Retailers need a robust tech strategy to confront the rising cost of fraud.

Digital technology has brought a relentless wave of innovation, making it easier for customers all over the world to purchase what they want with a variety of payment methods – from credit cards to mobile wallets and even cryptocurrencies such as Bitcoin. While these innovations bring welcome convenience for the consumer and broaden the market for retailers, they have also driven sharp increases in the volume of fraudulent transactions merchants and issuers are subject to.

Retail fraud is a growing issue for merchants, who are increasingly looking for solutions that will help them deal with the problem in the long-term
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As more consumers opt to do their shopping online, accurately tracking purchases, verifying identity, and matching transaction data to customer information has become a great challenge. This is especially true for companies that do not have robust procedures in place for collecting and cross-referencing such data.

Retailers are keen to find solutions that tackle fraud without being too aggressive and putting customers off
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According to a recent CNBC article, retailers list fraudulent returns as a top concern, especially around the holiday season. Retail fraud is a growing issue for merchants, who are increasingly looking for solutions that will help them deal effectively with the problem in the long-term.

Loss Prevention Magazine estimates that return fraud has proved a significant drain for retailer profits this past holiday season. Of the $9 billion in losses attributable to return fraud last year, $2 billion took place during the holiday season, with more than 5 percent of holiday returns in 2017 expected to be fraudulent.

Due to the lack of visibility and direct customer engagement in online transactions, retailers are challenged to verify a shopper’s identity. Furthermore, there is often a lag between the time an order is placed and when that transaction is confirmed, opening the door for more errors or fraudulent activity.

“The larger volume of sales in the November and December months, especially around peak dates such as Black Friday and Cyber Monday, is invariably followed by a spike in cardholder disputes and chargebacks,” says Matthew Katz, CEO of Verifi, a leading global provider of end-to-end payment and risk management and card not present fraud and chargeback solutions.

Due to the lack of visibility and direct customer engagement in online transactions, retailers are challenged to verify a shopper's identity
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“For retailers,” Katz explains, “these chargebacks mean not only incurring fees from card networks and acquirers, but also losing holiday stock, absorbing additional shipping costs, and losing customer trust and future sales.

Of the $9 billion in losses attributable to return fraud last year, $2 billion took place during the holiday season
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“As consumers analyze the debt they’ve incurred during the holiday period, billing confusion and so-called ‘friendly fraud’ – where customers experience buyer’s remorse and dispute a legitimate transaction by going directly to the card issuer to obtain a refund – become an increasingly costly problem for both merchants and issuers,” he adds.

This issue continues to get worse. According to a 2017 report by Appriss Retail, total merchandise returns accounted for more than $351 billion in lost sales for U.S. retailers. To put that revenue in some perspective, the number comes close to the estimated 2017 federal budget deficit of $400 billion. Retail fraud and abuse accounted for a substantial share of these transactions – $17.6 to $22.8 billion in the United States.

This brings inevitable, and undesirable, consequences to consumers and the economy in general, as retailers are ultimately forced to offset losses by raising prices or reducing costs. This can in turn cause economic slowdown or stagnation, and ultimately lead to job losses. Last year alone, per the Appriss Retail report, return fraud cost U.S. retailers and workers between 596,000 and 775,000 jobs. Additionally, these fraudulent activities also have a significant negative impact in government tax revenues, with retail revenue losses costing states a total of $1.1 billion to $1.4 billion in lost sales taxes.

As more consumers opt to do their shopping online, accurately tracking purchases, verifying identity, and matching transaction data to customer information has become a great challenge
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Atlanta-based data analytics provider, LexisNexis Risk Solutions, recently surveyed over 650 risk and fraud executives from retail organizations. Their findings indicated that the level of fraud as a percentage of retailers’ revenue rose from 1.47 to 1.58 percent in the last year alone. It is little wonder that retailers recognize this problem as one they need to address with dedicated resources and a consistent integrated strategy.

Safeguarding the customer experience is a crucial consideration for retailers looking to implement fraud-tackling technology
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The LexisNexis study found that, although many retailers were investing in fraud monitoring, the results weren’t always effective. Companies found it difficult to strike a balance between being protective and turning away genuine customers and transactions. Retailers are keen to strike a balance between these two priorities, and to find solutions that tackle fraud without being too aggressive and putting customers off.

According to Kimberly Sutherland – a senior director of LexisNexis’ fraud and identity management strategy – many merchants don’t quite know how to achieve this balance. The problem she sees is that businesses often resort to a one-size-fits-all approach to fighting fraud, and they end up by deploying a limited set of solutions that are not up to the challenge. “These less advanced and less sophisticated legacy solutions do not appear to be working, given the sharp rise in costs and volume of successful fraud attempts,” she remarks.

According to Katz, retailing needs more effective data-sharing solutions in order to prevent such large-scale fraud without denting customer relations. “By leveraging emerging technologies, we can equip merchants and issuers with the right information, at the right place, and at the right time. This helps protect hard-earned revenue for merchants, and also helps them provide better service to consumers – allowing genuine fraud to be addressed quickly and more effectively, thus improving customer trust, retention, and loyalty.”

By providing the issuer with merchant information and robust order data – featuring customer identity and intent of sale – early on in the dispute process, it is possible to significantly help prevent such losses, argues Katz. He adds that issuing banks that neglect to include merchants early in the dispute process generate an unnecessarily high chargeback volume. Yet there is still a lack of awareness in the industry about which solutions are readily available to help them mitigate that problem.

Connecting the merchant and the issuer early in the dispute process can prevent the loss of millions of dollars in sales
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Integrating the sort of technology that companies like Verifi provide as a tailored service to merchants and issuers can help to dramatically reduce instances of fraud – and indeed help identify friendly fraud, thus saving the sale – while also improving customer relations. Through leveraging and cross-referencing of robust data, customers can enjoy a better overall experience of quick and hassle-free returns and claim legitimate refunds without ever feeling as if they’re being unfairly questioned or targeted.

Integrating the sort of technology that companies like Verifi provide as a tailored service to merchants and issuers can help to dramatically reduce instances of fraud
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Safeguarding the customer experience is a crucial consideration for retailers looking to implement fraud-tackling technology into their processes, as modern shoppers view flexible return policies as a right rather than a privilege. Customers might refuse to shop with retailers that choose to implement restrictions and checks on returns. Draconian policies could permanently cost a merchant legitimate customers, and therefore prove to be just as damaging as the mounting cost of retail fraud.

“Consumer awareness of their chargeback rights has increased,” says Julie Conroy, research director for Boston-based analyst firm Aite Group. “We’ve seen a doubling of the term ‘chargeback’ on Google for the past five years.”

In their research, Aite Group found that card issuers often give customers varying degrees of leeway when it comes to accepting evidence for granting a chargeback. Retailers complained to the firm that this lack of consistency led to mixed results from issuer to issuer. Chargebacks protect cardholders from fraud and give them recourse if goods are not as advertised, but the fact that this process is now easier for consumers also means that it is increasingly being abused.

“No one likes getting on a 13-minute call with their bank to dispute a charge,” Conroy says. “If you can allow them to do this digitally, you’re providing a better customer experience.” The other issue is cost: the average call is 13 minutes. “For some of these disputes, the consumer could be on the phone for 30 minutes,” she says. “That’s really expensive. The aggregate cost for U.S. issuers alone for call centers to field these calls is $2 billion a year.”

This is one of the reasons why so many merchants are now incorporating Software as a Services (SaaS) into their existing systems. Verifi’s Cardholder Dispute Resolution Network (CDRN), for example, is an innovative platform that enables issuers at the initiation of a dispute to redirect customer disputes to the merchant. In doing so, the chargeback process is paused up to 72 hours, allowing the merchant time to assess and resolve the dispute directly with their customer before it becomes a chargeback. In 2017, CDRN handled over 19 million disputes with an average 88% successful resolution rate on actionable disputes.

Yet even as retailers move towards embracing these comprehensive, high-tech fraud-prevention systems, offenders will inevitably continue to devise ways of taking advantage of any available loopholes. This is why it is important for SaaS providers such as Verifi to constantly improve their systems to stay ahead of the game. According to Katz, to address such needs, Verifi launched Order Insight in 2017 – an advanced collaboration platform that further applies this principle of intelligently connecting data from merchants to issuers and cardholders to access accurate and timely purchase data.

“Order Insight is the next phase in the evolution of our services, where all parties are connected to work together for mutual benefit. By being able to share and access data – such as purchase item description (size, color, style), date of purchase, merchant’s name and contact information, customer’s device used, IP address, etc. – the volume of chargebacks can be significantly reduced. This results in fewer fees and penalties imposed on merchants – but most importantly in the retention of sales and improved customer relations, all of which translate into increased profits.”

fraudulent activities also have a significant negative impact in government tax revenues, with retail revenue losses costing states a total of $1.1 billion to $1.4 billion in lost sales taxes
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Katz explains that “Order Insight enables issuers to access shared merchant data in near real-time at the initiation of a customer dispute. In addition to the goods or services in dispute, detailed information on the cardholder’s transaction history, previous disputes filed, refunds issued, and account delinquency are also instantly available, allowing each issue that arises to be efficiently dealt with to the benefit of all parties.”

The device (and type) that was used to make the purchase can be identified, in addition to the name, username, IP address, location, as well as phone number and email address included in the merchant’s customer profile to match the unique cardholder information with the bank’s system. Customers, too, have access to their order details through the issuer-hosted mobile or online banking application, providing immediate answers to a transaction query for a quick and painless resolution. If a transaction isn’t recognized, then the merchant name, address, customer service number and email address – as well as terms and conditions, warranty information and return policies – will be provided to resolve confusion created by vague descriptions on a statement. Whenever a dispute arises, each party will have access to the information to determine the legitimacy of the sale, thus reducing the impact of issues such as friendly fraud.

“Shared data can be beneficial in multiple fraud scenarios, and friendly fraud is no exception,” says Conroy, who believes that collaboration solutions, such as Verifi’s, are a crucial part of the industry’s fraud-fighting toolkit. “Connecting the merchant and the issuer early in the dispute process can prevent the loss of millions of dollars in sales,” agrees Katz, and that’s certainly something that merchants and issuers in an increasingly competitive and technology-driven retail landscape will need.

This article was originally published on World Commerce Review

Alice Bonasio is a VR Consultant and Tech Trends’ Editor in Chief. She also regularly writes for Fast Company, Ars Technica, Quartz, Wired and others. Connect with her on LinkedIn and follow @alicebonasio on Twitter

The post Tackling Retail Fraud with Technology appeared first on Tech Trends.

With the global cost of chargebacks mounting for consumers, banks and merchants alike, we need innovation to fight back

Online fraud is now the most commonly experienced crime in England and Wales, according to a report published by the UK National Audit Office (NAO). Up to 1.9 million cyber-related fraud incidents were estimated to have taken place last year alone, with the cost likely to run into billions of pounds.

Online fraud is the most commonly experienced crime in England and Wales
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The report also outlined that the NAO faces a significant challenge in influencing partners, such as banks and law enforcement bodies, to take on the responsibility of preventing and reducing fraud. As a “low value but high volume crime”, fraud is often overlooked by governments, law enforcement, and industry alike, says Amyas Morse, Head of the NAO. Acknowledging that the landscape for tackling online fraud is extremely complex, the report calls for an urgent response to address it.

Fraud is often overlooked by governments, law enforcement, and industry
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The report further cites that online fraud is under-reported; even where data is available there is a lack in the sharing of information between government, industry, and law enforcement agencies. In fact, there is no formal requirement for banks to report fraud or share reports with government, yet we see consistent evidence of fraud recurring all over the world. This is an enduring and global problem, one that takes a heavy toll on merchants and service providers of all sizes, as well as banks, issuers, and ultimately customers.

There was a 17% rise in consumers being caught out buying phantom goods online
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The growing scale of online fraud also suggests that many people are still not aware of the risks, and that there is much to be done to change behaviour. This is also evidenced in separate figures from Citizens Advice showing a 17% rise in consumers being caught out buying “phantom” goods online. This type of cybercrime occurs when fraudsters advertise items at cut prices on social media sites like Facebook and Instagram—as well as online marketplaces such as Gumtree and eBay—and con buyers into spending on average £1,100 on products ranging from cars to flights and even insurance, which simply do not exist. In only a few months, January to March this year, Citizens Advice logged over 3,600 complaints about such phantom goods.

These scams can have a lasting financial and emotional impact on consumer confidence and their relationship to merchants. While educating consumers is both sensible and necessary, the NAO report stresses that government and industry still have a responsibility to protect citizens and businesses. The report also found that the protection banks provide varies, with some investing more than others in educating customers and improving their anti-fraud technology.

Given that organized attacks of online fraud is likely to increase, this investment is absolutely essential—yet keeping up with the latest techniques employed by fraudsters can put tremendous strain on a company’s logistics. While few would argue that fraud detection and prevention is a priority for businesses, the fact is most businesses lack the necessary resources to build and maintain such solutions. It is the industry’s responsibility, however, to keep up—and ideally get ahead—of these fraudsters in order to protect both themselves and consumers.

Technology adoption can have significant impact on fraud prevention
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The adoption of such technologies has indeed been shown to have a significant positive impact on fraud prevention. Take, for example, EMV—the technical standard for smart payment cards and terminals that have allowed the rollout of payment solutions, such as Chip and Pin and Contactless. In the UK, its implementation led to a dramatic reduction of 32% in the levels of overall card fraud in the seven years following their introduction in 2004, according to official figures from the UK Card Association.

Such measures have undoubtedly made fraud much more difficult to perpetrate in “card present” payment scenarios, yet the shift to online retail has brought with it an entirely new set of challenges relating to fraud prevention and mitigation. There is no getting away from the fact that individual shopping habits have fundamentally changed over the past decade, and that the shift towards online and mobile shopping is not going to be reversed. PricewaterhouseCoopers’ (PwC) Total Retail 2016 Survey found that the popularity of mobile shopping continues to rise, stating that “46% of our global sample buys products via mobile at least a few times a year, compared to 40% last year”.

Chargebacks happen when customers dispute a transaction and request a refund
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While this might be good news for consumers in terms of better prices, more choice, and added convenience, it leaves the bulk of “card-not-present” transactions—which are the norm in online shopping and vulnerable to problems such as chargebacks. These chargebacks happen when customers dispute a transaction in their statement and request a refund—often going directly to their card issuer or bank and bypassing the merchant altogether.

Gross card fraud losses for 2015 reached $21.84 Billion
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According to The Nilson Report, gross card fraud losses for 2015 reached $21.84 Billion, not including the costs incurred by issuers, merchants, and acquirers for their operations, call centres, and chargeback management. By 2020, the report concludes, card fraud worldwide is expected to reach $31.67 billion, and that measures such as improving methods of reducing fraud on card-not-present transactions are critical to keeping those losses in check.

This is a complex issue, since there are many factors which can trigger a chargeback in the first place, and a blunt approach can cause a merchant more harm than good. One of these factors is known as “buyer’s remorse”—where a customer finds a product at a cheaper price elsewhere and uses the system as an alternative returns and refund mechanism. This is one of the forms that so-called “friendly fraud” takes. Another common scenario is where a person requesting the refund is not entirely sure they haven’t made the transaction, but will “try their luck” anyway. Since the cost of investigating such claims is often much higher than the value of the refund itself, banks will mostly opt to issue the refund without dispute, and some customers have learned to take advantage of this to manipulate the system. According to industry research firm Aite Group in their Impact Note of August 2016, 60% to 70% of chargebacks are the result of first-party or friendly fraud.

There are many ways for businesses to make themselves less vulnerable to chargebacks
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Business can minimise vulnerability to chargebacks in various ways. These include ensuring that they build a good relationship with their customers, by providing accurate product information and keeping the lines of communication open, so customers are more inclined to approach merchants with queries than to go directly to the issuing banks to initiate a dispute. Having a clear and efficient refunds policy also minimises the chance of experiencing so-called buyer’s remorse, where a customer is tempted to use chargebacks as a backup refund mechanism. However, many customers still get confused when seeing an unfamiliar name appear on their statement, as often merchants will be listed under names which differ significantly from their brand or trade name.

“When a customer sees a charge they don’t immediately recognise on their card, they often ask the bank to remove that charge from their statement”, explains Matthew Katz, CEO of Verifi, a provider of end-to-end payment protection and management solutions. “This is done by calling the bank directly to raise a dispute, leaving out the merchant who could potentially provide further information to clarify what the charge relates to. In fact, our research has found that up to 86% of cardholders bypass the merchant and contact their issuing bank directly to dispute or question a charge on their bill”.

While banks generally issue a refund to the customers, the process often has a very negative impact on overall customer experience, causing confusion and lingering trust issues which can lead to future sales being lost. This has an added impact on the merchant’s bottom line, on top of the fees, fines, and operational expenses of handling the chargeback in the first place.

Chargeback costs can quickly snowball
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These costs quickly snowball, ranging from administrative resources needed to investigate claims and process refunds, to fielding customer queries and potential loss of legitimate sales, present and future. Add this to the operational expense of preparing and shipping merchandise, as well as the value of the goods themselves which often must be written off, and the cost for merchants quickly adds up. Ultimately, this is also very bad news for consumers, as these costs will eventually trickle down the supply chain and translate into higher prices. The true price of these chargebacks is not reflected in the refund amounts alone, significant as these may be. In their September 2015 report, The Impact of Fraud and Chargeback Management on Operations, Javelin Research found that organizations typically spent between 13% and 20% of their operational budget on fraud and chargeback management.

“Globally, chargebacks continue to grow and represent a significant challenge”, agrees Katz, “To address this problem, we need solutions that better align the interests of cardholders, merchants, and issuing banks on a global scale, focusing on continual innovation and refinements that are essential to effectively combat this problem”, he believes.

This is what Cardholder Dispute Resolution Network (CDRN) does, according to Katz. Verifi’s solution—which covers approximately 50% of the US market and boasts a 90% resolution rate—was named for the fifth year in a row as “Best Chargeback Management Program” by CNP Expo. It is now continuing to expand in international markets such as the United Kingdom, Verifi having opened an office in London in 2016, and now announcing a key strategic partnership with payments processor MegaCharge.

Verifi handles over 200,000 individual chargebacks each month
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One of the problems that CDRN addresses, according to Katz, is the fact that by the time merchants learn of the issue, it’s often too late to stop the chargeback. “Our patented closed-loop technology integrates directly with the top issuing banks. This pauses the chargeback process for up to 72 hours and redirects cardholder disputes from the bank to the merchant in near real-time. The merchant will have more time to assess and resolve the dispute before it ever becomes a chargeback. To date, we are supporting more than 25,000 accounts globally and handling over 200,000 individual chargebacks each month—amounting to an estimated $195 million in chargebacks prevented.

“The problem of chargebacks and friendly fraud are not only impacting businesses’ bottom line, but hindering future growth and jeopardizing customer retention, trust, and satisfaction rates. For merchants to strengthen their risk management and counter friendly fraud, the ideal line of defense would permit merchants to provide insights into the cardholder’s order as shopping cart-level data. This would feature merchant details and even the device used to make the purchase through the financial institution’s platform—all at the time the dispute arises. This deeper level of data can help cardholders better understand their purchases and avoid filing false cases of fraud that result in lost sales, higher labour costs and more”, Katz concludes.

Since the bulk of consumer purchases will be made online, it stands to reason that to tackle online fraud we must leverage data and technology in increasingly sophisticated ways. As the recent reports on the growing scale of this global problem show, gone are the days when the tools to do so could be considered an optional extra. They have, quite simply, become business essentials for every merchant looking to conduct business in the digital age.

This article initially appeared on World Commerce Review

Alice Bonasio is a VR Consultant and Tech Trends’ Editor in Chief. She also regularly writes for Fast Company, Ars Technica, Quartz, Wired and others. Connect with her on LinkedIn and follow @alicebonasio and @techtrends_tech on Twitter.

The post Can Technology Prevent Online Fraud? appeared first on Tech Trends.