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Online fraud protection measures have side effects

A significant portion of many online merchants’ turnovers are lost to fraudsters. Companies are caught in a bind: Too many fraud prevention measures can scare off customers. New technologies may offer solutions.

In an interview with the German news channel n-tv, our Senior Vice President Fraud Management Robert Holm highlights the importance of the balance between security and convenience in fraud prevention.

How critical has the problem of online fraud become nowadays?

The financial damages for merchants are enormous. Payment defaults resulting from fraud now represent one to three percent of a company’s turnover. In addition, each fraud case carries additional costs, such as for prosecuting offences. The total costs can amount up to six percent of the turnover. Plus, there is the additional effort and inconvenience for merchants and customers.

Who are the offenders and how do they work? Why is the industry unable to handle the problem?

The offenders of online fraud can be divided into three categories: There are the opportunists or amateur fraudsters who occasionally try to cheat a merchant. Then there are those who work on a larger scale, for example purchasing expensive electronics with fake identities bought off the darknet and reselling them. Finally, there are the highly professional, international organizations who are continually developing their methods and who work with the latest technologies. Staying ahead of these criminals is an endless cat-and-mouse game for online retail and for other institutions, such as banks, too. One of the most frequent forms of fraud is account takeover, whereby fraudsters take over customer accounts and make purchases with them.

And merchants and customers are left unprotected at their mercy?

Absolutely not. Total protection against fraud may not exist, but there is an array of options available for identifying and stopping fraudulent or suspicious transactions. However, companies are perennially faced with the consideration of to what extent they wish to protect themselves.

Because protection is expensive and merchants simply calculate fraud into their prices?

Costs are naturally one factor. Some companies do indeed have each order checked by staff for suspicion of fraud. Nowadays, such an expensive manual process can, to a large extent, be automated by modern risk management software. However, the payment methods also play a role. In general, the safer a payment method is for a merchant, the more inconvenient and unattractive it is for customers.

For example, if a fashion merchant doesn’t offer open invoice payment, a customer will likely buy from another merchant who does, because this remains a preferred payment method. It’s similar for multistage security questions during the ordering process. Everyone is familiar with Captchas that display illegible characters or blurred images that we are supposed to decipher. These may provide merchants with greater security, but they are a source of frustration among customers and can, in extreme cases, result in them shopping elsewhere.

What advice do you have for companies when facing this consideration?

Every company is different and has customers with different preferences. Every merchant must therefore determine which and how many protection measures are reasonable for them. However, there do also exist many passive security measures that customers are not even aware of, but which still offer them protection. These include credit rating checks with credit agencies or technical identification solutions. Behavioral biometrics technology, for example, creates an accurate profile of the movements and habits of a smartphone user and is able to verify whether the legitimate account owner is placing an order or whether an account has been taken over.

Even if companies can never achieve a decisive victory in this endless cat-and-mouse game, what can they achieve by committing to this fight?

It’s important that every company finds its own healthy balance between a positive purchasing experience for its customers and the anticipated payment defaults. This allows merchants to proceed with a calculated risk that still allows them to maximize profits. I would say that an online merchant who takes the issue seriously can limit its losses to one percent of its turnover.


Robert Holm was interviewed by Max Borowski from n-tv. You can find the original interview in the German news channel here

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