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by Andras Cser, Forrester
Industry View from
Traditionally, firms used fraud management solutions to prevent and mitigate fraud losses. While this still happens, recent trends point to deploying fraud management tools to create an attractive and frictionless customer experience, boost sales, penetrate new markets, and ensure customer acquisition and retention.
Estimates of the cost of fraud vary widely, but almost everyone agrees that it is huge and appears to be increasing. Fraud management tools provide a solution by mitigating losses while supporting an attractive customer experience.
LexisNexis estimates that in 2017, the cost of fraud was 1.58 per cent of revenue for retailers, 2.17 per cent of revenue for e-commerce, and 2.39 per cent of revenue for financial service companies. Forrester puts US and Western European e-commerce alone at $859 billion in 2018, implying $18.6 billion of e-commerce fraud. The cost continues to climb.
It’s critical for firms to maintain a seamless, frictionless customer experience (CX) across multiple channels. If it’s too difficult to sign up or get into an account and make a purchase, customers will become frustrated, abandon the transaction, and go elsewhere. A fraud management approach that’s too conservative will mean too many false positives – legitimate transactions incorrectly identified as fraudulent ones that increase fraud investigation costs – and lead to lost legitimate sales. Today’s fraud management products mitigate fraud risk, while maintaining a fast, effective customer experience.
Traditional enterprise fraud management (EFM) solutions are expensive, with average deal sizes in the $750,000 to $1.2 million range. Implementation costs can add another 40 to 50 per cent to the software costs. Despite this large investment, fraud management solutions have a direct impact on the bottom line: they improve fraud detection rates to reduce fraud losses. By automating and improving the accuracy of transaction risk scoring, EFM solutions reduce the number of false positives. This reduces the time spent investigating these claims, allowing companies to spend less on fraud management personnel.
Today’s fraudsters are often part of organised crime syndicates, sharing tools on how to best commit fraud and rapidly exploit weaknesses. It’s time consuming for fraud and risk management professionals to continually update fraud models, and increasingly difficult to identify fraud across multiple channels including mobile. To combat these threats, fraud management solution vendors are incorporating artificial intelligence tools, such as supervised and unsupervised machine learning, into their products. Machine learning supports real-time decision making and helps identify fraud across multiple channels. We expect improvements in fraud management effectiveness to help drive increased product growth over the next several years. It is also important to be able to explain decisions coming from machine learning algorithms.
Forrester expects blockchain to power the next evolution in fraud management. Blockchain is a robust, permissioned, distributed and tamper-evident secure database, making it a trusted repository for device ID and known fraudster blacklists. Blockchain already secures payments and can be extended to enterprise fraud management.
We estimate that financial services firms make up 39 per cent of the total 2018 spending on fraud management solutions.
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