Backburner No More: The Impact of Fraud on Operational Costs

Backburner No More: The Impact of Fraud on Operational Costs

There is more pressure than ever on merchants to reduce operational costs to offset pandemic-related losses. With brick-and-mortar channels limited and global travel and tourism on hold, businesses that are exposed to hard-hit segments and channels, are facing new cash flow crunches. 

In this blog post, I’ll discuss why embracing new technology can help merchants optimize their digital channels to promote resilience and reduce operational spending.

Adaptability is key 

Ecommerce has become a lifeline for merchants whose offline channels have been severely impacted by the pandemic. So bolstering the channel makes perfect sense, but it’s not enough. Merchants need to prioritize scale to ensure that offline and online operations can adapt quickly to volatility. 

Airlines, for example, were hit hard by the pandemic. A fraud management system not optimized to respond to volume fluctuations only magnifies loss at a time when internal resources are already strapped. The operational cost of maintaining a team of manual fraud reviewers when global demand is low can be substantial. Prior to the pandemic, the time, expertise, and training involved in conducting fraud review for highly risky geographies made business sense, despite being resource-intensive. Now, with fewer travelers, the operational costs cut into already thinning margins. Automated solutions afford merchants the flexibility to shift teams to revenue-generating positions depending on demand, sales, and customer needs. 

Online hotel booking platform SnapTravel recently took on several initiatives to accelerate growth. One of the things they did was to adapt their product, allocating an entire team to the development of COVID-19 related products. A lot of SnapTravel’s customers were afraid to make non-refundable bookings or plan a vacation too far ahead. SnapTravel countered these concerns by offering more transparent cancellation policies, adding COVID-19 messaging and notifications, and promoting more same-day and next day bookings. None of this would’ve been possible without an adaptable system in place that allowed them to quickly pivot and strategically reorganize operations, without taking on additional risk.

Identifying, interpreting, and leveraging data

Adapting fraud operations can help generate more revenue in the short term, but it is also crucial to scaling a business. As customer behavior evolves, rigid fraud systems may fail to recognize these new patterns. In Q1 of this year, Riskified saw orders by new customers increase by over 120% among food merchants. These new customers shopped differently. They made smaller but more frequent purchases than returning customers who spent more and used alternative payment methods. Social isolation and changing work patterns also caused customers to shop during different hours of the day. Before the pandemic, most orders were placed from 6pm-midnight. During the first months of the pandemic, consumers shopped more between 12pm-6pm.

For food merchants who had to scale operations to meet increased demand, the stakes became even higher. Fraud teams may be able to meet approval rates by tweaking and adjusting fraud rules when volumes are low. But with record high order volumes, merchants need an agile system that won’t strain their teams and sacrifice accuracy and performance as purchasing patterns shift.

Friendly fraud is another trend that grew with the onset of the pandemic. Some customers sought to take advantage of return policies, promotional offers, and complimentary customer services. Unable to support in-store returns, many merchants started offering 60-90 day return windows. And customers were quick to abuse the new policy. The effect? The return rate for the fashion industry was at its all-time high at 30% and that number is expected to rise. High return rates are a massive toll on projected revenue streams for merchants. In fact, under COVID-19, online returns resulted in a 25-30% jump in operational costs for sellers. Automated fraud detection systems that leverage elastic linking can identify customers who abuse store policies to detect emerging patterns before they become a greater issue, reducing the load from customer service teams.

Conclusion

Fraud management shouldn’t be end-all-be-all. Merchants need an adaptable solution that maximizes operational efficiency, instead of adding costs, maintenance, and time. Embracing new technology will be central to future-proofing operations so that merchants can focus efforts on meeting their shoppers’ needs– rather than on outdated processes that stagnate growth.