Merchants Fight Online Fraud, But Leave Some Customers Unhappy

by Raymond Pucci 0

Dynamic fraud detection methods, such as machine learning algorithms, are giving merchants the means to beat back bogus online sales orders. As the following article reports, while advanced fraud fighting methods are highly successful, there are sometimes legitimate sales that get rejected, leading to unhappy shoppers.

When people shop online at retailers like Macy’s Inc. and Finish Line Inc., their visits are tracked and shared with an outside firm that scores their behavior and decides whether to approve or deny purchases. Shoppers who exhibit behavior that such scoring firms often associate with fraud, such as buying without checking the return policy or paying for the fastest shipping option, have a higher chance of getting declined. Sometimes they never find out why their transactions are canceled or who made the call.

Behind these decisions is a group of firms hired by retailers to weed out fraudulent online customers. They determine which indicators correlate with fraud and then evaluate shoppers based on hundreds of data points. A Tel Aviv-based company called Riskified works with Macy’s and Finish Line. Its rivals include fellow startups like Signifyd and Forter, as well as players like CyberSource, which was acquired by Visa Inc. in 2010, and Accertify, which American Express Inc. bought the same year.

Online shopping has created new challenges for retailers trying to combat fraud, such as people using a stolen card or falsely reporting a transaction as fraudulent. Credit-card companies typically cover the cost of unauthorized purchases in stores. But with online transactions, retailers are usually on the hook when a customer reports a fraudulent charge.

Merchants finally have advanced measures to combat online fraud which has become a significant problem.  Many fraud detection firms, including those mentioned in the article, have delivered highly effective fraud identification results, so these measures should continue unabated. However, a problem occurs when there is a lack of communication between merchant and customer, when a legitimate sale has been rejected—or as the industry calls it—a false positive. Rather than be secretive about it, merchants should reach out to customers and let them know what is happening. Are legal departments standing in the way? If these consumer issues persist, regulators could potentially step in to introduce disclosure requirements. But the bigger picture is that merchants and their security vendors should continue to be proactive in countering e-commerce fraud, as the fraudsters will not go away.

Overview by Raymond Pucci, Associate Director, Research Services at Mercator Advisory Group

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