Online fraud continues to grow.


In the age of Snapchat, Uber and Seamless, it seems as though most industries are on track to deliver their products near-instantaneously. Unfortunately, retail is not one of those industries.

While consumers have more options for purchasing products digitally than ever, most retailers aren’t able to match demand for same or next-day shipping. While the high costs of offering same-day delivery have (rightly) been widely cited as the barrier to entry for many retailers, there is a less visible reason lurking beneath the surface that is causing serious debate at the highest levels of retail operations: the growing risk of online fraud.

Online fraud is a major challenge for every company that sells products or services online. According to last year’s True Cost of Fraud report, fraud losses as a percentage of retail revenue grew to 1.3 percent, nearly doubling from 2014. Plus, the October upgrade to EMV [Europay, MasterCard and Visa] payment terminals in stores is beginning to result in the migration of more fraud online as criminals move to exploit the next weakest target, as it did in countries like the U.K., Canada and Australia.

As a result, retailers exercise extreme caution when processing online orders, and shockingly, many rely on the outdated practice of manually reviewing online orders to mitigate potential losses. This human-driven process — which often entails employees literally searching on Google Earth to evaluate whether an address seems legitimate — necessarily results in human error and people’s unintended biases factoring into decisions.

Broadly speaking, there is great reluctance among the industry in talking about this issue in a serious way. The reality is that there’s really no upside for retailers or banks to expose these practices. However, what many retail executives tell us in private is that the practice of manually reviewing transactions in an effort to prevent online fraud is the primary blocker for same-day shipping and delivery. Manual reviews directly affect the customer experience, and are now a business-level problem — it’s time for them to come to an end.

In such a competitive space, retailers must back up their promises with action. Despite the teams of upwards of 50 employees manually reviewing transactions, vetting an average of 10 percent of online orders, according to an annual merchant fraud report from CyberSource, necessarily results in a huge queue of orders with a turnaround time of several hours.

As a result, it’s nearly impossible for retailers to offer same- or next-day delivery without risking breaking their promises to their customers. For example, a large, high-end clothing retailer we spoke with recently explained that they cannot offer same-day shipping guarantees because far too many orders would miss the window due to their current manual review infrastructure.

There’s not much retailers can do to make the manual review process better — even during high-volume periods like the holidays. While retailers can predict the upswing in their business, it’s neither financially nor logistically feasible for them to hire and train enough new employees to keep up with triple their typical number of orders. Yet, this doesn’t stop retail employees from doing what they can to make the process move as quickly as possible.

I recently spoke with the fraud director for a European luxury brand that sells high-dollar product, who told me she spends most nights after work at home reviewing digital transactions over a glass of wine to make sure they’re real. While her efforts are commendable and may help things move a bit faster for a few customers, ultimately her tireless work is not a scalable strategy to meet the desires of today’s digital consumers.

Meanwhile, consumer expectations are only getting higher. Young digital natives in particular are putting pressure on retailers to meet their rampant desire for convenience and fast service. Our recent survey found that more than half of millennial online shoppers expect same-day delivery when they reach checkout on any online retailer. Yet, only about 4 percent of the top 50 online retailers in the U.S. even have same-day delivery as an option, and less than half offer guaranteed next-day delivery.

Unfortunately, for many brick-and-mortar brands with an online presence, digital-only companies like Amazon are in that 4 percent, and can meet staggering consumer expectations. Their secret? No manual reviews. Amazon has the technological infrastructure in place to accommodate fast shipping, and more traditional brands must aggressively modernize in order to keep up.

That said, I realize that overhauling manual reviews is a long-term solution. Luckily for retailers, on-demand delivery companies like Postmates, Instacart and more can provide a short-term fix the fast shipping times consumers by picking up products directly from brick-and-mortar locations. Since the widespread implementation of EMV, brick-and-mortar stores have become more secure from a fraud perspective. As a result, retailers can get their products to consumers the same day while also avoiding the dangers that come with online transactions, allowing them to compete with digital-only brands.

In 2016, it is striking that roughly half of large e-commerce companies do not offer same-day shipping. Putting aside the fact that it costs more to ship faster, the logistics to execute same-day shipping are already in place — the real bottleneck is order verification when the threat of being ripped off by fraudsters is higher than ever, and (in some instances) warehouse and broader fulfillment operations.

Whereas fulfillment is a soluble problem that is more within a company’s control, fraud has not yet been fixed by software and automation at a mass scale. This is a huge challenge that needs to be figured out as e-commerce continues to grow rapidly as an overall share of retail.

Pat Phelan is senior vice president of identity at TransUnion and founder of Trustev, which was was recently acquired by TransUnion.

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