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Should online merchants fear their customers?

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If you heard that two-thirds of online retailers decided to turn away legitimate, paying customers for fear that somewhere out there, someone wanted to defraud them, you’d think they were nuts, right?

But unfortunately, that’s the sorry state of much of the old anti-fraud strategy embraced by online retailers today. It’s a state of affairs that has garnered “Man Bites Dog” headlines like this one from Bloomberg: “Retailers are so wary of fraud they’re rejecting real customers.” 

So, what’s going on? Well, it isn’t exactly news in retail circles or online fraud protection circles that merchants decline legitimate orders as a way to reduce the chance of online fraud. Consider the old joke: 

Q: What’s the best way to avoid online fraud? 

A: Don’t ship any orders.

But it’s not very funny. In fact, it’s sad. Retailers are missing out on millions of dollars in sales because they are not taking advantage of advances in the fraud field that squarely address the issue of “false declines,” or the practice of incorrectly withholding legitimate online orders for fear of fraud. 

Online fraud protection is undergoing a transformation

Like everything in the digital world, online fraud is rapidly changing. Fraudster’s methods are evolving at breakneck speed and their ability to scoop up stolen identities is growing just as fast. But the methods for retailers to protect themselves are also undergoing a rapid transformation. 

In recent years, a whole new fraud protection paradigm has emerged — guaranteed fraud protection, a model that relies on machine learning, human intelligence and a shift of liability for fraud from online merchants to fraud-protection providers.

Something had to change, as is made painfully obvious by a new report that was the subject of Bloomberg’s man-bites-dog story. Experian, the big consumer credit reporting agency, surveyed 500 businesses and 5,500 consumers to assess the current state of fraud protection.

The resulting report describes a world in which businesses feel under siege by fraudsters and torn between two competing and self-defeating impulses:

  1. Let fraud slip through the cracks to avoid slowing down orders, thereby ensuring a smooth customer experience. 
  2. Turn down legitimate business in order to lower the risk of shipping fraudulent orders.

In fact, Experian says 67 percent of retailers surveyed said they err on the side of declining suspicious orders, even though they know some portion of the orders they’re declining are legitimate. When you add financial institutions and other types of businesses that Experian surveyed, 71 percent err toward turning down transactions for fear of fraud.

Declining legitimate online order comes with big costs

Their reasoning? Two-thirds of those surveyed said shipping a fraudulent order is more costly than declining a good order — a belief that sounds reasonable, but isn’t necessarily so. 

Experian concluded the survey respondents’ misperceptions about false declines might have stemmed from “not taking into account the cost of a negative experience.” In other words, once you refuse to ship a legitimate customer his or her order, you’re not likely to see them as a customer again.

Moreover, a study commissioned by Signifyd found that over a three-year period, a major retailer that deployed a guaranteed fraud protection system saved $2.7 million in fraud costs and made an additional $3.2 million in sales by not withholding orders it otherwise would have declined.

It is hard to blame retailers for the misperception. Experian’s report tells the story of exasperated executives who know they aren’t tackling fraud as well as they could be. In fact, 72 percent said they are more concerned about fraud today than they were a year ago — including 45 percent who said they were “significantly” more concerned.

And why not worry more, given that 65 percent said they are suffering the same or larger fraud losses than they did a year ago. As for what they’re doing about it: Only 54 percent said they were “somewhat confident” that their organizations could detect fraud. Only 35 percent expressed an interest in being a leader in detecting and mitigating fraud.

Guaranteed fraud protection attacks failed approaches

It was against the backdrop of discouragement and despair described in the Experian report that the paradigm of guaranteed fraud protection emerged. The best guaranteed fraud solutions use big data and machine learning to identify fraudulent and legitimate orders, while shifting the liability for chargebacks and other fraud-related costs to the fraud-management provider.

The arrangement tackles the problems inherent in the two approaches that merchants have historically turned to.

First, consider the practice of letting fraudulent orders slip through in order to preserve the overall customer experience. The guaranteed fraud protection model relies on data from millions of transactions to differentiate between good and fraudulent orders in milliseconds and on a large scale. And because the model provides a 100 percent financial guarantee for all approved orders that turn out to be fraudulent, merchants no longer need to worry about fraudulent orders slipping through.

Second, the problem of losing out by withholding orders that are actually legitimate is also solved. Merchants can ship more orders by relying on the machine’s intelligence and knowing that they are covered should fraud actually result from an order that was approved and shipped under the guarantee model. 

Fraud is not going to go away. In fact, the respondents in Experian’s survey will tell you that the problem is growing. Wishing the problem away is apparently not working. That’s the bad news in Experian’s report.

The good news: Help is not only on the way, it’s here.

Contact Mike Cassidy at Follow him on Twitter at @mikecassidy.

Mike Cassidy

Mike Cassidy

Mike is the head of storytelling at Signifyd. A former journalist and a retail geek, he covers ecommerce and the way technology is transforming digital commerce. Contact him at