Retailers have a payment fraud problem, but it’s not what you think

Instances of fraud are increasing. But you don’t need me to tell you that. The retailers I speak with are all saying the same thing: they’re getting hammered by fraud from every angle. Data backs these assertions. Research from Adyen by the Centre for Economic Business and Research found UK retailers lost £11.3bn to payment fraud in 2023. Our research from last year found that 24% of UK consumers have been victims of payment fraud. While 66% fear they’ll fall victim to fraudsters soon, making them ultra-cautious when shopping online. As fraud rates rise, retailers naturally consider tightening their fraud prevention measures to stop fraudulent payments at source. The aim, commonly voiced by the retailers I speak with, is to eradicate payment fraud. My response to them is that it’s likely the wrong approach. It might seem counterintuitive. I would never suggest that retailers should just accept fraud as the cost of doing business. Failing to stop payment fraud can also negatively impact brand reputation, lead to inflated payment processing costs, and, in extreme cases, even cause a business to lose the ability to accept digital payments—a death knell for any enterprise. However, tackling fraud is nuanced. There are many factors to consider, and sometimes enforcing strict rules to catch all fraudsters backfires, potentially hurting profits more than the fraud itself. For example, we’re seeing more retailers beginning to use specialist fraud prevention solutions. And why not? These tools do a great job of helping merchants prevent fraud. The problem is that the few pence charged to carry out the fraud check can erode a substantial portion of the profit from a sale for retailers with razor-thin margins. The cost leaves retailers with a few unenviable options. They can accept the revenue hit, pass on the costs to their customers, or not use these tools and leave themselves open to fraud. Applying stringent fraud rules also blocks legitimate customers from completing their transactions—otherwise known as a 'false decline.' More often than not, it causes customers to abandon their purchase and can even risk alienating customers, potentially deterring future transactions with the merchant. In the past 18 months, I've witnessed a mounting sense of urgency among businesses to tackle fraud head-on, but the truth is they’re struggling. The fragmented nature of their payment systems, inconsistent data sets, and technical limitations are holding them back from implementing any form of dynamic payment fraud prevention strategy. This problem makes businesses realise their issue isn't solely about fraud—it's about the fundamental workings of their payments. Accepting an online payment has become infinitely more complex over the past decade. Lift the hood on the payment systems of most businesses in the UK, and you’ll find a patchwork of payment processors, payment methods, and other services held together by the digital equivalent of sellotape. Addressing this complexity is crucial for businesses aiming to combat fraud effectively. By consolidating their payment operations through a single integration, they replace sellotape with concrete. This gives merchants a foundation to move forward and define an effective fraud strategy to fight fraud, going beyond the simple goal of preventing fraudulent activities. Instead, it should determine where the business stance aligns on this spectrum and define its risk tolerance. With the strategy defined, retailers can confidently choose the tools they need to execute. For example, they may deploy a specialist fraud prevention solution on transactions over a certain value or stemming from countries considered ‘high-risk’. They may also consider adopting advancements in payment processing like Network Tokens, which are proven to reduce fraud. Finally, retailers must appreciate that payment fraud is dynamic and continually evolving. Regular reviews of the fraud prevention strategy are critical to ensure it continues to align with business goals and external trends. We’re also seeing more retailers set up monitors and alerts that flag payment fraud attacks in real-time, allowing them to react fast and potentially save the business millions of pounds in lost revenue. In the face of fraudsters' ever-evolving tactics and factors such as the cost of living crisis and digital transformation, fraud remains an imposing challenge for retailers. The prevailing fraud prevention strategies most employ are ineffective and detrimental to the bottom line. This is not for lack of trying. Payment systems are immensely intricate, and the majority of retailers lack the necessary tools and expertise to combat the issue. However, this challenge isn't disappearing anytime soon; retailers must step up and confront it head-on.