The global payments ecosystem is undergoing a revolutionary shift towards digital commerce. Recent years have witnessed remarkable growth in online transactions, with total payment volume (TPV) seeing a 51% surge in 2021 compared to the previous year.
As the industry barrels forward into 2022, experts predict big increases in TPV compared to 2021. However, amidst this rapid expansion, the issue of online payment fraud looms as a significant challenge, necessitating a comprehensive approach to fraud prevention.
Understanding the Payments Landscape
The surge in digital transactions brings with it an increasingly complex problem: how to deal with fraudsters. With the growth of digital payments, merchants now face the pressing need to comprehend their payment profiles, manage risks, and navigate the evolving threat landscape. This presents a substantial financial and operational risk, compelling merchants to address this issue proactively.
Escalating Costs of Fraud Prevention
According to the Merchant Risk Council, the expenses borne by merchants to combat online fraud surged five-fold between 2019 and 2021. What began as eCommerce merchants spending an average of 2% of their annual revenue on fraud prevention in 2019 escalated to a staggering 10% by 2021. Despite this substantial investment, merchants continue to grapple with the challenge of combating increasingly sophisticated tactics.
Adding to the urgency, data from the European Central Bank revealed that fraudulent card transactions amounted to €1.03 billion in the eurozone, underscoring the need for robust fraud prevention measures. The financial toll is not only on merchants but also on consumers and the broader economy.
The PSP Paradox
In their pursuit of effective fraud prevention, many merchants rely on value-added solutions offered by their existing payment service providers (PSPs). However, while this approach may seem convenient, it comes with potential long-term costs. As attacks become more sophisticated, the tools designed to combat them must be equally advanced.
PSPs face a delicate balancing act. They must manage their portfolio risk exposure while also ensuring high conversion rates for their merchants. The challenge intensifies in the European Union, where PSD2 mandates stringent acquirer fraud rates to offer TRA exemptions to merchants. Striking this balance is complex, leaving some merchants potentially underserved.
Pitfalls of Inadequate Fraud Solutions
Relying solely on PSPs' fraud prevention tools can be costly. Fraud-fighting companies like Vesta are seeing that such reliance on PSP basic solutions can lead to losses of conversions for merchants. Furthermore, many PSPs' fraud solutions are built on legacy technologies, characterized by static, rules-based systems that lack flexibility and scalability. These limitations result in inaccurate fraud decisions and high false decline rates, impacting both revenue and customer experience.
And this is precisely where merchants go astray: over-declining good customers is no better than letting in fraudsters. Don't leave money on the table! Balancing risk with customer experience is essential in delivering maximum revenue. The most effective solutions work just as hard to approve legitimate customers as they do at blocking bad actors.
Seeking Dynamic Solutions
The quest for effective fraud prevention solutions requires innovation and adaptability. As PSPs focus primarily on their core business of offering payment acceptance for their merchants, the fraud solutions built into the payment gateway might lack the dynamism of dedicated fraud prevention offerings.
Merchants will consider outsourcing their fraud prevention capabilities to partners with expertise in fraud detection and digital commerce optimization across the entire customer journey, not just at the point of transaction.
This is territory where PSPs, payment gateways, and payment processors can add solutions like chargeback indemnification, Authorization as a Service (AaaS), and graph analysis to completely optimize their merchants' approval rates.
The Imperative of Data Insights
Partial visibility into the customer journey poses challenges for merchants. Many struggle to access timely data from their PSPs, particularly insights related to PSD2, fraud, and risk. A lack of actionable data and insights about approval rates, declines, and fraud reduction can leave merchants uncertain about their performance.
When legitimate transactions are falsely flagged as fraudulent, both businesses and consumers suffer.
In the era of PSD2, merchants need to make informed decisions backed by comprehensive data. This entails asking PSPs probing questions and verifying data sources. Beyond focusing solely on fraud decline rates, merchants will examine friction in pre-authorization and explore the use of 3DS secure to optimize customer experience.
The Way Forward
In the face of a rapidly changing payments landscape, merchants and payment processors must work together to adopt a proactive stance towards fraud prevention. When PSPs collaborate with a dedicated fraud prevention partner like Vesta, they can empower retailers to enhance conversion rates, streamline account-level authentication, and reduce false declines, all while ensuring a superior customer experience.
The dynamic synergy between fraud prevention platforms and PSPs empowers retailers to unlock global growth by boosting conversions, approvals, and revenue optimization for existing and potential customers. Viewing fraud prevention and digital commerce optimization as an ongoing, proactive effort is the key to navigating the complex landscape of digital payments securely and successfully.
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