Yes, fraud affects your bottom line

After meeting with C- and D-level e-commerce executives and networking with them at trade shows for nearly a decade, I haven’t met many who are focused on how fraud impacts their business. Typically, their top issues are generating more site traffic, retaining site visitors, increasing conversions, creating seamless checkout processes, and increasing the lifetime value of their customers. If and when they talk about fraud, it’s understood as a specific topic inside payments, a technical issue that doesn’t require much of their bandwidth. Even though I respect their perspectives and I know that other challenges might be prioritized over fraud, I think there’s a huge underestimation of the role a fraud prevention strategy can play in an online business—including supporting those top-of-mind goals.

Fraud’s impact on the bottom line

At its core, a company’s main goals are winning customers and earning revenues that are greater than expenses. Fraud prevention has a role in both those processes, although the one that comes to mind first is cost reduction. Fraud from consumer-facing sources represented 2.14% of e-commerce revenues in the 2017 Lexis Nexis True Cost of Fraud survey, while Javelin Research put the cost of fraud losses, false positives, and fraud management at 7.6%. But because the average margins for retailers tend to hover around 4 to 8%, fraud may actually consume a huge proportion of a company’s profit. The exact cost of fraud will vary by sector and company, but the reality is that as e-commerce fraud continues to grow, so will the related costs to businesses.

An executive looking at these numbers might see them as more reason to focus on revenue generation and customer experience while people they trust handle the fraud cost-control issues. However, because fraud management directly affects the customer experience, it needs to be on executives’ radar.

A lot has been said about fraud prevention technologies, big data, and AI, but at the end of the day, the only way to prevent fraud is declining certain orders or preventing them from being placed. The consequence of that reality is that order approval and denial mistakes will be made, because no system or human is perfect. Instead of losing your revenue through fraud, mistakenly declined orders will cost your business real revenue as well as the loss of ongoing and future business. In the fraud prevention world, we call these declined orders “false positives,” but for those of you who run these e-commerce sites, it’s more like “all the time and money invested to make that customer click ‘buy’ circling the drain” – a nightmare scenario!

False positives damage customer experience

How big is the false positive problem in e-commerce? False declines cost businesses more than 13 times as much as completed fraud: $118 billion per year versus $9 billion. And that’s just the beginning of the problems that false positives cause, according to Javelin Research. A harder-to-quantify but bigger issue is how false positives reduce the lifetime value of the customers whose orders are declined in error. BankingTech reported that Javelin found affluent consumers who shop while traveling—the kind of customers many retailers would love to have a strong relationship with—are more likely than other shoppers to be declined by mistake. And thirty-two percent of those customers who are falsely declined don’t shop with that retailer again, which increases the cost to acquire customers.

Order screening can impact CX, too

If the cost and customer impact of false declines weren’t enough to grab high-level attention, let’s talk about how fraud management can affect customer experience (CX). We’ve already talked about how fraud prevention comes down to “yes” or “no” on every order. Making those decisions requires time and information. Each element can affect CX. Consumers expect fast approval for orders, and delays can confuse and frustrate them. The time it takes your business to respond to and ship their purchases is a factor in how they’ll rate their experience with you.

If your fraud screeners need to contact a customer for more information before they make a decision about the order, that can slow things down. Depending on how the interaction is handled, it may also make the customer wonder why your shop needs to know more about them. Nobody wants to be treated like a potential criminal, and in the digital era, a single person who feels mistreated by your business can do real damage to your brand by describing their experience on social media.

As you can see, fraud management goes far beyond guarding against lost revenue and merchandise, and it affects customer retention as well as costs. That’s why strategic decisions in e-commerce need to factor in the impact of fraud management on order evaluation time, the potential for false positives, and customer contacts to ensure that your plans for attracting and retaining customers are supported by, not undercut by, your fraud management practices.