Economic conditions have a way of shaking up the marketplace and the ability of e-commerce to produce goods and services for end customers. Factors such as inflation, interest rates, and layoffs are powerful economic forces to be reckoned with. In a recent discussion, Sunny Thakkar, Director, Head of Merchant Fraud Solutions at Worldpay from FIS, and Daniel Keyes, Senior Analyst for Merchant Services at Javelin Strategy & Research, discussed another economic force that needs to be confronted, the increased incidence of fraud. They expound upon some concerning stats, explore why fraud tends to increase during a macroeconomic impact, and examine the solutions to mitigate fraud.
Macroeconomics and Its Impact on Merchants
As today’s world becomes increasingly interconnected, the macroeconomic impact of events, which deal with the economy at a global level, can be felt down to everyday merchants and their businesses.
Instability within the economy seems to create the perfect breeding ground for fraud, and bad actors stand ready, willing, and able to target the weakest links and take advantage by using the latest technology and sophisticated fraudulent tactics.
“I apologize for leading with all these scary stats,” Thakkar said, “but I wanted to highlight the current macroeconomic state because it not only plays a role in impacting merchant sales and growth, but as we’ve found from history, macroeconomic factors are also known to amplify fraudulent activity. Recession or not, when it comes to the current global macroeconomic climate, things are looking far from ideal.
“The UK right now is experiencing very high inflation. Their customer price index is at over 10% right now. Many of us know that two U.S. banks were recently shut down by regulators. That created two of the largest bank failures in modern history, and the only one larger than that was in 2008. That was at the height of the financial crisis.”
All these looming microeconomic factors are also requiring businesses to make difficult cost-cutting decisions such as mass reduction in forces. And that’s evidenced by the large number of layoffs already reported by corporations. A website called Layoffs.FYI that tracks layoffs has reported over 150,000 layoffs in 2023 alone. That almost surpasses all of 2022 combined.
“All this is leading to impacts on the overall global economic growth, and that’s already forecasted to slow by 1.7% in 2023. That’s the third-weakest pace of growth in nearly three decades,” Thakkar said.
“As far as general impacts to the businesses, the drive to e-commerce has obviously been a good thing. It’s allowed businesses to thrive during a global pandemic. But industries such as retail and grocers have also experienced a major added cost because of the drive to e-commerce. Things like logistic fees, that’s from sales but also from returns,” he added.
“You think about digital advertising expenses, managing a website with all your products and goods and service. It’s a lot of expense that goes into that. “Then there’s the increase in chargebacks costs that merchants are facing today. That’s due to the increase in fraud that merchants are seeing through channels in e-commerce. As you may know, e-commerce merchants bear more of the burden of the liability of chargebacks that result due to fraud.”
Then there’s the traditional pain points that are now being amplified for merchants, including payment friction, which can lead to cart abandonment. “That’s resulted in over $260 billion and impacted sales from merchants already that we found in a report in 2023,” Thakkar said.
Although the growth of e-commerce has been on everyone’s radar, it comes with its own challenges that businesses must be prepared to deal with.
“You laid it out very nicely,” Keyes said. “E-commerce sales are great. The increase in e-commerce is beneficial to a lot of merchants, but it opens a whole other can of worms, as far as their challenges, problems, and costs that a lot of merchants aren’t prepared to handle. At least not prepared to handle efficiently, and they need to really consider their strategy to go forward as e-commerce grows more and more popular.”
“It’s not slowing down, either,” Thakkar said. “We just released our Worldpay Global Payments Report, and we found that the growth in e-commerce is continuing to rise.”
“Global e-commerce transaction value grew by a healthy 10% YoY from 2021-2022. We project global e-commerce transaction value will rise from roughly $6 trillion in 2022 to over $8.5 trillion in 2026,” he added.
The Cost of Returns for E-Commerce Businesses
Ease of returns makes or breaks an e-commerce business these days. Free and easy returns and shipping are also the cherry on top and a key differentiator as customers determine where to do their shopping. Not offering these features as table stakes will take businesses out of the e-commerce game in no time.
What is not readily talked about is just how much it costs a business to accept returns. It is not cheap.
“A study done in 2021 estimated that the cost of a return to a retailer was 66% of the price of the item itself,” Thakkar said. “A $50 item cost over $33 for that retailer to fully process and then return it for resale. It’s a very expensive process. But it’s also a great customer experience, which is very important today, and it’s one of the things that online shoppers have become accustomed to.”
“Research shows that retailers are adopting this, as 45% of the top 1,000 retailers are offering free shipping today,” he said. “Not having that as an option can lead to loyal shoppers shifting their business elsewhere. It’s very easy to do in an e-commerce situation. Just type in a new URL and I can start finding goods where free shipping is offered now.”
Economic factors are squeezing the bottom line for businesses as they navigate a tougher economic environment, one that’s difficult for consumers and companies alike.
“Now the tough challenge for companies will be combining all these added expenses, especially with recent cost-cutting pressures and then just the general looming economic hardship that’s being faced by consumers,” Thakkar said. “This is all going to require merchants to capitalize on every genuine transaction as possible. Now the keyword here is ‘genuine,’ and that’s because as I mentioned a little while earlier, there’s numerous data points showing that an increase in fraudulent activity occurs during financial crises.”
“Everything from insurance fraud, identity theft to payments fraud, all have seen increases in fraudulent behavior in the past. So having fraud mitigation at the time of checkout is going to be critical for these merchants.”
That’s a product of e-commerce’s rising viability, Keyes noted.
“As e-commerce gets more popular, it just enters new challenges with fraud and new opportunities,” he said. “It shifts the focus from in-store fraud to online fraud. And it’s not going away anytime soon. Merchants need to figure out how they want to deal with it and deal with it efficiently.”
With Macroeconomic Impact Comes Increased Fraud
It’s clear that most fraud is incited by outside economic pressures that create desperate financial situations, which is the perfect storm for fraudulent activity to spike. Further encouraging individuals to commit fraud is the perceived anonymity, as they are not physically stealing from a store but instead are doing so privately, in their own home, which seemingly lessens the guilt.
“Macroeconomic factors create the ideal environment to enable fraudsters,” Thakkar said. “There are anti-fraud researchers that have studied model conditions that lead to higher risk of fraud and have coined this term called the ‘Fraud Triangle.’ This is where individuals are motivated to commit fraud. When three elements all come together, those three elements are motivation or some type of pressure. It’s an opportunity, and then there’s rationalization.”
According to Thakkar, the pressure or motivation to commit fraud, that’s the one that is most influenced by economic hardships. It’s because individuals are experiencing a financial burden. They’re losing a job or there’s increased cost due to inflation. This is leading to desperate measures to provide for themselves and their families.
“The second piece is that of the perceived opportunity,” Thakkar said. “Looking at fraud and e-commerce as an example, the anonymity and the ease of deception that’s present in the online shopping world can tempt an individual to commit fraud. It’s not like I’m going to a store and shoplifting and have that risk of being caught. This e-commerce environment has allowed someone to be in a safe environment within their own home and be able to commit this fraud with relative ease.”
“Finally, there’s the way to rationalize fraud and that’s not being consistent with one’s values. An example would be there’s a rationalization that credit card fraud is a victimless fraud and that billion-dollar companies and banks can afford it. You’re rationalizing why this is OK,” he added.
Another reason that we see fraud increase during macroeconomic impacts is that people are more vulnerable due to the general anxiety of the current economic situation. This is where fraudsters take advantage of emotions and use it against the victim to successfully carry out deceptive practices.
“The COVID-19 pandemic was our last microeconomic event. We’ve seen that cost of data breaches during this time reached a 17-year high in 2020,” Thakkar said. “And the FTC also cited that the pandemic was responsible for a 70% increase in consumer-reported fraud in 2021. These are direct data points relating to macroeconomic factors creating higher fraudulent events.”
With technology growing more sophisticated, fraudsters will benefit from the accessibility and ease of committing fraud. Therefore, the incidents will simply increase.
“There’s just so many ways to commit this kind of fraud with the rise of e-commerce that were more difficult or just different with in-store shopping,” Keyes said.
“And they’re going to only grow this. Fraudsters always find a way to take advantage of people and companies. There’s a lot of room to run for them online, and it’s going to be an ongoing problem.”
The structure of businesses themselves is another factor, Thakkar noted.
“Another reason that fraud increases during this time is because there’s a reduction in workforces,” Thakkar said. “That often creates resource gaps in fraud and risk organizations. That allows these bad actors to exploit unanticipated vulnerabilities by the companies, and fraudsters are constantly testing the waters. They’re slowly pushing the boundaries until they finally find the perfect gap or loophole.”
“Once they find that, it’s often too late to mitigate and fraudsters may have already fully exploited that long before any mitigation steps can be put into place,” he said. “If you’re in a situation where staff is light, ensuring there’s some right automated tools and processes put in place—that’s going to be critical for successful protection of your business.”
“Further cost-cutting measures beyond just reduction in forces that companies are taking is cutting the expense of technology. Fraud technology is one area that we’ve seen be an expense that’s being cut. That’s where it can get really tricky. If you already have staff shortages and gaps, now there’s the potential for wide-scale attacks that can become even more severe.”
Managing a Balance Between Identifying Fraud and Reducing Friction
Hitting the mark on two ideals—managing fraud and providing a seamless, frictionless customer experience—is a constant and ongoing challenge for businesses. If businesses do not have the right anti-fraud tools in place, they can lose money and consumers. But they also stand to lose money and customers if they don’t offer a hassle-free payment experience.
“It’s certainly not easy to manage this balance,” Thakkar said. “It’s going to be tough, especially since every impact to a genuine transaction, even if it’s just an impact due to added friction at checkout, can lead to decreasing sales—not only for a single transaction, but you can risk losing that entire customer’s lifetime value. We call that insulting or customer insult. If I decline a customer at checkout, someone who’s valuable, it’s easy to type in another website and find another good on another competing business. Making sure that the experience stays seamless and frictionless for those good customers is incredibly important.”
“That’s why maximizing conversions, while not losing focus on an effective fraud strategy for e-commerce sales, is going to be critical for merchants,” he said. “If you don’t have the right fraud strategies in place, then you’re opening yourself up to another situation. Traditional fraud management, especially ones that operate with a strictly rules-based technology, is not going to be the best option.”
“We must consider fraud management as payment optimization. If you think about what traditional fraud management focuses on, it’s mitigating fraud. The buck stops there. When you look at fraud management with a payment optimization lens, the focus should be on preventing the riskiest of transactions while maximizing genuine authorization approvals, while involving the least amount of friction to the payments experience as possible. That means real-time decisions using sophisticated artificial intelligence and machine learning.”
The most important piece of the puzzle in making accurate determinations and approving transactions is data.
“The data piece is important here,” Thakkar said. “Think about a jigsaw puzzle. Every transaction is essentially a jigsaw puzzle that you have milliseconds to solve. The more data I have, the better I can put this puzzle together. If you don’t have enough pieces, you risk getting that decision wrong. Sometimes you might not have the right pieces and you can’t put that puzzle together. And either way, you don’t have enough information to make an informed decision of ‘do I approve or decline this transaction?’”
“Data is incredibly important. It needs to be coupled with a limited to no step-up authentication, which introduces an opportunity for cart abandonment and lost sales,” he said. “If I’m at checkout and I’m about to make a payment and all of a sudden, I get a pop-up window that wants me to confirm details about myself, that’s introducing friction and can cause someone to get concerned and leave that sale, and they’re out the revenue in that situation.”
“For merchants who are shipping physical goods—a lot of those merchants are doing manual reviews before shipping those goods out to check one more time for fraud and ensure that as they ship that good, they’re making sure it’s going out to a genuine customer so they don’t get a chargeback on the back end of that. The problem with that is it creates more friction and a bad experience for the consumer, so (it’s necessary to have) the ability to execute the fulfillment of goods instantly as soon as I hit checkout.”
What Businesses Should Seek in a Fraud Protection Provider
The challenges for e-commerce businesses can seem insurmountable, but luckily, there are plenty of ways to tackle these problems and improve your current strategy. A key is choosing the right fraud protection provider.
“There are several things to consider here,” Thakkar said. “The first one, consider what KPIs are a priority for the fraud provider. A provider who only focuses on fraud, chargeback reduction, or reduction of fraud can be harmful to overall sales. Providers should be transparent about the value that they can provide in terms of the overall approvals. So that should be approvals due to fraud.
“The second piece is ensuring that the provider doesn’t operate in a black-box method. That’s where fraud decisions are being made in this funnel without any real clarity back to you on what or why these decisions are being made to protect your businesses,” he said.
“I’ve worked with a lot of businesses over the years, helping merchants find the right solution for them. And every merchant that I’ve worked with has some difference in their operating model. If a business operates in a black-box method, the business doesn’t have an opportunity to add input on why they need to operate differently in their business. Ensuring that businesses see why decisions are being made offers businesses the opportunity to provide feedback on changes for a successful fraud management strategy. Then look at solutions that create a strong ROI, a return on investment, for your business.”
There’s also reduction and staffing. According to Thakkar, if you’re not able to hire more staff during peak seasons, you can’t slow down your fulfillment for goods—you still have to keep up with that demand. It’s important to find a solution that can offer automated fulfillment opportunities. That reduces the need for manual intervention that can be key in using technology to accomplish your operational goals. The problem is fraud providers are not using the right technology, and they’re not applying the right data to accomplish this.
“Ensure that providers have a strong artificial intelligence or AI and machine learning also known as ML-based fraud detection, and that can generate all the data that we can collect and come up with real-time and accurate decisions,” Thakkar said. “Adding as much data as possible at the time of checkout can lead to a better outcome at the end of the day. That’s an outcome that can get you to the right decisions and reduce the amount of false positives (I.e. insults to your customer), but also ensure that you’re not increasing fraud as well.”
Navigating all the ways to prevent fraud and providing the best customer service experience can be complicated, to say the least.
“It’s a tightrope that merchants and their service providers need to walk in preventing fraud,” Keyes said. “Which can be extremely costly, also ruining the experience for customers. There are many different facets of the customer experience where you would like to check for fraud but where it could cause a customer to bounce off at the same time. You can’t allow fraud. So you need all these different types of solutions.
“All these are potential ways to check but that ideally don’t disrupt the experience for the customer. It’s complicated telling merchants and their service providers that they always need to keep in mind,” he said.
Guaranteed Payments Solution
As a way to circumvent all the aforementioned challenges businesses face in today’s macroeconomic environment, FIS has created Guaranteed Payments. It offers real-time, seamless fraud decisions.
“We recently launched Guaranteed Payments, which uses exactly the framework of payment optimization, focused fraud protection,” Thakkar said. “It focuses on overall sales conversions and approval rates. That’s our primary KPI guarantee. Payments offer real-time, frictionless fraud decisions, and it’s all backed with a 100% financial liability shift on fraudulent chargebacks.
“Chargeback guarantee orders can also be instantly fulfilled without the need for manual reviews to achieve things like expedited or same-day shipping and that meets the demands of today’s e-commerce shopping experience that we’ve all become accustomed to, without the fear of liability of losses that come to that business,” he said.
As we enter further into this next macroeconomic event, staying vigilant towards fraudulent activity will be critical, but being too restrictive can also be detrimental. The focus behind every set of KPIs for fraud management needs to be not just to focus on reducing chargeback rates or the count of fraud prevented, but the percent of transactions that are being approved as a result of your intelligent fraud management. As the competition in today’s market is far too great, we risk the loss of not only a single transaction but the loss of loyal, returning customers. You may only have one chance to really get this right.
It’s a high-stakes proposition, Keyes said.
“If you know if you get this wrong, you disenfranchise your customers,” he said. “You lose sales. If you get this wrong, it’s very costly. It’s something that every merchant needs to take seriously and take the time to make sure they’re doing what’s right for their particular business.”
