Putting too much front-end fraud protection in place can be a very bad thing for online merchants battling CNP fraud.
My business partners and I run a few different businesses, some service based and some product based.
When it comes to product based businesses, there's a rising amount of Card Not Present (CNP) fraud happening.
We see it all too frequently in several of our online businesses.
CNP fraud is a growing problem, and the 2016 LexisNexis True Cost of Fraud study shows the costs of fraud is on the rise for merchants. The seventh-annual report suggests that for every dollar lost to fraud this year, it’s going to cost online merchants $2.40 in total revenue.
That's a whole lot of cash, especially for scrapy, small businesses like ours, trying to survive. And what's one of the main contributors to merchant fraud burden? Chargebacks.
Fraudulent transactions account for nearly 50 percent of total merchant chargebacks. And the more you process these types of transactions, the more chargebacks you’ll be issued, and the more customer and revenue loss you’ll experience.
Merchants know fraud is a problem that isn’t just going to disappear. They know they need fraud mitigation solutions, but what many fail to do is find the proper balance between fraud control and customer experience.
The rest of this post is based on what we (myself and CTO) learned as we tried, failed, tried again, probably failed again, and so forth as we sought to figure out front-end fraud protection.
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The Good and Bad of Front-End Fraud Protection
Unfortunately, we've learned the hard way that effective front-end fraud protection is necessary for having a healthy CNP business. Merchants need preventative solutions, such as secure card activation and customer authentication, that help you combat credit card fraud on the front end.
Like most merchants, our immediate reaction was to beef up our front-end fraud protection measures, however, it's important to not go overboard with your protection. Using too many pre-sales fraud preventions can rapidly turn into reduced conversions, and no merchant wants to turn away a good sale or customer.
While blocking fraudulent purchases is a good idea, blocking transactions from legitimate purchasers not only loses money for your business, it also causes you to alienate customers, possibly for life. Depending on your business and what you sell, the LTV of a customer might cost you more in the long run than fraud costs.
Finding the Right Balance
Rather than throwing all your eggs into the front-end basket, you need a balanced and comprehensive approach to fraud and chargeback management. You have to develop a layered, comprehensive approach to fraud that uses a combination of the right tools and analytics to protect payments and boost your bottom line across all channels and that targets all forms of fraud.
Some solutions on today’s market are a one-size-fits-all approach; we didn't want this and you shouldn't either. These solutions aren’t really effective solutions. They’re fixed solutions that don’t allow you to tailor chargeback prevention to your business and specific needs and can’t keep up-to-date with the ever-evolving CNP landscape, which hurts your sales and causes you to lose more in profits due to chargebacks and lose more customers because of overly-aggressive fraud prevention methods.
Using a service like Chargeback.com to monitor alerts creates the essential balance to stop fraud while still letting good, valid sales flow through without interruption. Every merchant should couple pre-chargeback notifications on the back end with front-end fraud prevention tools, such as digital fingerprinting (Verifi.com), 3-D Secure (3 Domain Secure) and biometrics technology (Verint.com) that allow you to accept non-fraudulent transactions and eliminate chargebacks by confirming people’s identity. This balanced fraud protection combination gives you total chargeback protection.
Related Article: 5 Things Most Small Businesses Don’t Know About Payment Processing
Merchants who create a holistic fraud and chargeback prevention strategy are better equipped to fight fraud while improving their bottom line and customer experience.