As consumer behavior around the world adapted to the “new normal” created by COVID-19, increased reliance on online shopping led to exponential growth in digital commerce. This rise in digital commerce opened up the doors for sophisticated fraudsters to exploit vulnerabilities in merchants’ online security. Fortunately, there are tools for merchants that are effective in mitigating these threats.
To learn more about online fraud prevention, PaymentsJournal sat down with Rahul Pangam, VP of Risk Strategy at PayPal, Arthi Rajan, VP of Global Fraud Risk at PayPal, and Raymond Pucci, Director of Merchant Services at Mercator Advisory Group.
Growing e-commerce translates to a growing need for merchant fraud prevention
It is widely known that COVID-19 triggered a shift toward digital commerce, with e-commerce penetration hitting an all-time high of 21.3% in 2020. This is something PayPal has seen firsthand, as the company went from 325 million to 375 million active customers between spring 2020 and spring 2021.
This shift presents clear opportunities for merchants, the most lucrative being that digital commerce opens up new revenue potential. “This [active customer growth] is not just consumers… it’s also merchants who have had to really focus on the omnichannel shopping experience,” said Rajan.
The massive influx of digital customers brings new challenges around fraud prevention for merchants. “E-commerce draws a crowd of fraudsters and many merchants that may not have been used to the online sales channel and what it brings with it—the fraud—were unprepared. And I think their eyes were opened [to the fact] that they really need to undertake a dynamic fraud strategy,” said Pucci.
Rajan used the analogy of building a castle to further explain how the shift to digital commerce led to a rise in fraud. Imagine someone building a stone wall around a castle in an attempt to protect the crown jewels. Those who want to steal the jewels won’t get discouraged and turn around. Rather, they will build their ladders even higher to scale the wall. The same concept applies to digital commerce: e-commerce rises, and fraudsters evolve in response.
“As you continue to build the walls of your castle higher, those fraudsters bring taller ladders to get over the hump. And this is just the nature of the ecosystem that we live in,” she explained.
The true cost of online fraud
To better understand the current fraud landscape, PayPal recently sponsored a report from the Ponemon Institute titled “The Real Cost of Online Fraud.” In the study, more than 600 analysts and senior leaders were surveyed about their organizations’ fraud prevention efforts. Several key findings from the study are summarized in the infographic below.
Of the 632 total respondents, 81% reported that their organizations are more vulnerable to fraud as a result of rapid digital transformation.
“When you embark on a voluntary digital transformation, you have had the time to think through not just the transformation itself, but all the areas that you need to transform along with it, like authentication, fraud, and so on,” said Pangam. “But when you are thrust into this event that sort of accelerates that transformation, you really don’t have the time to think through and implement a lot of [these] things,” he added.
While 45% of organization leaders ranked themselves high or very high in fraud prevention prior to the pandemic, only 34% of respondents do today; a drop of 11%.
Finally, just over half (51%) of respondents reported that they did not believe fraud prevention was being prioritized highly enough within their organization. “This tells me that, because of the disruptive change, [organizations] had to juggle a lot of balls at one point in time and being able to prioritize and dedicate to each individual area is almost impossible,” explained Pangam.
Pucci agreed, adding that the report’s findings expose the vulnerability of merchants. “The true cost of fraud for merchants is not only the merchandise or the value of the service, but also the labor and overhead resources that go into fulfilling an online order and then realizing there’s fraud attached to that,” he said.
Fraud prevention begins with a partnership
Over time, PayPal has observed that the most successful fraud teams tend to be the ones that both have a collaborative relationship between internal fraud and cybersecurity teams and also work with an external partner that has effective fraud prevention tools.
It is important to note that a potential partner should have more than just bells and whistles. It needs industry expertise.
To combat the rising threat of fraud, PayPal recently introduced a new fraud solution to its suite of products, specifically for enterprise merchants: Fraud Protection Advanced. The tool is built on over two decades of data harnessed from PayPal’s two-sided network of both merchants and consumers across 15 billion annual transactions.
Fraud Protection Advanced builds upon PayPal’s existing Fraud Protection risk management solution. It is targeted to mid-size and large merchants rather than smaller ones.
“What we heard from our mid-market and large enterprise merchants is they wanted a more advanced flavor of our fraud protection capabilities for self-service… We took that feedback and we built an advanced version of Fraud Protection,” said Pangam.
Unlike other solutions on the market, merchants who were already processing with Braintree, a PayPal service, can access Fraud Prevention Advanced almost immediately, instead of having to wait weeks or months for a new solution to be installed.
Online commerce has skyrocketed since the emergence of COVID-19, providing a valuable revenue opportunity for merchants that embrace it. However, fraudsters are eager to exploit vulnerabilities in online security, making fraud prevention more important than ever.
By partnering with an organization such as PayPal, which has a slew of tools designed specifically for merchant fraud prevention, merchants can keep sophisticated fraudsters at bay and protect both themselves and their customers.
“Fraud fighting is really a team sport. It takes every part of your organization, and it takes an ecosystem partnership to really keep that overall e-commerce environment safe and one where customers can shop with confidence and merchants can focus on growing their businesses,” concluded Rajan.