Money2020_2016_special

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Thought Leaders Corner Effective Fraud Prevention for SMBs by Isaac Gurary When most people think of online credit card fraud, they imagine fraudsters targeting popular websites such as Tiffany’s, Amazon or Macy’s. While large businesses are most certainly targets for fraud, most have sophisticated in-house fraud departments that exclusively deal with fraud prevention. Those fraud prevention departments are generally well staffed with experts that have access to sophisticated fraud detection technology. When it comes to small to mid-sized businesses, most are not able to afford to employ such personnel and fraud prevention is often delegated to customer service reps, warehouse managers or simply anyone that happens to have a few extra hours that can manually review certain orders. The latest LexisNexis True Cost of Fraud Report (<strong>2016</strong>) states that the average small to mid-sized eCommerce business receives 353 fraud attempts monthly, of which 114 are successful. This obviously comes at great cost to eCommerce merchants, so many have implemented basic fraud prevention strategies to help mitigate this risk. What are some of these strategies that SMBs are currently using for fraud prevention? 1. Usage of Gateway Fraud Filters: Most Gateways allow the eCommerce merchant to set up some basic rules to block transactions that may be fraudulent. An example of that is when there is an AVS mismatch they can decline the transaction. This is generally the first line of defense used by SMBs and can work decently for businesses that are not high fraud targets. This is not a great solution for most eCommerce businesses as the selection of available rules is pretty sparse and the available rule set capabilities are not very flexible, leading to a higher rate of false positives (blocking a legitimate transaction due to overzealous fraud prevention efforts). The technology utilized is also pretty basic so the potential to block all fraudulent transactions is limited as well. 2. Manual Review: Many eCommerce merchants will have employees that will review purchases over a certain dollar amount to confirm their legitimacy. Currently, the average eCommerce merchant manually reviews 26% of all transactions*. The manual reviews typically involve using search engines such as Google to find any mentions of the purchaser’s name or other credentials, tracking the purchaser’s social media accounts, and using online maps, often with street views to make a best estimate if transaction on their website was made by the cardholder. While this is a definitely improvement for using gateway filters exclusively and manually reviewing orders does catch a lot of obvious fraud, there are still quite a few downsides to this method: a The employee(s) doing the manual review would need to be up to date with all the latest fraud tactics - any knowledge gap can be very costly.
Thought Leaders Corner b Manual review costs money in employee time & error. c The fraud prevention resources that are available to the employees doing the reviews are quite limited and the methods are unscientific. You will often hear such employees say how they rely on their “gut feeling”as opposed to relying on concrete data and statistics. 3. Third party fraud prevention solutions - There are many firms that offer technological solutions to help mitigate fraud risk. They generally fall into three categories: a b Scoring model/Scoring & Tool model: These solutions leverage multiple third party fraud prevention databases and use the data to provide a risk score, which is the likelihood that a transaction is fraudulent. Some of those tools go further and provide tools to create logic on how to interpret the score. These solutions are a boon to SMBs as the available resources for fraud detection are greatly enhanced. However, eCommerce businesses still need to do a significant amount of manual review for those transactions that are not obviously legitimate or fraudulent. Additionally, creating rules can be extremely complex for an employee that is not a fraud expert. Moreover, if the employee that built the fraud rules leaves the company, there is a very long learning curve for the replacement to get up to date and understand the logic of the rule set. Many such systems also require an upfront fee in services, which can be costly for a small merchant. Fraud Prevention Solutions that offer Insurance on their decision: These solutions are fairly new to the market (2-3 years) but have been growing quickly in popularity. ECommerce merchants send all their transaction data to the insurance solution and will be provided with a yes/ no response on the transaction’s legitimacy. If the order that was passed as legitimate ends up resulting in a fraud chargeback, the insurance company will cover the full cost of the chargeback. These solutions are ideal for merchants that do not want to have the responsibility of dealing with any fraud related tasks. However, this peace of mind comes at a big cost: i. These solutions are very pricey and typically cost between 1% - 4% of gross revenues ii. iii. c Isaac Gurary Co-founder, NoFraud As president of MaidenLane Jewelry, Isaac Gurary understood the challenges his customers were facing battling fraud. With his partner, he founded NoFraud and successfully built a solution that fused every fraud prevention technology with human intelligence to eliminate fraud without erroneously blocking legitimate transactions. The contract terms for these solutions are often long and set up fees can get expensive The false positive rate(blocking legitimate transactions) rate is often higher as the company protects itself against paying out claims. Hybrid Solution: merging the strengths of the existing fraud prevention options is a hybrid solution. The solution charges a fee per transaction (like the tool models) and is a full service solution (similar to the insurance models) and works in real time so no fraud expertise is needed from the eCommerce merchant and no fraud prevention work is needed on the part of the merchant either. An optional Chargeback protection is available as well that can be turned on or off at will without any long term commitment which can be helpful for those that are risk averse. Affordable and once set up, friction free, this is a great option for SMBs. NoFraud is an example of such a solution. How does an SMB choose the most fitting fraud prevention solution? As there are so many options for eCommerce SMBs to mitigate their fraud risk, what can be helpful is for the merchant to ask themselves the following questions:
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