The global payments ecosystem continues to experience exponential growth in digital commerce. In 2021, Forter saw a 51% increase in total payment volume (TPV) year over year compared to 2020. In 2022, this volume is expected to increase by 65% ​​compared to 2021. In the same Time, this increase in transactions brings another problem: digital commerce fraud.

Merchants must have a detailed understanding of their payment profile to manage threats and balance risk. According to the Merchant Risk Council, the amount merchants spend to fight online fraud increased fivefold between 2019 and 2021. In 2019, e-commerce merchants spent an average of 2% of their annual revenue on prevention. fraud. By 2021, this share had increased to 10%. However, it is a battle that merchants continue to lose. Additional data collected from the European Central Bank indicated that the total value of fraudulent card transactions was €1.03 billion in the eurozone.

However, as merchants become more aware of the costs of fraud, they realize the need to deploy fraud prevention solutions. Many merchants use these services provided by an existing payment service provider (PSP). However, this approach could cost merchants dearly in the long run, as increasingly sophisticated fraud tactics require equally clever tools to combat the threat.

The challenge for PSPs

PSPs need to balance the risk exposure of their own portfolio, with interests in the high conversion rates of all their merchants, especially in the EU where PSD2 requires very conservative acquirer fraud rates in order to offer TRA exemptions to their traders. This means that they cannot serve the interests of every merchant given the need to balance the overall fraud rate on their books. This makes it difficult to provide a superior fraud prevention solution at all levels.

Inaccurate fraud decisions result in false declines of legitimate transactions. This leaves revenue on the table and hurts the customer experience. Data from Forter indicates that relying solely on PSP fraud prevention tools can cost merchants up to 8% of their conversions.

Limitations inherited from PSP fraud solutions

In most cases, PSP anti-fraud solutions rely on legacy technologies with static rules-based systems that are rigid and not scalable. These limitations can lead to inaccurate fraud decisions with high false rejection rates. Additionally, merchants need to be able to understand how to set, manage, and maintain these static rules, which requires diverting time and resources from their primary sources of revenue.

With PSPs primarily focused on their core internal fraud risk business model, their anti-fraud solutions are not as dynamic as dedicated fraud prevention offerings – they can only analyze whether a payment is fraudulent. PSPs that are payments experts do not necessarily have the investment in fraud prevention to provide cutting-edge capabilities in a non-payment capability. Retailers should therefore outsource fraud prevention capabilities to a dedicated partner who can examine fraud and digital commerce optimization throughout the customer journey, not just at the point of transaction.

Partial customer journey visibility is a problem

Many merchants also have difficulty accessing or receiving data from their PSP, especially PSD2, fraud and risk information in a timely manner. PSPs tend to struggle to identify trends outside of payment fraud because they lack visibility across the entire customer journey. This can mean that unusual patterns, such as account takeover or policy abuse, go undetected.

A lack of actionable data and insights into approval rates, denials, and fraud reduction leaves merchants in the dark about their own performance. What does this mean for traders? When legitimate transactions are caught in the same net as fraudulent transactions, businesses suffer as well as consumers. False refusals are costly; according to Forter’s NUMO report, merchants can lose up to 75 times more revenue to false declines than to fraud.

In the era of PSD2, merchants should be able to make decisions backed by well-explained data, which comes from asking their PSPs hard questions and verifying data sources. It’s also not about declining rates of fraud, but also a loss of customers due to friction over pre-authorization and the use of 3DS Secure rather than taking advantage of exemptions. It all comes down to traders’ lack of knowledge, driven by a lack of richness and accuracy in the data they receive. The current challenge for traders is that they need to know what to track, what good data is supposed to look like, and be able to compare PSP data to data they can track and monitor themselves.

Is it time to change?

Tackling fraud head-on has never been more crucial for merchants. As retailers expand their operations, they need to outsource fraud prevention capabilities to a dedicated partner who can examine fraud and digital commerce optimization throughout the customer journey, not just at the point. of transactions. For example, a fraud partner can help optimize conversion rates by providing real-time payment decisions, streamline account-level authentication to stop account takeover, and reduce false declines to deliver a superior customer.

Using a fraud prevention platform alongside a PSP enables retailers to drive global growth through increased conversions and approvals, including analyzing how they can maximize revenue from current customers and future. This proactive method is far more appealing than viewing fraud prevention and digital commerce optimization as a box-ticking exercise.

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