Traditional fraud and risk solutions are becoming less and less effective. This is not only because fraudsters are becoming more sophisticated but also because the digital economy has rapidly grown in size and complexity. Online merchants face a long-standing challenge: delivering frictionless commerce experiences without creating excessive risk. It is especially challenging for online merchants to strike the perfect balance between trust, risk, and simplicity. As the environment becomes more complex, merchants must adopt new, data-driven strategies to keep fraud at bay while continuing to create a positive customer experience and grow the business.
From marketing, to merchandizing, to transaction, to post-transaction, data fuels today’s ecommerce landscape. Powered by the ubiquity of connected devices, data has the potential to inform every decision a merchant makes at every stage of the customer journey. This creates an opportunity for merchants to deliver great, personalized commerce experiences to their customers.
All this data also creates an opportunity for fraud. Whether compromised identity data, breached financial data, social engineering-derived information, or even malware, fraudsters have access to their own large data sets and unprecedented access to sophisticated tools and forums.
To fight fraud, firms must work with a partner that can leverage the insights of a vast risk intelligence network to outmaneuver fraudsters.
Traditional fraud and risk solutions are becoming less and less effective at supporting merchants in this environment. This is not only because fraudsters are becoming more sophisticated but also because the digital economy has rapidly grown in size and complexity. Merchants need new solutions to help them stay a step ahead of fraudsters.
IDC has witnessed an economy wide shift to digital commerce thanks to the proliferation of digital, mobile-first experiences and consumers’ adoption of these experiences. This shift has been gradual but clear over the past decade, with the U.S. Census Bureau reporting that over 11% of all retail transactions occurred online in 2019. The COVID-19 crisis has significantly accelerated this trend, causing more transactions to occur online, propelling the demand for secure, seamless, cross-channel digital experiences. As a result, many merchants that had not previously invested in a digital strategy have ramped up their ecommerce operations rapidly to keep their businesses alive through the pandemic.
But COVID-19 is not the only driver here. Consumers were already expecting engaging, cross-channel,and personalized digital experiences when they interacted with brands. This is especially true in today’s global economy, where merchants are no longer able to defer transformation due to the operational challenges of selling to a wide range of customers:
In IDC’s 2020 PayPal Enterprise Payments Survey, “preventing fraud and managing risk” tied for first place as the top challenge faced by online sellers. Savvy merchants understand that if they want to succeed, every business and technology decision they make must be centered around the customer experience. This includes fraud prevention, where merchants must prioritize a solution that addresses end-to-end fraud, provides robust data analytics, and quickly adapts as fraud evolves.
Unfortunately, the massive growth in ecommerce has also led to rapid growth in fraud, in terms of volume and sophistication. Fraudsters have made significant investments in data, technology, and business models required to be successful at their jobs. In addition to data, fraudsters can turn to a considerable set of tools and services to streamline their operations. Crime-as-a-service (CaaS) functions even enable the outsourcing of fraud. Attack automation tools can use identity and payment data again and again to find vulnerable sites and merchants. Remote access, location spoofing, and a range of bots let fraudsters appear to be whomever they wish to impersonate. Meanwhile, malware allows a range of theft and deception, from the stealing of data to proxy locations. In short, fraudsters have a large tool set with which to orchestrate a variety of attacks on online merchants across the globe.
At the same time, legacy fraud prevention systems have not effectively kept pace. These system soften rely on linear models that are not adept at recognizing changes in the risk environment. These legacy systems typically have limited shared intelligence, meaning merchants can learn from only their own experience rather than from the broader community.
Basic machine learning (ML) rule sets, while typically better than manually developed rule sets, tend to age poorly and are challenging to update. The result is high false positives, friction for end customers,and operational inefficiencies.
The response to the growing fraud threat has been a proliferation of new security solutions: identity, device, email, behavioral biometrics, physical biometrics, etc. These solutions add more layers of protection and are effective at improving performance. But there are also drawbacks; adding these additional security systems creates a flood of data, which must be managed and is typically viewed in isolation of other data sources. This creates complexity in understanding which elements represent risk and can obscure data relationships that would otherwise be highly predictive. The result is that such “layered methods” that combine these concepts into workflows, while better than using them in isolation, can be suboptimal in performance as merchants are challenged to pull together multiple point solutions from different providers to create the “customer experience” they are envisioning.
As merchants scale their businesses and expand their ecommerce footprint, they must address unique risk challenges head-on and at all stages of business growth.
Major trends that will shape the fraud management, digital payments,and ecommerce market over the next36 months include the following:
This raises the risk of CNP fraud with compromised cards. New customers pose additional challenges because merchants don’t know how they behave,so there is a high risk of creating unnecessary friction. When the goal of keeping customers is to maximize lifetime value, friction will keep customers from returning to merchants’ websites. Worse,if fraud is committed in a customer’s name, even established customers may stay away forever.
Needless to say, merchants have complex business and risk challenges when selling online across geographies and customer segments. Partnering with the right fraud solution provider can help sellers solve several competing priorities.
A robust fraud solution provides online merchants with the following key benefits:
When properly implemented, a comprehensive fraud management solution will allow merchants to focus on what they really want to focus on — growing their business.
PayPal’s two-sided network provides a rich source of data that feeds its predictive models. The data comes from over 360 million active consumers and over 28 million merchants across the globe. PayPal’s risk solutions are the only offerings in the industry that leverage PayPal’s extensive two-sided network combined with industry-recognized machine learning and analytics, helping more accurately detect and block fraud in real time (see Figure 1). The results can include the following:
PayPal makes standalone and integrated solutions available to ecommerce and financial services businesses of all sizes, providing scalability as businesses grow.
PayPal is a globally recognized and trusted financial technology brand. The company also offers technical support, business consulting, and continual innovation that will drive success.
PayPal faces the following challenges in the fraud management and digital payments space:
Digital commerce is expanding rapidly, in terms of both size and complexity. Merchants must accelerate their online strategies to remain relevant but must do so without taking on unnecessary risk or sacrificing a good customer experience. At the same time, fraud is growing more sophisticated and threatens to take a larger and larger share of revenue. As the environment becomes more complex, merchants must adopt new, data-driven strategies to keep fraud at bay while continuing to create a positive customer experience and grow the business. AI and ML are critical to achieving this goal, and having a rich data source of transaction data is essential to leveraging the technology. IDC believes that robust fraud solutions will grow in importance as the shift to digital commerce continues to drive more and more transactions online. PayPal, with its range of solutions built on its unique data assets, is well positioned to succeed in the digital commerce market.
Our mission at PayPal is to democratize financial services to ensure that everyone, regardless of background or economic standing, has access to affordable, convenient, and secure products and services to take control of their financial lives.Fueled by a fundamental belief that access to financial services creates opportunity, we work across our brands to give people the financial tools they need to connect and transact in new and powerful ways — and ultimately, to join and thrive in the global economy. For more information, please visit us at: paypal.com/us/enterprise/manage-risk