News, Education and Events Decoding Digital Payments & Fraud

News, Education and Events Decoding Digital Payments & Fraud

Guest Perspective: Who Can You Trust in Retail Transactions?

Guest Perspective: Who Can You Trust in Retail Transactions?

Establishing a new standard of trust in the digital age

By Ori Eisen, Chief Innovation Officer, 41st Parameter & TrustInsight, a part of Experian

Ori Eisen The world is dominated by digital. Consumers have grown accustomed to the convenience of technology and are addicted to the devices that provide every day necessities and on-demand entertainment right at their fingertips. Meanwhile businesses are struggling with how to move quickly and adapt to this digital revolution while maintaining safe business practices. Today, more than half of all U.S. consumers use smartphones, and have become increasingly comfortable using all kinds of devices for a wide range of activities like purchasing their morning latte, transferring funds into their savings account, booking travel and even purchasing big-ticket items. Banks and retailers know that offering their services digitally—especially through mobile—is becoming the primary way to foster closer ties with their customers.

But still, there remains a common (and tenuous) thread in the digital world that enables peace-of-mind for legitimate transactions between consumers, banks and retailers: trust. Trust is much easier to establish in the offline world where consumers are recognizable and goods are transferred physically, but extremely difficult to replicate in the digital world.

What is the problem?

This five letter word is a critical element for everyone engaged in a digital transaction. Consumers shouldn’t have to worry about their personal information being misused or tampered with during or after a transaction, retailers want to be sure that they will be paid for the goods or services they provide and credit-card companies want to know that they won’t be stuck holding the bag for chargebacks or other forms of fraud. Consumers need to trust the businesses and organizations they are transacting with and retailers need to trust the individual behind the digital transaction. In each case, trust is crucial. But today’s digital world makes it difficult to establish, maintain or measure.

Our research shows that approximately 70 percent of online purchases are made by customers seen for the first time by that particular retailer. According to IdentityMind, 75 percent of all merchants conduct manual reviews on digital transactions—a process that is time consuming and often unnecessary, even for first time customers. On average, these merchants are reviewing 27 percent of their orders—even more (between 33 and 45 percent) for SMBs.

The rapid rise of smartphone usage paired with the declining effectiveness of some of the online world’s traditional identifiers, such as cookies, means that establishing a reliable and trustworthy digital identity is more difficult than ever. The dilemma is a complex one, and merchants need to better understand how to establish trust in a world where customers essentially remain anonymous.

How big is the problem?

Trust Me Approximately seventeen percent of card-not-present transactions are rejected every day: some for credit reasons and some on suspicion of fraud. Those based on suspicion of fraud are worth more than $3 billion each year. In addition, globally, online retailers pay up to $250 billion in fraud losses and financial institutions lose up to $15 billion every year, according to a Forrester report. 

In the cases where fraud is wrongly rejected, merchants and issuing banks not only grapple with loss of revenue and high operational costs to rectify these wrongly declined situations, but also with the potential loss of customer loyalty. The loss of customer loyalty is difficult to quantify but can have a huge impact on reputation and total lifetime value.

What can you do?

How can trust be established in the digital age? This era of the digital consumer has created a need for a new standard for online trust that has never been stronger. In the online world, a familiar face or a photo ID just doesn’t exist. Merchants must have a way of recognizing and rewarding trustworthy customers in the most effective and efficient way possible.

  • Have a better understanding of your clients and their devices. Because devices always mediate online transactions and relationships, the device is the natural starting point for establishing trust; but the device alone is not enough. It’s always possible that a good customer’s device might be spoofed or misplaced so it can be used in ways its owner would never permit. The key is to connect the device with data elements that belong to the owner as well as their behaviors—to establish a history, or recognizable pair, that can be relied upon. This way, when merchants see a pair that has been trusted by others, they are more inclined to approve the transaction. When issuing banks see that a community of merchants trusts a pair, they also are more inclined to approve the transaction.
  • Knowledge is power. This approach of leveraging consolidated knowledge from the masses is becoming a common practice across businesses. Having insight into a consumer’s behavior and interactions with other businesses or merchants enables an organization to better assess the trustworthiness of that consumer. The concept of trusted parties is already widely understood and accepted; for example, credit scores, email whitelists, mobile device allowed lists, and in the TSA’s Trusted Traveler program. Applying this approach to broader online applications allows for a new standard of trust to be established that offers benefits to all involved.
  • Be a trusted consumer. The consumer can also vouch for themselves by establishing a trusted transactional history, which is nearly impossible to fake. A long, well-established online purchasing history that includes multiple transactions over years as well as feedback from institutions or people that interacted with the consumer help to tell a story of trust online.

Today, merchants are under increasing pressure to provide robust services through digital channels. But online services introduce anonymity, increased opportunities for malicious behaviors, and require a level of trust that simply doesn’t currently exist. To help establish an environment of measurable trust, merchants and financial institutions will discover that by better understanding their customers through their devices and relying on a shared history of previous digital behaviors, while protecting privacy, will help remove the barriers, and increase their success—both in financial and loyalty terms, to online and mobile transactions.

Ori Eisen is a 15-year veteran of the information technology industry with deep experience in preventing B2C e-commerce fraud. Before launching 41st Parameter, Eisen served in several high-profile card-not-present fraud roles including as the worldwide fraud director for American Express and the director of fraud prevention for VeriSign/Network Solutions. In October 41st Parameter was acquired by data aggregator Experian for $324 million.

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Daniel Leibovitch