Fraud Prevention: Online Retailers’ Secret Weapon for Combating Economic Headwinds
Following several years of exponential growth, e-commerce is bracing for lean times ahead. Online retailers are contending with economic headwinds fueled by a global conflict, a drawn-out pandemic, and rising inflation. A June 2022 survey reveals that 83 percent of Americans are cutting back on personal spending due to increased inflation.
Online payment fraud is also on the rise. A recent study from Juniper Research found cumulative merchant losses to online payment fraud globally between 2023 and 2027 will exceed $343 billion. Fraud tactics such as account takeovers (ATOs) continue to plague the industry, compromising reputation and profits.
Navigating these headwinds will require online retailers to implement new ways of capturing revenue. One overlooked path is strategic fraud reduction. A sophisticated approach can help merchants retain existing and attract new customers while bolstering brand reputation. As global fraud propagates through e-retailers, automation ensures payment security while improving the customer experience (CX).
Today’s consumers expect high standards of speed, security and convenience. Online retailers must work even harder to build trust and meet heightened CX standards while combating payment fraud. A review describing an unwarranted payment decline, an instance of fraud, or even a slow checkout experience can damage a retailer’s reputation and dissuade new customers. Retailers must maintain a delicate balance between account protection and friction at checkout.
Retailers will gain from prioritizing customer retention — acquiring a new customer is five times as expensive as retaining an existing one. In addition, a returning customer is more likely to convert at checkout than a new shopper. Based on Salesforce’s formula, increasing customer retention by even 5 percent can increase profits by at least 25 percent. Keeping customers coming back for more establishes a strong brand reputation that can significantly cut business expenses and generate profits through increased lifetime value, and a secure and seamless checkout experience plays a significant role.
Purchasing friction can take different forms; among the costliest is false declines. Roughly 40 percent of customers abandon their cart after the first payment decline. In 2020 alone, payment declines cost retailers $600 billion in global e-commerce revenue. While these statistics are distressing, improved payment decline parameters can combat climbing fraud rates.
Less Friction = Less Fraud
Advances in artificial intelligence (AI) are helping e-commerce retailers reduce purchasing friction, curb fraud, and minimize risk from chargebacks. For example, AI and machine learning (ML)-based technology can help retailers leverage large data pools from multiple vendors on return rates and fraud rates for more strategic decisions. AI and ML can also provide instant analysis to approve or decline a transaction. Higher approval rates not only strengthen customer loyalty and increase profits, they also help companies avoid fraudulent chargeback costs.
Chargeback fraud is a chief concern for online retailers. Automation helps retailers both avoid fraudulent chargeback costs and dispute fraudulent chargebacks. Automated chargeback representment services can streamline the resource- and time-intensive evidence collection process. ML technology can draw on extensive order records to scrutinize IP addresses, conduct device fingerprinting and behavioral analytics, and more. It can then compare data to past orders in merchant networks to help retailers identify chargebacks that are likely to win in a dispute.
Simply put, AI can give online retailers the opportunity to offer the secure, streamlined checkout experience required to compete with marketplaces like Amazon.com and Alibaba. Faced with a dip in consumer spending, rising CX expectations, and evolving online payment fraud tactics, retailers can level the playing field and weather the stormy days ahead.
T.R. Newcomb is vice president of strategy and corporate development at Riskified, an e-commerce fraud management platform.
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T.R. Newcomb is vice president, strategy and corporate development at Riskified, an e-commerce fraud management platform. He is an internet/technology executive with 15-plus years experience across multiple functions, including business development, operations management, corporate development, and private equity investing.