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As consumers increasingly use their digital devices to make online purchases, merchants find themselves struggling to find the right balance between robust fraud protection and a frictionless checkout experience.
Achieving this balance isn’t easy, but it’s critical to the success of every online store.
A new report commissioned by ClearSale and researched by the Aite Group – “The E-Commerce Conundrum: Balancing False Declines and Fraud Prevention” – provides new insights into how online merchants today are navigating this challenge.
Yes, e-commerce fraud attacks are more and more common – both domestically and internationally. In fact, almost all of the merchants we surveyed reported at least some level of attempted fraud in 2018, and 22% said these fraud attacks exceeded 0.51% of their company’s revenue.
Organized crime rings are likely behind much of this fraud activity. Because the kingpins of these crime rings are seldom caught, there is little to prevent them from continuing to escalate their coordinated attacks.
Rising fraud levels underscore the importance of implementing robust fraud controls. This is especially true for merchants who have no idea how often they've been a target of fraud attacks.
Losses caused by fraudulent chargebacks are a major contributor to fraud losses, with 19% of merchants surveyed reporting losses costing more than 0.5% of revenue in 2018.
Despite the expectation that fraud would decrease in the wake of the global EMV implementation, the opposite has occurred. Card-not-present (CNP) fraud has escalated rapidly and is expected to top $6.4 billion in the United States by 2021.
When developing a fraud prevention strategy, the first decision a merchant must make is whether to build an in-house fraud prevention team or leverage a third-party fraud prevention provider.
Our study revealed a market trend towards outsourcing. Only 7% of merchants say they manage fraud prevention entirely in-house, with no outsourcing and no use of external tools.
This is notable because five years ago, fewer than 5% of merchants outsourced their CNP fraud prevention.
For those merchants who choose to partner with a third party, many of the solutions available involve automated processes:
|IP address verification||Examines the IP address to determine geographic location.|
|Email address verification||Determines the age of the email address and velocity of use and performs other tests.|
|Chargeback protection service||Guarantee service that shifts liability for chargebacks from the merchant to the solution provider.|
|Customer identity verification||Checks various data elements to third-party databases to determine whether a customer is who they claim to be.|
|Comparison of IP and email address for geographic similarity||Determines whether the IP address and email address originate from the same geographical location.|
|Device identity||Matches the identity of the device to one previously used by a returning customer.|
|Case management tool||Back-office tool used for manual review and potential charge-offs; can match customer details to determine if prior incidents have occurred with the customer.|
|Machine learning models||Analytic models trained to detect various types of suspicious activity.|
|Outsourced fraud score||Fraud score based on results from several solutions computed by an outside supplier.|
|In-house fraud score||Fraud score based on results from several fraud solutions computed by internal algorithms.|
|Behavioral biometrics||Used to detect bot or fraudster behavior and to match specific pattern of interaction with device as previously experienced by returning customer risk and issuer’s method of authentication.|
|3D Secure (3DS)||
Product offered by card networks to enhance data elements from both the card issuer and the merchant to enhance security.
3D Secure, also known as 3DS, is a payment network technology protocol that adds a layer of authentication to digital commerce transactions. With 3DS, the merchant sends additional contextual data about the transaction (such as device fingerprints, IP addresses, or shipping and billing addresses) to the issuer, which enables the issuer to better assess the transaction risk.
Fraud isn’t cheap — and neither are the technology investments merchants must make to reduce fraud and protect the customer experience.
The merchants we surveyed are spending an increasingly large percentage of their revenue combating CNP fraud, with 30% spending between 0.21% and 0.5% of revenue in 2018.
If merchants are learning anything in today’s increasingly risky marketplace, it’s that they need to take a flexible approach to fraud prevention. Just because they’ve invested in a solution doesn’t mean it will always meet their needs, so it’s important to be willing to consider new and more effective alternatives.
In fact, 72% of merchants surveyed are planning to add or make changes to their fraud solutions.
While the factors listed above may convince an e-commerce merchant to implement fraud prevention measures, these factors alone don’t explain how merchants choose their fraud prevention providers.
Many vendors offer all of these tools. How do merchants select a particular provider?
In our survey, 11 factors emerged as key influencers. The top three? Quality of customer service, the perceived reliability of the provider’s brand, and the ease of integration.
ClearSale clients also appreciate high-quality customer service, as evidenced by our reviews.
“This is in line with our perceived feedback from our customers, who constantly recognize the importance of quality customer service.” -- ClearSale client review on TrustPilot
Sometimes, correctly identifying fraudulent orders from good orders is like finding a needle in a haystack. The merchants we surveyed use multiple tactics to validate incoming orders, including both manually reviewing questionable orders and automatically declining highly suspicious orders.
We were somewhat surprised to find that all our survey respondents review at least some of their transactions, and 15% review every transaction. Only 2% of merchants review fewer than 10% of transactions.
ClearSale’s approach to fraud prevention means doing three things well:
Our team of more than 700 specialized fraud analysts is the largest manual review team in the world and has been delivering the highest order approval rates since 2001. Contact our sales team to learn more.
Given the inefficiencies around manual reviews, it may seem prudent to automatically decline orders that are highly suspicious. More than half of the merchants we surveyed report their fraud prevention solution automatically declines between 3.1% to 7.5% of all their transactions.
For both merchants and consumers, false declines are frustrating. False declines are good orders that end up declined due to suspicions of fraud – meaning the merchant loses a sale, and a customer is prevented from placing an order.
The potential impact unhappy customers can have on revenue underscores just how important the customer experience is in online shopping:
And here lies the issue with false declines: E-commerce merchants need to prevent fraud – but if the fraud prevention process is too stringent or inflexible, the process will almost certainly incorrectly decline some percentage of good orders.
Just how high can these false declines get? Aite Group estimates that losses due to false declines will grow to $443 billion by 2021, up from $331 billion in 2018. Considering that e-commerce fraud only costs merchants $4.4 billion in 2018, this means merchants lose 75x more revenue to false declines than they do to fraud.
Another challenge with managing false declines is that different generations of consumers react to false declines differently.
Millennials – individuals who were born between 1981 and 1996 – make more than 50% of online purchases, and their spending power is growing, as demonstrated in the graph below. This is important for merchants, because millennials have high expectations around their online shopping experiences. They are far less willing to forgive a merchant for a false decline than older generations might be.
False declines are such a problem in the industry that 79% of merchants we surveyed measure false decline rates as a key metric.
What makes reducing false declines even more challenging is that a transaction can be declined at any part of the authorization process — not just by the merchant, but by any party in the payment authorization process.
This is where measuring false declines can yield useful insights.
Our survey revealed that payment gateways and credit card networks are the most common sources of declines.
When it comes to monitoring CNP fraud, the false decline rate is just one important metric to track. After all, if you can’t measure it, you can’t improve it. Here’s what other key metrics merchants are keeping their eyes on when it comes to reducing fraud risk:
While e-commerce fraud continues to escalate rapidly, false declines can also wreak havoc on revenue and customer relationships.
So, how can merchants balance fraud prevention, revenue, and the customer experience?
Here are four recommendations to consider implementing today:
Evaluate your CNP fraud protection and make sure it detects and prevents fraud without generating high false positive rates that can lead to costly manual reviews and potential false declines.
Because a transaction can be falsely declined at any point in the payment approval process, talk with the other parties in your network to discuss how to work together to increase sales without increasing fraud losses.
Determine how and where fraud losses are occurring and whether additional fraud prevention layers can help mitigate those losses.
Whether you’re thinking of adding a new fraud protection layer now or including it in future plans, your business case should consider any potential gains in operational efficiency and reduction in fraud losses. Also, consider that as other merchants implement more stringent fraud prevention strategies, organized crime rings will target less-protected merchants. Don’t let that be you.
We conducted our research in May 2019 as a collaboration between ClearSale and Aite Group. Aite conducted an online survey of executives at 100 U.S. merchants with annual revenue between $100 million to $999.9 million.
To qualify for their survey, merchants with revenue between $100 million to $499 million had to generate at least 30% of their revenue via e-commerce, while merchants with revenue of $500 million to $999.9 million had to generate at least 20% of their revenue via e-commerce. Ultimately, 75% of the participating merchants generated at least 50% of their total annual sales via digital channels.
"I have always received immediate response and minimal fraud rejection -- which leads to increased sales."
"Clearsale has a great fraud protection using their algorithmic matching of potentially fake orders, and will scan them as they come up and reject them if they are suspected as fraud."
"Quick fraud detection on all orders. Ease of use on the platform. Never had a chargeback."
"Their customer service is the best. They are quick to respond and answer question regarding orders that are denied."
"Clear sale are very good, the orders get approved quickly ,which is great so we know we can confidently send out the goods. payment confirmation usually happens in 2-3 hrs. once that happens we know we are covered."
"The product is great. We've never had a complaint from day 1. The setup was easy. And the continued service has been exceptional. With a product like this you want it to work behind the scenes without ever thinking about it. That's clearsale. It does exactly what it is supposed to do and never causes us troubles."
"I don't have to spend time researching orders to see if they are fraud or not. I love that clearsale backs up their approvals with a money back guarantee if the order turns out to be fraud."
"I love that it takes the stress away from me worrying about fraud charges."
"We are in the Durable Medical Equipment supply industry and we use Shopify as our shopping cart. With Covid 19 we have seen a tremendous increase web traffic and online purchases. Prior to Covid 19 we had a number of fraudulent transactions that led to multiple investigations on Local, State and Federal levels all of which produced no returns only because the crooks were faster. This cost us in..."
"ClearSale offers a great service that comes with a complete peace of mind. Their staff are easy to reach and pleasant to deal with. I particularly enjoy that I no longer have to spend hours a day investigating customers who purchase from our online store and try to determine if they are legitimate or not. No more rolling the dice with our business. ClearSale also backs up all their..."
"The competitive rates, their quick response to customer service"