The Role of Fraud Prevention in a Recession
Retail e-commerce sales surpassed $4.9 trillion worldwide last year and are predicted to exceed $5.5 trillion by the end of 2022. However, to eight out of 10 small to midsize business (SMB) owners, those numbers aren't striking joy as worries over a looming recession mount. Over half of Wall Street's investment and economic professionals seem to support their concerns, attributing an inevitable economic downturn to the Fed’s attempts to combat inflation by raising interest rates and running off the balance sheet.
Whether a recession will actually hit or not, its duration or severity, many businesses, including Amazon.com and Meta, are preparing to weather an economic slowdown by cutting spending and scheduling layoffs. Such sentiments influence SMBs to follow suit, and many are opting out of renewing software contracts as well as tightening their employee base. The general attitude and trend, while worrisome to business owners, is welcome news for fraudsters and bad actors who thrive by exploiting vulnerabilities such as understaffed customer service teams, overworked warehouse workers, and lapses in advanced fraud prevention software.
Fraudsters are opportunists and in addition to striking when they sense "blood in the water," they're motivated by economic concerns themselves. The end of federal COVID relief and unemployment benefits affect many bad actors and they require new revenue streams.
In fact, fraud attempts have been on a steep incline in previous months. NoFraud, the company I lead, went from tracking 1.13 million fraud attempts and transaction declines in Q1 ’21 to 2.4 million in Q1 ’22, a whopping 112 percent increase. NoFraud also detected a 10 percent increase in triangulation fraud for items like baby formula that folks desperately need, as well as a notable uptick in fraud instances for seasonal items like pool and barbecue equipment.
The present is as good a time as any for every e-commerce business to prioritize expenses and identify costs that are operational necessities or provide high value. The key to getting through a recession, and good business sense no matter what the economic landscape may be, is learning how to become more profitable with the resources you already have. It’s time for technology to rise to the occasion and help retailers do just that, without spending tons of money.
One of the major responsibilities of effective fraud prevention, in addition to blocking fraud, is being able to unblock orders that may appear suspicious but are in fact legitimate. Relying on rigid gateway filters often causes many good orders to be rejected, leaving real money on the table. Rejecting legitimate customers due to suspicions of fraud (aka "false declines" or "false positives") such as a billing address that's miles away from the shipping address, not only causes the merchant an immediate loss of the value of the order and loss of the customer acquisition costs, but the lifetime of the customer is lost as well as any positive review or recommendation that customer could potentially pass on to others.
Proper fraud detection and prevention software employs advanced machine learning coupled with expert human oversight to examine all the details of every order to determine the likelihood of fraud indicators actually having valid explanations for apparent discrepancies, even conducting live cardholder verification procedures, to ensure good orders aren't being lumped together with fraudulent ones.
Efficiency is another high value benefit that effective fraud prevention offers e-commerce businesses. Leaving fraud prevention and chargeback management to fraud professionals alleviates merchants from the timely task of manually reviewing orders for fraud and disputing chargeback claims. Enterprises that rely on manually reviewing orders often suffer from fulfillment delays and bottlenecks during promotions and holidays.
Additionally, fraudsters are quick to identify loopholes in businesses that are reliant on manual review, often placing orders late at night or exploiting time zones to place orders that are likely to reach the warehouse before being reviewed for fraud. Another fraud tactic is for fraudsters to purchase a gift card using stolen credentials at 3:00 a.m. The fraudster is free to use the legitimate cardholder’s billing and shipping addresses to trick the merchant’s rudimentary fraud rules into passing the order as low risk, as no merchandise is being shipped with this purchase, and the cardholder is unlikely to notice the unauthorized purchase at that hour. The fraudster will then use the gift card to place a separate order, usually within a few minutes of purchasing the gift card, and this time the fraudster is free to have merchandise shipped to the location of their choice without raising any flags.
Using one tactic or another, when the economy falters, fraudsters pounce. The good news for e-commerce businesses is that not only can they protect themselves from rising fraud at an affordable price point, but they can utilize their fraud protection to increase overall revenue, improve efficiency, foster customer relationships, and help them transverse any potential recession unharmed.
Isaac Gurary is the CEO of NoFraud, a provider of e-commerce fraud prevention and revenue protection.
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