Is fraud prevention costing eCommerce more than fraud itself?

In these turbulent COVID-19 times, eCommerce companies have faced both famine and feast as they adapted to the restrictions and opportunities created by COVID-19.

Research shows that in the past 12 months, the number of first-time online shoppers has doubled. However, while these new users represent a significant opportunity, many businesses are missing out because they're simply not able to tell whether these potential customers are legitimate or not with their existing fraud prevention technology.

As a result, new users to eCommerce businesses are far more likely to be declined at the point of transaction, leading to the immediate loss of this revenue — and in many cases, these customers never return, meaning longer-term loss of lifetime value.

This phenomenon is called New User: Missed Opportunity (NUMO), and it costs retailers a fortune. The longer-term loss of revenue could easily be more than the cost of the occasional fraud loss that an eCommerce business's existing fraud prevention solution is preventing.

So how does NUMO happen, and how can eCommerce companies change how they approach fraud prevention technology?

The missing millions — the scale and frequency of NUMO

A customer's first experience of purchasing online is critical. The process needs to be as welcoming, easy and frictionless as possible. When a customer has decided to try out a new supplier and gone to the trouble of selecting their item and entering their personal details, the last thing they want is for that effort to go to waste if the order is declined.

The damage that this causes is highlighted by recent research from Forter that found that 40% of those declined customers will take their business elsewhere and are unlikely to return. The opportunity to build a long-term relationship with that customer is lost forever. In their bid to stop fraud, some eCommerce businesses are forgoing revenue, and the numbers suggest that they are losing out financially — especially when taking into account the lost repeat business from lost new customers.

Why are new users being declined?

So why are these new customers being turned away instead of being welcomed with open arms? The answer lies in the limitations of legacy fraud prevention tools that struggle to make robust decisions about a user's authenticity when presented with limited data. In an ideal world, the data within a fraud prevention tool includes what customers have bought in the past, linking online and in-store transactions, how often coupons are used and the frequency of product returns. This is all in the name of establishing the customer's integrity.

Unfortunately, many fraud prevention tools are based on manual reviews and rules, and these provide limited visibility of the wider eCommerce ecosystem. There isn't enough information to establish the authenticity of the customer — the reviews and tools are not dynamic enough to keep up with the increased volume or changing behaviour — and this results in false declines and frustrated customers.

Of course, trust is a two-way street. It is not only the merchant that can have suspicions about authenticity. Customers, especially first-time online shoppers, can be nervous when providing a lot of personal information to a site and can abandon their purchase when pressed for extra details.

Recent research by Baymard in the UK found that 24% of customers abandoned their carts because the merchant wanted them to create a customer account, while 18% did so because the checkout process was too long or complicated. 17% decided they didn't trust the site with their payment information.

So, while the merchant aims to qualify the customer by getting the information to satisfy anti-fraud tools, the customer is being dissuaded from continuing. This extra friction contributes to NUMO.

How technology can address this problem

eCommerce businesses must address fraud. There's no arguing that. But if the tools they're using are actually compromising genuine customer relationships, they're contributing to potential losses that are even greater than the fraud itself.

How can technology address this? The key is accessing that all-important behavioural data that gives the eCommerce business confidence in the integrity of the customer without adding friction. By investing in advanced tools that access massive datasets across enterprises, banks, payment providers and industries, merchants get a better picture of what 'good' customers look like, meaning fewer are declined.