Keep your PSPs close and your fraud prevention partners closer
The global payments ecosystem continues to witness exponential growth in digital commerce. In 2021, Forter saw a 51% increase in total payment volume (TPV) year-on-year from 2020. In 2022, this is projected to increase by 65% compared to 2021. At the same time, this increase in transactions presents another problem: digital fraud trade.
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 on combating online fraud quintupled between 2019 and 2021. In 2019, e-commerce merchants spent an average of 2% of their annual revenue on fraud prevention. In 2021, the proportion had grown to 10%. However, it is a battle merchants continue to lose. Additional data collected by the European Central Bank stated that the total value of fraudulent card transactions amounted to €1.03 billion in the Eurozone.
But as merchants become increasingly aware of the costs of fraud, they realize the need to implement fraud prevention solutions. Many merchants use such services provided by an existing payment service provider (PSP). However, this approach may cost merchants in the long run, as increasingly sophisticated fraud tactics require equally intelligent tools to combat the threat.
The challenge for PSPs
PSPs must balance their own portfolio risk exposure, with interests in high conversion rates for all their merchants, especially in the EU where PSD2 requires very conservative fraud rates for acquirers to be able to offer TRA exemptions to their merchants. This means they cannot serve the interests of each individual merchant given the need to balance the overall fraud rate across their books. This makes it difficult to offer a superior solution for fraud prevention across the board.
Inaccurate fraud decisions result in false rejections of legitimate transactions. This leaves revenue on the table and is detrimental to the customer experience. Forter’s data indicates that relying solely on PSP fraud prevention tools can cost merchants up to 8% of their conversions.
Older restrictions on PSP’s fraud solutions
In most cases, PSP’s fraud solutions are built on older technologies with static, rule-based systems that are inflexible and unscalable. These limitations can result in inaccurate fraud decisions with high false rejection rates. Furthermore, sellers need the ability to understand how to set, manage and maintain these static rules that require the diversion of time and resources invested in their core revenue streams.
With PSPs primarily focused on their core internal fraud risk business model, their fraud solutions are not as dynamic as dedicated fraud prevention offerings – they can only analyze whether a payment is fraudulent. PSPs that are payment experts do not necessarily have the investment in fraud prevention to deliver breakthrough capabilities in a non-payments capacity. Retailers should therefore outsource fraud prevention functions to a dedicated partner who can look at fraud and digital commerce optimization across the entire customer journey, not just at the point of transaction.
Partial visibility of customer journey a problem
Many merchants also have problems accessing or receiving data from their PSP, especially PSD2, fraud and risk insights in a timely manner. PSPs tend to struggle to identify trends outside of payment fraud because they lack visibility into the entire customer journey. This can mean unusual patterns, such as account takeover or policy abuse, go undetected.
A lack of actionable data and insight into approval rates, denials and fraud reduction leaves sellers unclear about their own performance. What does this mean for sellers? When legitimate transactions are caught in the same net as fraudulent transactions, businesses suffer as well as consumers. False declines are costly; according to Forter’s NUMO report, sellers can lose up to 75 times more revenue to false declines than they do to fraud.
In an age of PSD2, merchants should be able to make decisions supported by well-explained data, and this comes from asking their PSPs the tough questions and verifying data sources. It’s not about fraud reduction either, but also about looking at loss of customers due to friction on pre-authorization and using 3DS secure instead of exploiting exceptions. This all boils down to the lack of knowledge merchants have, driven by a lack of richness and accuracy of the data they receive. The current challenge for sellers is that they need to know what to track, what good data should look like and be able to compare PSP data with data they can track and monitor themselves.
Is it time for a change now?
It’s never been more critical for merchants to tackle fraud head-on. As retailers scale their operations, they should outsource fraud prevention functions to a dedicated partner who can look at fraud and digital commerce optimization across the entire customer journey, not just at the point of transaction. For example, a fraud partner can help optimize conversion rates by providing real-time payment decisions, streamlining account-level authentication to stop account takeovers, and reducing false declines to deliver a superior customer experience.
Using a fraud prevention platform alongside a PSP enables retailers to drive global growth through increased conversions and approvals, including analyzing how to maximize revenue from current and future customers. This proactive approach is far more appealing than viewing fraud prevention and digital commerce optimization as a tick-box exercise.
