Despite being critical to the profitability and success of eCommerce companies, online risk management and fraud prevention is often assigned as a secondary task to the payments or customer service teams. In fact, many businesses are reluctant to hire a designated risk management professional or team and will only do so after being hit with a significant fraud attack.
In this post, we’ll outline the problems this pervasive mentality creates, and explain why adopting a different approach to risk management is financially worthwhile to your organization.
Minimal Expectations Yield Sparse Results
The prevalent attitude among eCommerce companies is that online risk management has little to do with driving company growth – that is the job for their sales and marketing counterparts. In the minds of many eCommerce executives, the sole purpose of online risk management is preventing fraud and eliminating chargebacks. This attitude creates a challenging reality for those responsible for risk management.
Based on our work with risk managers at thousands of online merchants, the biggest challenges faced stem from lack of understanding of risk management within the organization. Many risk management teams don’t include a single fraud professional, and rely on customer service representatives and temporary staff to handle peak sales seasons. This lack of expertise, along with the risk-averse bias of most fraud detection and management tools and the focus on chargeback rate as an important KPI, leads to high decline rates. In other words, when it comes to data mismatches, missing information, or orders that are in any way borderline, most risk management teams and systems err on the side of caution.
High decline rates negatively impact not only sales revenue, but also customer loyalty. A legitimate customer whose order was wrongly declined is much less likely to return to your store and place another order. When inexperienced staff is tasked with reviewing orders for fraud and is measured only on chargeback rate, metrics related to customer experience, such as order review time and customer friction, are bound to be overlooked.
Pick The Low-Hanging Risk Management Fruit
In eCommerce, risk management is an under-leveraged asset in terms of financial performance, and the low-hanging fruit are declines & customer experience. On average, 66% of orders typically declined by merchants can and should be approved, resulting not only in lost revenue but also in customer insult. In addition, many merchants have long order review times and a high friction approval process, resulting in delayed shipping and poor customer experience.
Investing in improving the efficiency and accuracy of the risk management process can reduce these positive declines, boost sales revenue, and improve customer satisfaction. This can be achieved either by hiring fraud professionals (rather than customer service reps), or by allocating the time and money to properly train customer service reps for the risk management role.
Properly training the risk management team does not guarantee a streamlined, frictionless customer experience. eCommerce companies must forgo the notion that online risk management can function in a sort of vacuum, separately from the rest of the company. When planning to expand to a new market, for example, it’s crucial to involve not only sales and marketing, but also the risk management team. Management must allow sufficient time for the risk managers to become adept at using local data sources, and ensure they have the tools and knowledge required to efficiently review orders from this new market for fraud. Otherwise, the orders from this market might be declined, and all the marketing and sales efforts will go to waste.
A Most Cost-Effective Investment
At the end of the day, investing resources in risk management – such as making sure the risk management team has sufficient analysts and access to effective fraud detection tools, hiring skilled fraud professionals or taking the time to train new employees, and allocating IT or dev resources to implement new solutions or optimize existing systems, is in the company’s best interest. While in the short-term, optimizing the company’s risk management operations will require spending, this investment will generate significant revenue in the long-term. Not only will it allow your organization to recoup lost revenue from falsely declined transactions, but it will also improve customer experience, driving customer loyalty and potentially boosting customer lifetime value.