Why fraud prevention strategies are backfiring for businesses

The amount of fraud committed in the UK more than doubled in 2023 (Alamy/PA)

Every business in the world has one thing in common—the need to accept payments for their services or goods. However, it’s never as simple as it sounds, especially when you consider the role fraud plays. Global losses from online payment fraud are projected to soar past $362 billion in the next five years. In the UK alone, businesses took a hit of over  £173.8 million in the first half of 2023 due to card-not-present fraud.

While establishing strict rules to eliminate all fraudulent payments seems obvious , it comes with a cost. The price tag attached to specialised fraud prevention services can be prohibitive for businesses operating on thin margins. Even though these checks only cost a few pence to initiate, that can be enough to wipe out a significant percentage of a sale's profit margin.

Stringent fraud rules also block legitimate customers from completing their transactions—a situation known as a 'false decline.' If you’ve ever experienced one, you’ll know how frustrating it is. More often than not, it causes customers to abandon their purchase and can even risk alienating customers, potentially deterring future transactions with the merchant.

For these reasons, some businesses simply accept fraud as the cost of doing business. However, this isn't a smart approach either. Handling chargebacks —which arise when a customer submits a dispute —is expensive. Data from the Merchant Risk Council finds merchants spend $35 to manage friendly fraud for every $100 they face in disputes.

Failing to stop payment fraud can also negatively impact brand reputation, lead to inflated payment processing costs, and, in extreme cases, even cause a business to lose the ability to accept digital payments—a death knell for any enterprise. It’s not just about having the right tools. It’s about being smart with them, knowing when to use them, and how to balance friction with fraud prevention.

In the past 18 months, I've witnessed a mounting sense of urgency among businesses to tackle fraud head-on. But the truth is they’re struggling. The fragmented nature of their payment systems, inconsistent data sets, and technical limitations are holding them back from implementing any form of dynamic payment fraud prevention strategy.

This problem makes businesses realise their issue isn't solely about fraud—it's about the fundamental workings of their payments. Accepting an online payment has become infinitely more complex over the past decade. Lift the hood on the payment systems of most businesses in the UK, and you’ll find a patchwork of payment processors, payment methods, and other services held together by the digital equivalent of sellotape.

Addressing this complexity is crucial for businesses aiming to combat fraud effectively. Constant assessment and evaluation are vital to keeping up with changing fraud trends and risk appetite. Ultimately, businesses need to be aware of all the levers to effectively manage fraud and combine fraud prevention tools to meet their business's unique needs. This is only possible when the payment systems are unified and modernised.

Amid fraudsters' evolving tactics and factors like the cost of living crisis and digital transformation, fraud will undoubtedly continue to be a considerable challenge for businesses. Current fraud prevention strategies that most merchants use aren't working and are harming the bottom line. This isn’t due to a lack of effort. Payments are incredibly complex, and most businesses lack the tools and expertise to meet the challenge.

But it’s a problem that isn’t going anywhere, so businesses must rise to the challenge.

Theo Spyrides is Head of Product at Primer