As the economy recovers and consumer spending shifts from brick-and-mortar to e-commerce, the threat of online fraud is expected to grow. According to the 2011 LexisNexis True Cost of Fraud Study, while there was an overall decline in fraudulent transactions last year, the average amount of each fraudulent purchase continued to increase. In fact, 2011 brought some of the largest data breaches in history — over 180 million stolen records — giving fraudsters a vast amount of information to attempt attacks. This data suggests that retailers and consumers should be prepared to see a rise in fraudulent transactions long term.
To effectively assess the impact fraud is having on their profitability, retailers must measure beyond the loss of the good and include shipping fees, restocking fees and interest — all costs associated with inefficient fraud prevention.
Retailers walk a fine line when establishing their risk mitigation techniques and methodologies. It's tedious and expensive to manually review orders, and retailers can lose significant revenue if they cancel too many orders that look fraudulent. Having the right intelligence and flexible tools are key to enabling retailers to distinguish the difference.
Automating the Process and Providing the Best Intelligence Are Key
Retailers that are most successful at fraud prevention will have systems in place that provide a complete view of transactions — i.e., who places, pays for and receives an order — to fully understand the risks associated with a particular transaction. This can be achieved by incorporating data and analytics throughout the retail transaction process to deliver the following:
- optimize the up-front, automated screening;
- ensure the right cases are being sent to manual review; and
- deliver real-time order decisioning.
Automated screening processes can be optimized by inputting front-end scores, attributes and rules definitions that will automatically validate and verify three key attributes:
- Identification: the relationships between different parts of a customer's order such as the phone number listed, billing/shipping addresses, etc.
- Connectivity: the device that was used to place the order and where the order originates from.
- Order: specific aspects around the order such as amount, shipping method, payment type, product codes, etc.
The application and automated analyses of these attributes allows complicated orders to pass through the screening process automatically rather than be flagged for manual review. The best tools for automating the screening process are flexible and not overly sensitive. They don't identify and cancel legitimate, albeit complicated orders, as fraudulent.
A manual review process is inherently more costly than systematic review, but a single tool saves reviewers from flipping through many screens and sources and combing tons of data, making the process as efficient as possible. For instance, it's ideal that analysts in the manual review process use one tool that can preview people, places and addresses associated with the order. The more data that's readily available, the easier it is for reviewers to spot relationships.
To optimize the order decision process, retailers should aim to make all the data available in the screening and manual review stages also available in the order decision. Again, the data should be available through a single tool. Smart retailers create business rules within the tool that rely on all the integrated data sources so that the system can automatically cancel or process orders. Data integration and automation in this process will allow retailers to access the best information in real time.
Conclusion
Retailers must not underestimate the sophistication of fraudsters. It's more important than ever to choose data sets and tools that provide a comprehensive picture of each order, automation capabilities and flexibility to ensure they're not losing revenue by cancelling legitimate orders. As one retailer put it, "Reviewing orders takes time; if you take the time to review an order and it's good, you might miss the shipping time and end up upsetting a good customer." The retailers that take a holistic view in combating fraud will be the ones that are best equipped to succeed in today's e-commerce environment.
Jim Rice is the director of market planning for retail and e-commerce markets at LexisNexis Risk Solutions. Jim can be reached at jim.rice@lexisnexis.com.
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