One in five German online shoppers has already been the victim of fraudsters. This is revealed by a Bitkom-survey which results were published in January. Fraud vs. sales: Online retailers want to generate the highest possible sales. Their core business is sales. However, bad debt losses can have a significant impact on the sales if merchants have not implemented smart risk management in the checkout.
The highest possible checkout conversion and the lowest possible risk from fraudulent transactions – it remains a balancing act. So, what should retailers look out for in order to increase sales and protect their customers from fraudsters through smart risk management? I talked to Louisa Tran, a risk and fraud expert.
Recognize own risk
First of all, retailers must recognize their own risk exposure. This includes a comprehensive analysis of their own product range and its attractiveness for fraudsters. Some product ranges are more susceptible than others. Particularly popular are product groups that can be resold quickly on the black market and require little storage space: Cell phones, sneakers, high-quality perfumes, game consoles.
In order to assess one’s own risk situation correctly, the payment mix should also be carefully examined: Unsafe payment methods such as purchase on account, installment purchase or purchase on credit card increase the attractiveness for fraudsters, while purchase on account is conversely the most popular payment method in Germany and thus a source of revenue.
When retailers offer fraud-prone products in combination with unsafe payment methods, smart risk management control is essential.
If dealers offer their own marketplace, they must also critically examine the product ranges of the various brands during the onboarding process. They also have to clarify to what extent the partner brands have implemented their own risk management control or downstream fraud prevention.
Check the status quo of the own risk management solution: Tender offer, Implementation, Hypercare
How is your own risk management currently positioned? Which fraud detection software is in use? What is checked manually, how much is operated automatically? What does the downstream fraud check look like? What is handled internally by the business department and IT, what is outsourced to service providers?
Louisa Tran: “Many large online retailers use Machine Learning (ML)-based software solutions because of their exposure to risk. While the decision-making logic in passive payment method control is fully automated (EU-DSGVO), this is not yet fully the case in fraud prevention.
Because the final decision on whether or not an order is cancelled due to fraud is often made by an expert and not by a machine. The human eye and manual checking remain indispensable in fraud prevention.
When tendering, online merchants should review all risk management solutions of the different providers and take enough time to do so. Many a devil is in the detail.
Realistically assess costs
Especially in the beginning a lot of money has to be invested: Machine learning systems, cloud solutions to link customer information, the right personnel… In addition, there are the expenses for professional service providers.
Louisa Tran: “The personnel and financial costs of smart risk management are often underestimated by retailers. After implementation, one should not say “Done! Now we can all sit back.” Smart risk management is an ongoing cost center that requires sufficient budget for personnel resources (special field, IT) as well as for external costs such as the connected service provider.
“The costs of smart risk management are often underestimated by retailers.”
Downstream analyses of the risk decision engine are required to make adjustments. The automated decisions made must be checked for plausibility and adjusted if necessary.
Personally, here I see the overall entrepreneurial relevance of smart risk management. ML-based software enables retailers to make individual decisions with regard to the payment mix. Above all, this can lead to a higher checkout conversion and thus to more sales. Properly operated, smart risk management is a driver for profitable sales”.
Improve internal communication and education
Louisa Tran: “The departments often have a battle against windmills. Against the fraudsters, but also within the company. Compared to purchasing or marketing, the risk department has little visibility and has to fight for every budget.
Risk management is too often seen as a sales killer rather than a sales driver.
Of course, the core business of a retailer is sales, he does not want to be a Serious Frauds Office. But risk management is such a big driver, it generates a lot of customer, order and product-related data, which can then be enriched with data from after-sales (return rate, dunning level, collection fee).
Often these important data pools are not sufficiently tapped. Also, the link to the upstream data from the customer journey (marketing channel, length of stay, number of clicks, etc.) is often unfortunately missing. There are so many important insights slumbering here.
Many optimization cases are not used, the fear of data protection leads to too much uncertainty. We don’t have to be stricter than the law, we shouldn’t be driven by fears.”
Defining the role of service providers correctly
Whether payment, scoring, address verification or receivables management: all major retailers work together with external service providers. Louisa Tran: “I would like service providers to put themselves more in the role and challenges of the special fields.
The specialist fields usually recognize the added value of a new product and thus of the service offered. The persuasive work must therefore not only be done with the specialist fields, but rather internally at a higher management level.
Since risk departments often suffer from a lack of visibility among decision makers, they are already in a bad position when it comes to budget for new risk tools.
In order to demonstrate the processes and, above all, the added value of good risk management, a great deal of educational work is still needed, as specialist departments and service providers must work hand in hand.
However, the industry is also called upon, they also must do important educational work. It cannot and must not be left solely to the specialist fields and service providers to convince the decision-makers on the trading side of the relevance of smart risk management”.