Articles

Written by: Andre Edelbrock, CEO, Ethoca

Effective loss prevention is always top of mind for today's retailers. But, as our economy slides deeper into recession, and every cent counts, it becomes an even more essential priority. The problem retailers face in addressing loss prevention is how to make sure they're protected while limiting the impact that protection has on their customers. This challenge is perhaps best exemplified for customers engaging with your brand through online shopping.

The problem arises because when the customer is not there to validate their identity, extra steps must be taken to authenticate the transaction and protect against credit card fraud. The hurdles that retailers ask consumers to jump include registering at a site, proving and validating their identity, and completing a transaction, and some times more. But despite good reasons for doing so, these processes frustrate customers and are cited by 40% of those who abandon their shopping carts as the reason why. Given how much you spend to get people to your site, losing them when they're ready to buy because you've sacrificed convenience for security just isn't right.

It's a dilemma that's becoming more urgent as hackers grow increasingly sophisticated. The ITRC, the Identity Theft Resource Center, reports data breaches jumped 47% in 2008.These data breaches mean big business for fraudsters. Entire underground businesses and black market economies exist for the sole purpose of selling customer data pilfered from a data breach — and then using that information to defraud retailers. So, how can today's retailers make sure they stay protected, without the risk of added measures turning off any of their "good" customers?

Customer-not-present loss prevention is different, and in many ways, more challenging than when the customer is physically present at the cash register. While there is no silver bullet, retailers can protect themselves without sacrificing the customer experience by layering a variety of different approaches. Many retailers have employed fraud detection tools to identify customer purchase patterns and flag any unusual activity. For instance, if the billing address and shipping address are different, the order might be given the red light for further inspection. Manual reviews are generally one of the safest bets, but have a few major drawbacks: they take money, additional employees, and most of all, time. Most customers aren't content with waiting several days until a manual review checks out for their order to be processed and shipped.

Some merchants have added 3D Secure, an authentication protocol offered by credit card companies (both VISA and Mastercard have their own branded versions), to their suite of anti-fraud solutions. However, while this offers the merchant protection if the transaction is later discovered to be fraudulent, most have refused to implement it because of negative reaction from consumers. Studies cite rates of up to 30% cart abandonment when customers are faced with this extra step after supposedly finishing their checkout process.

Merchants are also incorporating extra electronic steps to protect customer data and themselves. PCI compliance has received a lot of attention in the press and is one of the most important things you can do to both obey the law and protect yourself from major losses. After all, nothing will drain your revenue faster than a massive data breach, bad publicity, and subsequent payouts for non-secure practices.

In the past few years, it's become evident that one of the most important ways for retailers to fight loss prevention is to collaborate. With the vast amount of information available through increased communication channels and the Internet, retailers can prevent losses by joining forces and pooling information. Just like a neighborhood community crime watch, retailers can help their industry as a whole by working together, and help themselves even more by gaining access to knowledge that gives a vastly better assessment of risk, particularly with customers who've never shopped at their site before. It's a burgeoning trend, and the growth in collaboration is due to the tremendous power of having a more complete view of the customer's behavior online. In many cases, merchants can predict with near certainty who the good customers are, who the criminals are, and where exactly the risk lies. They can reduce the total cost of fraud and simultaneously reducing the impact on the customer experience.

Just like insurance claim fraud, e-commerce fraud losses are a detriment to everyone involved. Customers appreciate it when retailers make their shopping safer and keep prices from being inflated due to fraud damages, while still retaining the convenience and time-saving attributes that they love about the online experience. By staying informed, layering approaches, and working together, retailers can change the playing field of loss prevention until fraudsters are forced to look elsewhere for an industry that's less collaborative, and less prepared for their advances.

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