (Experian Global Fraud Report 2018)