Effectively managing the risk of online payments

By David Jokinen, Managing Director, Optimal Payments

A single risk management strategy doesn’t work in all circumstances. That’s why it’s important to work with a payment service provider who takes the time to fully understand your business model. When advising our clients regarding online fraud prevention, we take into account the real-world fraud patterns we’re seeing in their particular industry, as well as aspects unique to their business.

Poorly implemented, risk management tools can damage an e-commerce business if they alienate customers as often as they stop fraud. As a customer, have you ever felt the frustration of having your credit card declined when you knew full well that it should not have been? Resolving issues like this is seldom easy, and if the merchant is unable to do so with a minimum of fuss there is a good chance that the customer will simply buy from a competitor instead.

For example, if you sell expensive low-margin products, ensuring that you're dealing with the legitimate cardholder, or at least with someone at the same address, is essential. However, acting crudely based on the address verification service offered by some card issuers may produce high false-positive rates, declining far more legitimate transactions than fraudulent ones. The best way to take full advantage of this and some other risk tools, without jeopardising your turnover, is by implementing a two-step payment process. When confirming the customer's order, you obtain an authorisation from the card issuer, but you don't actually charge the card until you manually review the transaction in question. The human mind, properly trained, remains the most effective risk management tool available, and armed with innovative payments technology is able to quickly spot combinations of factors that just don't feel right. If you need to roll back the order for any reason, then you will never charge the card, which eliminates any possibility of a chargeback.

Conversely, if you sell downloadable products, or online services that are instantly fulfilled, then manual review is unlikely to be practical or cost effective. Full automation is usually the order of the day here. In consultation with our clients we can configure our real-time risk decision engine to block certain transactions and approve others according to the balance they are trying to achieve between revenue and risk.

In sum, with a full understanding of a merchant's risk management situation and objectives, we can recommend and configure a solution that will strike the right balance between a slick experience for legitimate customers and an unattractive challenge for those who seek to defraud them.