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The double edged sword of fraud and fraud prevention
Global Banking and Finance Review
Company
Justin Pike, Founder & CEO of Burbank
It’s easy to think of fraud as simply call centre scams and phishing emails preying on vulnerable people. But in reality fraud is far more varied, and far more damaging.
Online payments fraud comes in multiple formats such as friendly fraud, accidental fraud and chargebacks. These all have a cost, and it’s not just financial.75% of all chargebacks are now attributable to friendly fraud and card-not-present fraud now accounts for73% of all card payment fraud.
And here’s the twist: the bigger threat actually comes from fraud prevention.
The hidden cost of fraud prevention
The systems designed to prevent fraud can also block legitimate customers. It is estimated that up to 72% of transactions blocked by anti-fraud systems are genuine transactions, costing merchants nearly$443 billion every year. The criticality of this increases considering41% of customers who experience a false fraud decline will never return to that retailer.
Not only has the retailer lost this sale, they’ve potentially lost a loyal customer who could have provided a lifetime of custom. Multiply that by millions of customers and the economic impact is enormous.
Legacy fraud prevention systems still rely largely on guesswork. When legitimate buyers behave slightly out of their ordinary patterns, for example while travelling or making a large one-off purchase, the anti-fraud tools can flag this as suspicious. And while AI-driven systems tend to be better than rules-based tools, these too still generate their fair share of false declines.
The result is that merchants are paying heavily to protect themselves and are still losing revenue they could otherwise have kept.
From fraud loss to revenue gain
The cost of false declines is ten times more than the cost of actual online payments fraud. So you have to ask why merchants are willing to accept it as an unavoidable part of doing business online?
Perhaps the solution doesn’t lie with fraud prevention, but instead sits with changing the equation entirely by making fraud impossible.
We know that fraud is very low in physical stores due to the acceptance of card-present transactions. And it’s been this way for decades, so we know card-present works. Surely then, the obvious solution is to make card-present transactions possible online?
Card-present transactions are a direct connection between the merchant and the cardholder. This process relies on multi-factor authentication: the presence of the cardholder; the presence of the card, and the PIN. The combination of these three things makes fraud incredibly difficult to pull off.
And the best part? Customers stay loyal and merchants get to keep the revenue they may otherwise have lost.
Eliminating chargebacks
Fraud through chargebacks, both intentional and unintentional, is another significant revenue drain. Chargeback fees charged by acquirers can range from $20 to $100 per incident - when accounting for merchandise loss, shipping, and overheads, e-commerce merchants are expected to lose closer to $3.60 for every $1 of fraud via chargebacks. This is a major blow to the bottom line.
A Card-Present over Internet transaction virtually eliminates chargebacks, enabling merchants to unlock up to 7% more revenue while at the same time removing the operational drag of disputes and reversals.
A fraud-free future
Fraud prevention will always be essential, but it doesn’t have to come at the cost of customer loyalty and revenue.
By leveraging Card-Present over Internet transactions, fraud can be significantly reduced without needing to rely on imperfect tools. Legitimate customers will remain loyal, and revenue can be protected by eliminating false positives.
Fraud no longer needs to be a double-edged sword. With the right approach, it can be taken out of the equation, leaving merchants free to grow their businesses, and their profits.
About the Author
Justin Pike, Founder and CEO
Justin Pike is an experienced entrepreneur and innovator, renowned in the payments industry. He has over 22 years of experience in payments, with his first venture as co-founder of eNett International, a virtual payments operator in the travel industry, which was later acquired by WEX.
In October 2021, Justin founded and took the mantle of CEO of Burbank, a payments company offering revolutionary Card Present over the Internet (CPoI) technology that is transforming the online checkout experience and optimising revenue by enabling card-present payments over the Internet.
As a serial entrepreneur, Justin has also founded MYHSM, a scalable cloud-based payment solution, and spent nine years as founder and chairman of MYPINPAD, a startup focused on simplifying payment processes through software-based solutions.
Justin’s background in payments highlights his strong commitment to driving innovation and growth, aimed at developing and encouraging the simplification of payments technology.
Fraud is a deceptive practice aimed at securing an unfair or unlawful gain, often involving financial transactions that mislead individuals or organizations.
Chargebacks occur when a customer disputes a transaction, leading to a reversal of the payment. This can result from fraud or dissatisfaction with a purchase.
Friendly fraud happens when a customer makes a purchase and later disputes the charge, claiming they did not authorize it, often leading to chargebacks.
Card-not-present fraud occurs when a transaction is made without the physical card being present, typically in online or phone transactions, making it easier for fraudsters.
Multi-factor authentication is a security process that requires two or more verification methods to gain access to an account, enhancing protection against unauthorized access.
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