How Can a Fraud System Be the Key to Unlocking Merchant Innovation?

This is an innovation arms race. Large merchants aren’t just innovating against other merchants, but against fraudsters too. While your strategy teams are having meetings and conference calls, trying to predict the coming innovation inflection points of the next 5 years, fraudsters are having meetings of their own.

Somewhere a group is founding a startup to sell pre-programmed bots that can attack merchants with brute velocity. Somewhere else, in a time zone 14 hours away, a reshipping fraudster is on the phone with a card thief, negotiating rates in exchange for access to a network of unwitting reshipping mules. In two other far away locations, new acquaintances are exchanging instant messages about optimizing an eBay account for triangulation fraud, so they can ship stolen goods to customers in a new scheme that merchants only discover after the chargebacks pour in.

Fraudsters use the same tools that you’re using: advanced technology, coordination, and business development. And fraudsters have a distinct advantage: they’re not competing with other fraudsters they’re collaborating with them.

So every time merchants leverage a new channel or payment type, a new wave of adaptive fraud will follow. Consider the growth of digital loyalty programs. Merchants are releasing apps and digital currencies to enrich the customer experience, and some merchants have managed to “crack the code” of loyalty programs in big ways. For example, at Starbucks, nearly a third of its transactions happen over its loyalty app, and its loyalty program holds more money than some banks.

And the digital wallets associated with these loyalty programs are skyrocketing as well. In 2016 alone, Apple reported a 500% transaction volume increase in Apple Pay, which demonstrates that customers are willing to engage with retailers over new payment types.

Feedzai’s AI fraud detection platform is used to protect one of the largest global QSR programs, and we’ve seen first-hand how loyalty programs are correlated with unknown fraud. Now that customers are holding more money in loyalty programs, for example, fraudsters can commit financial crime simply by hacking an app. The lesson is that new innovations create new fraud.

For another example, consider what happened when innovative merchants unveiled “Order Online Pick Up In Store.” Fraudsters realized that in-person fraud units and digital fraud units were siloed, and a new kind of “Order Online Pick Up In Store” fraud emerged.

If you’re a merchant, what does this mean for you? The key to unlocking new business opportunities without unlocking new fraud attacks is to start having big conversations that bridge the innovation side and the risk side of your organization.

The merchants that win will be the ones who bring in new tools that can thread complete customer views across new and emergent channels, and that can block fraud even when it appears in a pattern that has never before been seen.

At Feedzai, we believe that we can enable innovation through risk management, because good fraud detection supports new business opportunities like loyalty programs, cross-channel journeys, and future innovations that have yet to be developed.

As our VP of Data Science Andy Tikofsky wrote, rules certainly have their place in any fraud system. But machine learning is the sole technology that can break down knowledge barriers to build a complete customer view for every transaction, uncover brand new fraud patterns, and stop the most creative criminals in their tracks.

Improving Fraud Detection: Rules versus Models
The Acquirer Playbook for Managing Risk
How Merchants Can Choose a Machine Learning Platform for Risk