How to Avoid Fraud This Holiday Season

August 18, 2015


This post is contributed by Stefan Nandzik, Director of Marketing at SIGNIFYD, a company that protects online merchants from fraud.

With three months until Black Friday, it’s time to start looking at your internal operations, and ensure you’re ready to go when the orders start pouring in. On average, November and December combined bring in over 20% of an ecommerce company’s annual revenue. And here’s where it gets exciting—the days between Black Friday and Christmas pull in 50-100% more revenue than shopping days during all other times of the year based on a report from RJMetrics.

Depending on how prepared you are, those numbers can be thrilling or terrifying (or both.) With the allure of twice as much profit comes the flip side: twice as many orders to fulfill and twice the stress on your existing processes.

When you’re rushing to prepare hundreds of shipments for the next week, how closely are you going to review those orders? More than likely, you’ll only have time to skim for fulfillment and billing details, skipping a more thorough review that could help you avoid the wrench in your profit dreams: payment fraud, in the form of chargebacks.

In 2014 alone, for every $1 of fraud, the ultimate cost to merchants was over $3, due to fees and time wasted. And, while the average value of a successful fraudulent transaction fell to $114 in 2014, the number of attempted fraudulent transactions increased 61% according to the Wall Street Journal.

To sum it up: Fraudsters know that the holiday season is your busiest time, and as a result, it’s their holiday too. For them, it’s a numbers game.

In the face of an order deluge, merchant operations face the following three likely scenarios:

1. You decline too many orders out of caution and a lack of time and resources to do a thorough order review. With the hike in orders, you decide to play it safe, and decline orders that don’t fulfill a basic criteria, e.g. the total order must be under $1,000 dollars, shipping and billing must match etc. While you avoid the risk, you also miss out on the reward, leaving money on the table.

2. You rejoice in the order influx, and approve too many orders while shortcutting the order review process to deliver on time. This gives you a faster turnaround on shipping your product to customers, and maintains their goodwill towards your company. Unfortunately, amid your joy, you leave yourself open to being taken advantage of by fraudsters. The revenue you originally counted on is now at risk of being eaten up by the chargebacks that you can receive up to 90 days after the actual purchase. Now, instead of reveling in your end-of-year revenue bump, you’re faced with the prospect of not knowing how much of your revenue you’ll keep, and how much will be slashed by chargebacks.

3. You approve the inpouring of orders while maintaining your commitment to the order review process, overloading your review resources and delaying turnaround. While this helps you defend against fraud, it frustrates your customers as your backlog increases, and your ability to deliver on time suffers. Sure, in the short-term you protect your revenue, but in the longterm, your business suffers from the steep drop in customer satisfaction.

Now that we’ve seen how that peak of orders can stress your existing process, let’s discuss how to address the issue.

Here’s a few options for relieving the order review headache:

Hire more people.

It’s often the first idea a merchant has, the thought that perhaps some hired help during the holiday season will make life easier. This can absolutely work for the fulfillment part of your business, but likely can’t solve your order review bottleneck issue, where the learning curve is quite steep. It’s no small task to efficiently train a new employee to detect payment fraud in a timely fashion. Plus, expanding your workforce, albeit temporarily, may be your most expensive option.

Improve your processes internally.

Invest in a better platform for your team to improve order review, allowing them to review cases faster. Multiple such tools exist at various price and quality levels. Look for a platform that uses machine learning to screen transactions and enriches orders with address details, location and social data, allowing your team to identify sketchy orders quicker. While this approach helps you weed out a good amount of fraudulent orders you will still receive some chargebacks, as some smart fraudsters may slip through undetected. However, if you intend to keep order review in house, it’s a good idea to invest in such a tool to aid your team. Plus, some tools offer the ability to submit selected worrisome orders for an external review, and pair that with a payment guarantee, so you can accept those often pretty large orders without risk to your business.

Have a 3rd party handle the whole process.

Given the complexity and importance of order review, you can simply use an outside service that reviews these orders for you and accepts the liability for their decisions. Options exist to route all orders directly to your vendor, and even to trigger your fulfillment and shipping processes automatically based on their decisions. This removes the entire review headache, giving you both peace of mind and a guarantee that you’re not liable for fraudulent transactions.

In short, start your holiday season preparation now. Think about your longterm plans—if orders continue to skyrocket, do you want to build out and train an internal team of fraud analysts to handle order review? Or, would you prefer to delegate this complex process to a 3 rd party skilled in fraud management and focus on your products and customers instead?

Talk to your team and walk through your processes with fraud experts like us to assess your current approach and review potential scenarios to strengthen it. Don’t make the mistake and delay this reality check of your existing practice: The peak business of the Holiday Season is right around the corner and so are the fraudsters waiting to take their share.

Headquartered in San Jose, CA, SIGNIFYD was founded by Raj Ramanand and Mike Liberty, a team of veteran risk and fraud experts from PayPal, to help online businesses prevent payment fraud. SIGNIFYD’s full-service cloud platform simplifies fraud detection through a financial guarantee, allowing businesses to increase sales while reducing fraud losses. SIGNIFYD is in use by multiple companies on the Fortune 1000 and Internet Retailer Top 500 list.