Retail and Hospitality

Commentary:

Fraud and online shopping

29 April 2008

Chief Executive of Retail Decisions, Carl Clump explains how confidence is king when it comes to Web shopping. When fraud is being detected, retailers can accept more transactions, and customers can shop without having to interrupt their shopping experience.

Consumers are increasingly shopping online and trusting their money to online retailers. Retail Decisions (ReD), world leader in fraud prevention, has seen online sales rise to unprecedented levels, up 53 per cent for December 2007 versus December 2006. Shoppers are reassured by the increasing online presence of big retail brands. The retailers and card companies, in turn, rely on fraud prevention experts to keep fraud to a minimum.

Retailers have all their card transactions screened by a third party, such as ReD, that identifies in real-time which are suspicious transactions. The additional cost for the retailer of providing this kind of fraud screening service is very quickly offset by not just savings in fraud losses and the back office problems in resolving them after the event, but also by the retail merchant being able to accept a much higher percentage of card payments at the outset. Many of which, would have been rejected by a less sophisticated home grown solution.

The initial step in this process is to obtain historical transactions from customers (typically three to six months worth). This is then analysed and used to develop a bespoke rule set for the client. Standard solutions are avoided because each client is unique. Even businesses operating in the same product category can have different risk profiles, different target customers and pricing strategies which means we cannot deploy a standard solutions across all of our customers.

It is this individual approach that gives ReD an edge over its competitors. Moreover, other companies within the fraud prevention arena are effectively only providing customers with a piece of generic software. By contrast, ReD has risk analysis departments which are constantly monitoring transactions and who are able to change a customer’s rules on a daily basis if required.

As a global player, ReD is able to share data of compromised card records across its international customer base. And because it operates in multiple verticals (ranging from telecommunications and retail to travel and airlines), it has a broad perspective of attempted fraud activity and is able to pass this knowledge on for the benefit of all its customers from one sector to another. This is particularly useful since criminals are constantly moving the targets of their attacks, rapidly changing both geographies and sectors. Therefore ReD cannot deploy a standard solution across all of its customers.

Many online businesses attempt to manage fraud prevention in-house. There are several risks to this approach, according to Carl Clump. Essentially, an in-house setup is restricted to an understanding of that company’s own fraud issues and the specific IT team’s fraud experience. As a result, retailers’ homegrown fraud prevention solutions are often unable to stay ahead of the techniques that criminals deploy internationally. Typically, between six to eight per cent of transactions are rejected by online merchants with in-house fraud prevention systems. Yet, in reality only one to two per cent of all transactions are actually fraudulent, meaning that as many as six to seven per cent of overall transactions that are actually good, are turned away.

Effective and efficient fraud screening, by removing fear from the online shopping process, for both consumers and retailers, contributes significantly to the continuing growth of e-tail.

This commentary first appeared in the Spring 2008 edition of Retailspeak magazine.