4 Real Ways that Online Fraud Affects Your Business

Posted by Pat Phelan on April 2, 2014

Most business are pretty lax when it comes to the issue of online fraud.

They assume, that just as they are with their own consumer purchases, that somehow they are protected or insulated against fraud. They’re used to the notion that if they notice fraud on their account, they report it to their bank and while its a pain, the bank will handle it and refund the money in time.

(For the record that’s not even guaranteed anymore. Some countries are starting to remove this absolute protection. We’re headed for insurance company territory in terms of exclusions, excesses etc).

The truth is far harsher; only one person is solely responsible for the protection or your business against fraud. Yep, that would be you.

Fraud is becoming such a huge problem for financial systems, a problem without clear solutions that its actually turning into a giant game of ‘pass the liability parcel’. Sadly, we all know how the game ends - no matter the cause or reason, the person left holding the parcel and the costs associated will always be the online retailer.

Here’s some reason’s why you need to start taking online fraud seriously;

1. Fraud is Expensive

Fraud costs you hard earned cash. You get an order, you ship a product or service. You expect to be paid. And then you don't.

And its worst than that because the losses might not be immediately obvious. Up to six months later (or more depending on where in the world you are), you go to your bank account and notice money missing. And only after does the letter arrives from the bank informing you that you’re been the victim of fraud. By this stage you’ve shipped the goods, thought that you’d collected the revenue (probably spent that revenue) and now you’re short the goods and have no revenue to show for it. On top of that you could be financially penalised by your payment processor or bank, enough incidents over time could result in increases in your processing fees and worst case scenario the revocation of your ability to process certain credit cards.

2. Fraud Destroys Customer Experience

Otherwise known as the 'Terrified by Visa' factor. Back in the day where a customer’s online experience wasn't a massive factor in sales conversions, having excessive security may not have been a huge factor. However these days as we move towards a more customer optimised web, experience is everything.

Giving your customers the online equivalent of an airport security screening by demanding an excessive amount of security screening information before they can purchase your goods or services is never a good thing and is likely to massively affect the number of customers who successfully complete a sale. And that's what you get once you start introducing additional levels of security to protect yourself from fraud. Its a lose-lose situation.

3. Fraud Costs You Lost Revenues

So let’s say you decide to do something about online fraud and implement a traditional fraud prevention system. Your transactions get screened against previous fraud profiles and patterns and anything that looks close to one of these patterns gets flag as fraud. Without making light of what’s a serious issue, its the online equivalent of racial profiling.

However it leads to an incredible serious problem for online businesses - false positive fraud results. What’s a false positive? Essentially its where a perfectly good transaction is flagged as fraud and blocked by a fraud prevention system being over zealous. One major US payment gateway estimate that in 2013 their merchants blocked $25.5 billion of perfectly legitimate transactions because of false positive results.

4. Fraud Creates Cashflow Headaches

One of the biggest problems with online fraud is the sheer logistical nightmares that it causes around financial management.

Its almost like being back in the old days of having to reconcile cheque payments against lodgements - remember those fun times? When you remove the absolute guarantee for a merchant that their sales are going to materialise as revenues you introduce a hugely unstable element into business projections.

Online fraud used to be an edge case, used to be something that was an exceptional case that you’d encounter very rarely and would just write off as a once off cost of doing business. It also used to be something that you didn’t think a lot about for the same reason. You assumed your bank, or your payment processor, in fact anyone but you was responsible for protecting you from fraud. Those days are gone and now every business accepting payments online, via the web or mobile now should have a strategy to minimise fraud and protect their revenues.

That's where we come in. Trustev has gone back to the beginning to try and find the root causes of these problems and how they impact on the online merchant. Instead of accepting the status quo and the industry way of doing things, we've built a new solution from the ground up that focuses on the key fact - knowing exactly who is behind the transaction, not just whether the transaction is valid.

If you're worried about fraud, get in touch.

Topics: fraud, Identity