Demandware says 30 of its clients booked more than $100 million in online sales in 2015, up from 22 a year earlier.
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Automating the process
Manually reviewing suspicious transactions can help reduce the number of false positives, but the practice can be costly for retailers, at about $7.50 per transaction. Plus, retailers can only expect to manually review about 10% of their transactions
A more effective defense against fraud is to employ a customized application that can detect fraud patterns specific to the retailer’s business. “Every retailer targets different types of customers, has different risk tolerances, and has different fraud problems,” says Clump. “We can automate the screening process to run through every sale generated by the merchant to spot the drivers of fraud as they emerge and take steps to protect the retailer from it.”
ReD Shield uses analytics, rules, neural network technology and data to identify all the components of a fraudulent transaction and the relationships among those components across multiple merchant categories, then assembles them in real time. This allows retailers to flag and review a suspect transaction before making a decision whether to accept it, request more information from the consumer or reject the transaction.
Understanding the relationship between data sets around a transaction can help retailers set rules that keep their rejection rates in line with, or lower than, their overall fraud rates, while ensuring that no good customers are declined.
“Most retailers have controlled actual fraud losses to 1% of transactions or lower, but if their rejection rate of suspect transactions is higher, it can indicate the rules in place for rejecting a transaction may be too draconian,” says Clump. “Fraud prevention rules that are too strict not only cost retailers good sales, but feed the perception among consumers they lack the systems to effectively combat fraud.”
Just as minimizing fraud losses is an important element of risk management, so, too, is controlling chargebacks. It’s not uncommon for consumers to seek to reverse a charge on a payment card, claiming the product was damaged or not as advertised. Such claims can be difficult to refute, and can lead to the retailer replacing the product or reversing the charge, generating a chargeback.
Because the credit card companies set thresholds for chargeback levels on a merchant’s account before financial penalties kick in, retailers have to be careful not to exceed that threshold. One way to accomplish that is to track the reason for the customer claim back to where it originated within a retailer’s operation. This will then allow the retailer to improve its business processes in these parts of its value chain to prevent future chargebacks.
“If merchants don’t track the reason for the chargeback, they have no way of knowing if the cause lies within their internal processes or the consumer is simply looking for an excuse to return the item because they can’t pay for it or they changed their mind and no longer want the item,” says Pavona.
Retailers also want to closely monitor that the ratio of authorized credit card transactions to transactions actually billed to a consumer’s credit card falls within best practice ratios.
Among other things, these guidelines are designed to avoid unnecessary or excessive authorizations that can limit consumers’ access to their own credit or cash (when debit is used), or which might send unnecessary fraud flags based on repeated authorization attempts.
Retailers seeking to reduce chargebacks should carefully scrutinize their terms and conditions for purchase and advertising, as well as their packing and shipping methods. If consumers repeatedly claim an item is not as advertised, the retailer needs to look at whether its marketing for the item is creating misleading expectations. If items frequently arrive damaged, the problem may reside in how the item is being packaged or the shipping service used.
“By tracking the reason codes for chargebacks, retailers can zero in on why chargebacks are occurring and take steps internally to reduce circumstances that lead to the chargebacks” says Pavona.
In some cases, certain payment products or marketing channels may generate higher chargebacks because their rules governing transaction disputes heavily favor consumers.
“Processors ought to proactively explain the rules for each payment product so that retailers understand the true cost of acceptance and help the retailer set up processes for handling chargebacks as efficiently as possible so they don’t get bogged down in the dispute process, which can be costly from a human resources standpoint,” says Pavona.
Beyond providing analytics on all aspects of the payment processing value chain of chargeback reason codes, Litle & Co. offers credit and debit card processing, including recurring billing advice, alternative payments such as BillMeLater, electronic checks and PayPal, as well as international transaction processing.
Returns and fraud
While taking steps to prevent items from being returned can help retailers control chargeback levels, evaluating return policies can help retailers reduce fraud. Criminals nowadays frequently purchase gift cards using fraudulent credit cards or other payment methods and then use the gift card to purchase items online, which they then return to stores for 100% of the item’s cash value.
The scam is appealing to criminals because they do not have to sell the item on the street for a discount, and the fraud technique creates a convoluted trail for fraud analysts to follow. “It is becoming a more common fraud tactic because many retailers have return policies that open the door to this type of fraud,” says Kuzio.
Retailers can close this loophole by reviewing their return policies and setting rules such as issuing only store credit for returned items. “Such policies deter criminals up front, because they want to get cash,” says Bill Roese, senior vice president of fraud management solutions for FIS. “Once criminals learn a retailer has tightened their return policy to avoid refunding cash for returned items, they will move on.”
Given the growing sophistication of payment and fraud prevention retailers need payment services partners that not only have the latest payment options and fraud detection technologies available, but that understand their business objectives.
Among the questions retailers need to ask any prospective payment provider or processor is whether they can support their expansion into new geographic markets, do they have experience providing fraud prevention for merchants that sell similar goods, and what kind of turnover they have among their staff.