No one could have foreseen the scope and scale of the eCommerce fraud prevention problem. From the beginning of online stores, unscrupulous actors began to target unsuspecting, hardworking merchants. Unfortunately, it appears that even if online commerce sparked a revolution in how businesses connect with consumers, it did nothing to curb the darker impulses of human nature.
Everyone hopes the day will come when no eCommerce fraud solution is needed. But while we wait for that day (check back next week maybe?), we’ve also seen a revolution in the good work being done by talented and dedicated fraud specialists to protect merchants against thieves. It’s thanks to these people that fraud prevention solutions made huge strides over the last decade.
Merchants around the world benefit from the recent improvements in rules planning, sophisticated AI machine learning, and human intelligence. Over the past year, however, payment providers have begun rolling out their own solutions — offering a critical service that allows the online payments ecosystem to thrive. That will increase penetration into riskier markets and products — but it also poses huge risks that need to be addressed.
The Promise and Perils of Payment Provider Chargeback Guarantee Solutions
Merchants turn to fraud prevention vendors for two reasons. One, is the need to protect their revenues from the ill-effects of fraud. But equally important is that merchants want a simple, easy-to-understand solution. There is a big learning curve for merchants in the fraud prevention space. Most want clarity and serenity as much as a chargeback guarantee.
On the face of it, payment providers starting to offer a native fraud solution is great news. Their brand recognition inspires confidence. For example, merchants the world over already use and trust PayPal. And that’s just the start. Their ubiquity means they process a huge number of transactions and are sophisticated technological actors, comfortable with collecting and analyzing data to make improvements for end-users. In addition, they can provide a “one-stop shop” that can make for a seamless payments experience.
And yet, there are a ton of negative potential consequences that should give merchants pause. Payment providers are in the business of collecting fees on transactions — not fraud prevention. In-house innovation is likely to be rare, leaving shops vulnerable to changing eCommerce fraud trends. A solution at the payment provider level also risks lulling merchants into complacency and a false sense of security. After all, who needs to take the time to understand the impact of fraud prevention on their business, if they know Stripe is already taking care of it?
What’s Needed Is Education, Diligence…and a Human Touch
These problems have (at least) four solutions.
First, vendors should do more to emphasize their fraud-specific experience and technological expertise. The average merchant still views fraud as “simple” chargeback prevention. Massive investment is needed to explain the technological, strategic, and tactical innovations necessary to prevent theft by increasingly sophisticated cyber-criminals — innovations payment providers are unlikely to fully commit to. Moreover, the potentially devastating impact an over-focus on chargeback prevention can bring via false positive declines needs to be better communicated to the market.
Second, payment providers must be transparent about their business model. A traditional chargeback guarantee solution only makes money on approved orders — a practice that keeps their business interests aligned with merchants’. In contrast, payment providers take a fee for every transaction, a potential incentive to not guarantee risky orders (but still profit on the transaction fee) while charging fraud prevention fees on safe orders. They must be proactive about ensuring their practices actually provide value to merchants, and provide full visibility so verification is possible.
Third, merchants must commit to doing their homework. No two businesses are the same. It might be that for a SMB just getting started in an industry with relatively little fraud, a solution at the payment provider level is sufficient. But for an equally small company selling an innovative product with high resale value, it will most likely be worth the time to choose a third-party fraud prevention solution. Merchants must understand their needs and be honest about what it takes to meet them.
Finally, the impact of eCommerce fraud needs to be humanized. Massive data breaches at gigantic global companies like the one that recently struck Capital One make for great headlines. They also serve to dehumanize the issue of fraud, making it less likely merchants will take it seriously (until it’s too late). Both merchants and vendors should focus more on the human impact of fraud —less time for founders to create visionary products, stressed employees, and even potential layoffs. Many businesses still do not fully realize the impact fraud can have beyond their bottom line.
Payment providers have a lot to offer the eCommerce fraud prevention space. But to avoid becoming a cure worse than the disease, they must integrate themselves into the existing ecosystem — not seek to replace it.
~The Editorial Board
