In fast fraud, perpetrators take advantage of weaknesses in online and mobile commerce fraud prevention systems. Digital purchases don’t require a physical credit card, so card-not-present (CNP) transactions are more vulnerable to scams. And because consumers expect to receive their digital purchases immediately, traditional payment solutions don’t have the speed required for immediate delivery.
This allows scam artists to easily steal digital goods that can then be re-sold on the secondary market. Other fraudsters hack into retailers’ systems and swipe customer credit card information for use or sale on the secondary market.
The results are costly. Research has found that retailers pay $3.34 for every dollar lost to mobile fraud, according to LexisNexis, and the cost of a data breach – both monetary and reputational – is around $4.8 million for the average retailer, according to a study by the Ponemon Institute.
Why Fast Fraud
Fast fraud is the result of multiple converging trends. More people are shopping online and via mobile device. In 2014, for example, 15% of all merchants offered mobile commerce options, doubling from 2013, according to LexisNexis.
These trends have escalated so quickly that many merchants’ existing fraud systems have been unable to keep up – and fraudsters have taken note. According to the Identity Theft Research Center, there were at least 783 tracked data breaches in the U.S. in 2014, up 27.5% from 2013 and an all-time record. Javelin Research and Strategy estimates CNP fraud was about $10 billion in 2014.
And fast fraud is about to get a lot worse. As the U.S. transitions to EMV credit card security standards, in-person credit card fraud will become more difficult. It’s likely that fraudsters will then switch their focus to more vulnerable CNP transactions. In the UK, for example, CNP fraud rose 79 percent in the first three years after EMV adoption.
Safeguarding Your Business
Unfortunately traditional payments solutions aren’t effective in shielding merchants from the unique challenges associated with CNP payments and immediate delivery of goods.
With traditional physical goods, ecommerce buyers must provide a delivery address during checkout. Even with same-day shipping, merchants have time to verify a purchase before releasing goods to the consumer.
But with digital goods, CNP consumers are required to provide very little information – with no physical delivery, there’s no address to confirm – and receive their product instantaneously.
The growth of fast fraud means merchants need solutions designed specifically to combat this threat. Here are some selection tips:
– Don’t go it alone. For many retailers, building an in-house fraud solution requires significant staff additions and technology upgrades. Typically, outside vendors are not only more cost effective, but can also monitor fraud patterns across numerous clients, allowing them to learn about new theft techniques and implement proactive fraud prevention measures.
– Look for guaranteed payments. Payments solutions that provide a guarantee assume all the risk, which is ideal for retailers. If the vendor wrongly determines that a payment is safe and allows the purchase to proceed, the vendor alone is then responsible for any losses.
– Do your research. Merchants can look at the vendor’s list of current clients to ensure it has experience in their industry and understands their unique needs and fraud profile. When possible, retailers should ask for referrals and interview some of the vendor’s past and present clients to evaluate whether needs are being met.
– Choose expertise over novelty. Fast fraud’s relative newness means many startups have jumped into the field, promising solutions. However experienced vendors have tons of experiential data which can be used to spot fraud more quickly and identify holes that could be exploited. They are also able to harness knowledge gained across industries to adapt solutions that meet a retailer’s particular needs. Retailers should, at minimum, make sure the vendor has experience working with businesses of similar size within their industry.
– Keep the customer experience in mind. Solutions that work by slowing down the transaction process or requiring the customer to complete additional verification steps often result in dissatisfied customers and abandoned purchases. Ask vendors how their solution will impact the customer. Look for the highest conversion rate for approved sales and the lowest friction checkout process possible.
Fast fraud has the potential to cost merchants a lot of money over the next several years, but it doesn’t have to. Taking the right steps now can prevent a lot of trouble down the road.
Chris Uriarte is Chief Payments Officer of Vesta Corporation