For online retailers, CNP fraud is a serious problem that will only get larger as the eCommerce market continues to grow. According to a recent report, fraudulent eCommerce transactions are projected to increase by 55% over the next 3 years, reaching approximately $18.5 billion by 2018 in the US market alone.

Despite this harsh reality, senior management isn’t giving this issue the attention that it deserves, as executives fail to recognize the correlation between fraud management and the company’s overall growth and success. It is common practice for fraud prevention to be assigned as a secondary task to the customer service or payments teams, and the resources allocated to handle fraud are insufficient. On top of that, fraud managers’ success is measured in very narrow terms. The wrong incentives and performance metrics are being put on the people managing fraud – more focused on lowering chargebacks than on protecting revenue.

In this post, we set-out the value of fraud management operations as a whole, and why it is imperative that senior management play a larger role and assume responsibility for this issue.

 

Why eCommerce CEOs Should Care About Risk Management

C-suite managers in eCommerce companies need to pay greater attention to online fraud management operations, because failing to appreciate the importance of risk management can negatively affect the entire organization’s success in a number of ways:

  1. Wasted Customer Acquisition Cost
    Online merchants decline between 1% – 10% of all orders placed on their stores.  Fraud managers usually have a hard time estimating how many of the declined transactions are “false positives” – meaning legitimate orders that were wrongly rejected due to fear of fraud. Meanwhile, Riskified numbers show that between 40% – 80% of typically declined transactions are actually legitimate.  Every time an order is falsely declined due to fear of fraud, not only is a terrible experience provided to a potentially new customer, but also the marketing investment spent to acquire that customer goes to waste.
  2. Stunted International Expansion
    Every market has unique shopping patterns, payment methods, social networks and data sources.  The vast majority of fraud prevention tools are designed to highlight mismatches and flag any potentially risky data point within an order. This, along with the focus on eliminating chargebacks as a fraud team KPI, leads to risk-averse fraud review processes, a tendency that is heightened when the fraud team lacks the knowledge or data to understand orders from a certain country.
    As such, when an online retailer decides to expand to new countries or to invest in growing the international customer base, it is imperative to keep the fraud team in the loop. Otherwise, the fraud review process can unwittingly undermine marketing and sales efforts to expand globally.
  3. Organizational Inefficiency and High Operational Costs
    Many eCommerce merchants hesitate to invest in risk management operations and assign fraud prevention to the customer service or payments teams. Therefore, those tasked with fraud detection are usually not risk management experts.
    As a result, more orders than necessary are reviewed manually, a process that is often unnecessarily lengthy and costly.  To prevent a backlog in the manual review queue and in an attempt to minimize shipping delays, it is common practice among online retailers to hire more staff to handle orders as volume grows. This is especially true during sales seasons, when temporary reps are recruited to support the fraud team. The inefficiency stemming from senior management’s reluctance to allocate resources and to invest in hiring experienced fraud analysts can result in high operational costs and in subpar customer experience.
    And online retailers are often unaware of these high costs. According to the MRC’s 2014 Global Fraud Survey, while manual fraud review typically comprises 50%-60% of merchants’ total fraud management costs, only 25% of online retailers take manual order review into account when estimating eCommerce fraud costs for their business.
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  4. Inability to Swiftly Stop Fraud
    When fraud management isn’t a priority within the organization, it isn’t monitored closely, and there is limited visibility into the factors that are generating fraud-related losses. The MRC 2014 Global Fraud Benchmarking Study found that 60% of respondents were unable to provide a breakdown of revenue lost to fraud by payment method, and only one third of eCommerce merchants are tracking fraud by mobile channel.
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    Without proper tracking and reporting, there’s no way eCommerce companies can identify the most swift and cost-effective ways to avoid fraud and reduce costs associated with risk management.

 

Five Key Steps Senior Management Should Take

As a business leader, your core focus is maximizing value for the organization, and risk management is typically an untapped place to identify new areas of growth. There are several key steps that will allow you to better understand the overriding impact fraud prevention operations have on your company’s overall revenue and growth.

    1. Learn more about your company’s current fraud management operations, with the end goal of avoiding fraud, ensuring a frictionless and positive customer experience, and boosting revenue. Some of the questions you should be asking to build this picture are:
      1. What is our approval rate?
      2. What percent of orders are being declined or filtered at the gateway level?
      3. What percent of orders are being reviewed manually?
      4. What is the average length of the manual fraud review process?
      5. How does our fraud detection process affect our customers?
      6. Are we utilizing services that require additional steps within the checkout process? Are we contacting our customers to validate their identities?
    2. Work to identify the most cost-effective changes that can be made to your company’s fraud management operations. For example, ensuring fraud analysts are kept in the loop regarding new sales and marketing initiatives, reducing order review times, removing generalized fraud filters, and/or incorporating different tools or systems in the fraud review process.
    3. Evaluate potential investment in optimizing fraud detection and prevention operations through both technology and the provision of dedicated personnel.
    4. Acknowledge that engagement with third-party vendors and external solutions may prove to be cost effective for your business.
    5. See the bigger picture in terms of how your fraud operations impact customer experience, sales revenue, and growth in the domestic and international spheres.

 

It’s Time to Assume Responsibility

Senior executives must begin to view their risk management team as revenue defenders rather than as merely a cost center. The performance and success of fraud management operations should not be measured simply by low fraud levels, but also by their impact on revenue and customer experience.  Thus, even with reservations on the cost of fraud management systems in the short term, it is imperative to bear in mind the long term cost effectiveness and business image which override such initial costs.

Taking the time to speak with your fraud prevention team to gain an authentic picture of the current state of your company’s risk management operations could, perhaps, be the first step in taking responsibility over this function.