The Rise of Machine Learning and AI in the Fraud Prevention Industry

13% of organizations today have adapted Machine Learning and AI into their fraud detection protocols. Another 25% of organizations plan on converting from a rule-based system within the next two years.

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Measuring False Positives is Not an Exact Science but Using Multiple Metrics can Provide a Better Understanding

When a legitimate customer has their order declined because of fraud concerns they may purchase from a competitor and may never return to the merchant who turned them away. This is not only painful in terms of losing the sale and potentially the lifetime value of that customer, but this makes measuring false positives difficult. Even if an organization identifies customers who reattempt their transaction or call-in to customer service to complete their order, this is not a complete representation of the volume of sales insults; it may only be the tip of the iceberg.

The first step to effectively measuring false positives is understanding that it is not an exact science, that the metrics we can use are proxies, and the more methods we have for deriving and measuring these proxies the closer we can come to understanding the whole picture.

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Nearly 90 Percent of U.S. eCommerce Sales are Domestic, Here are Several Reasons Why

A recent study from PPRO and Edgar, Dunn & Co. found that while about 40 percent of online sales in European countries are made to customers abroad, just 11 percent of U.S. eCommerce sales are purchases made from foreign countries. This lopsided figure underscores the difficulty of facilitating cross-border transactions, but there are many factors likely contributing to this large discrepancy.

Cross-border eCommerce is a two-way street, but traffic doesn’t flow evenly across the two directions. While just 11 percent of U.S. eCommerce sales originate outside of the United States, more than one-third of U.S. consumers shop online from brands and websites outside of the U.S. This is comparable to the share of consumers participating in cross-border eCommerce from Germany (32 percent) and the United Kingdom (38 percent).

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Reports Show Merchants Struggle to Balance Fraud Prevention and Sales Conversion

Card Not Present channel Merchants cite order rejection rates of nearly 3 percent for domestic transactions and nearly 7 percent for international orders. Meanwhile more than half of merchants depend on AVS and CVV checks, considering them to be effective fraud tools. While most merchants measure fraud rates and order rejection rates, far fewer take the next step to understand false positives.

According to the Merchant Risk Council (MRC) 2017 Global Fraud Survey, eCommerce merchants declined 2.6 percent of all orders for suspected fraud, and 3.1 percent of orders over $100. CyberSource found higher order rejection rates in their 2017 Fraud Benchmark Study: 2.9 percent for domestic orders and 6.8 percent for international ones. While merchants are declining 3 percent of more of their orders, not all of these are actually fraud attempts.

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Amazon Increased Conversion Additional 36% After Fixing Early Issues on Prime Day

According to marketing analytics data from Jumpshot, when Amazon’s Prime Day kicked-off on Monday July 16 their daily sales conversion rate was just 4.5 percent higher than the previous Monday. On Tuesday July 17, however, after Amazon resolved many technical issues, the largest online retailer enjoyed a sales conversion rate 40 percent higher than the previous Tuesday, ultimately making Prime Day a success with over $4 billion in online sales. Despite website and checkout issues at launch Amazon saw a slight bump in conversion on the first (partial) day of their sale, but correcting these errors to led to an additional 35.5 percent increase in conversion the following day.

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Amazon Debuts Cash-based Alternative Payment Method

Amazon Cash is the latest payment method and feature supported by Amazon and was designed for the under- and unbanked. Consumers can request a barcode that is linked to their Amazon account, and when checking-out at a partner retail store location the customer can add between $15 and $500, using cash, which will become stored credit on their Amazon account. Amazon Cash was announced on April 3rd and is now available in the United States.

This new payment method immediately becomes a new option for U.S. Amazon customers. According to the FDIC, 7 percent of U.S. households were unbanked in 2015, while an additional 20 percent were considered underbanked. Amazon Cash provides a more direct way for these consumers, 27 percent of U.S. households, to make purchases with the online retailer.

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Card Issuer False Positives Represent $118 Billion in Lost Processing Volume

According to a recent study by Javelin Strategy & Research, issuers left $118 billion on the table last year by wrongly declining payment card transactions for suspicion of fraud, known as an ‘insult’ or false positive. Nearly 60 percent of these issuer false positives occurred at the physical point-of-sale and about two-thirds were for transactions total $100 or more.

Javelin’s study found that 15 percent of U.S. cardholders had at least one legitimate transaction declined at authorization by the card issuing bank in the past year, impacting about 33 million consumers attempting eCommerce, mobile or brick-and-mortar transactions.

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Facebooks Leads the Way, But Many Social Media Platforms DriveTraffic and Sales

The top 500 online retailers in terms of site traffic from social media earned $3.3 billion in revenue from social shopping in 2014 while a popular eCommerce platform shows that many of its small and medium merchant clients are increasing site visits and volume through multiple social media apps and sites as well. If you doubted the significance of social media in driving web traffic and sales, these figures from Internet Retailer, Shopify and Business Insider may convince you otherwise.

Including desktop and mobile access, social media drove 1.5 percent of eCommerce web traffic in the first quarter of 2015. While this seems quite low in comparison to the 16 percent of eCommerce web traffic from paid search and 34 percent from organic search, traffic referrals from social media are in a period of steep growth as social contributed just 0.5 percent of eCommerce web traffic in the first quarter of 2014. This represents a year-over-year change of 200% for social driven web traffic, meanwhile traffic from emails, organic search and paid search fell by 4 percent, 8 percent and 20 percent, respectively.

Increasing traffic is one thing, but as merchants continue to shift more advertising dollars to social platforms they want to know how that translates to sales.

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Growing Mobile Traffic Underscores Importance of Mobile Friendly Sites and Apps

According to data from comScore, 13 percent of U.S. Internet users that visited retailers online did so only using mobile devices, including both mobile web and mobile apps. Meanwhile nine out of the ten largest online retailers in North America are seeing at least one-third of their digital traffic in the mobile channel, and at least 50 percent of digital traffic is from smartphones or tablets for five of the top ten. With the increase in mobile-only Internet users and total mobile traffic across all Internet users, it is as important as ever for organizations to leverage mobile optimized sites and/or mobile apps as sales conversion tools.

While mobile traffic is continuing to grow there is still a significant disparity between conversion rates in traditional eCommerce and the mobile channels. Multiple studies show that tablets tend to have conversion rates closer to that of computer-based eCommerce, but smartphones lag far behind. For example, data from Monetate’s Q4 2014 eCommerce Quarterly estimates the global conversion rate for traditional, desktop- or laptop-based, eCommerce is 3.41 percent compared to 2.86 percent on tablets and 0.92 percent on smartphones.

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Two More Social Sites Add Buy Buttons to their Platform

Social sharing sites Pinterest and Instagram each announced new features to reduce friction and convert more users into customers by adding buy buttons and other calls-to-action directly within advertisements or posted content on their respective mobile apps. Rather than follow links to start checkout directly on a merchant’s site, users will be able to make and complete purchases or signup for services without leaving the Pinterest or Instagram mobile apps.

Instagram and Pinterest are popular apps and websites that millions of users enjoy for sharing and browsing photos and interesting products or websites, and many businesses leverage these platforms to build their brand and awareness of products or services they offer. While these have been great sources for merchants to get users onto their websites, now they will also be able to leverage ways to allow Pinterest and Instagram users to complete purchases more easily.

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