How Customer Profiling Can Reduce Online Fraud

Payment fraud is a rising threat to merchants in Europe, especially Card-Not-Present (CNP) fraud. ACI Worldwide benchmark data of top global retailers reveal a surge in CNP fraud in 2015.card image visa mastercard american express Fraud rates per volume showed an increase of 30% on 2014 globally, and fraud rates per value have increased 33% on 2014.

Two-step authentication such as 3D Secure has had a positive impact on fraud rates in countries like the UK, where consumers are widely supportive of this anti-fraud solution. However in other countries, including those in the DACH region, 3D Secure is a significant factor in cart abandonment rates.

While 3D Secure is an effective fraud prevention solution and is proven to reduce CNP fraud, with cart abandonment rates over 20% (as seen in Germany) when 3D Secure is implemented, an alternative approach is needed.

Customer Profiling

In the fight against payment fraud, merchants have an advantage when they know who their customers are, where they are located and what device they are using. This information helps to identify suspicious transactions that do not fit with typical buying patterns; for example abnormally large purchases or transactions from regions the merchant generally does not sell in.

Customer profiling uses existing data to build a picture of a merchant’s typical customer. For those businesses starting out in eCommerce it can build a profile from scratch, as transactions happen, and by using data from similar merchants in the same vertical and region.

With a clear idea of who the customer is, customer profiling allows merchants to set rules that determine whether a transaction should proceed, be flagged as suspicious, or blocked entirely. These rules may include a requirement that the country where the payment card was issued matches the IP address where the purchase is being made, or the merchant may decide to block a country completely if they experience repeated fraudulent transactions from that region.

It is important to review your customer profile regularly and adjust the rules accordingly. If your business strategy changes, for example if you start to offer high value goods, launch your eCommerce site in cross-border, or are affected by seasonality; your customer profile will change too.

Device identification is another tool in the fraud prevention armoury that can further profile the hardware being used for the transaction, and analyse its relationship with other devices to minimise fraud exposure.

Customer profiling is not just about identifying suspicious transactions; it is also about filtering out good customers and ensuring a smooth payment journey for them. False profiling is one reason for abandoned shopping baskets, one that can be avoided with the right profiling tools and rules.

Other anti-fraud solutions can also be used alongside customer profiling. For example, 3D Secure may be utilised when a payment transaction is flagged as suspicious, while customer identified through positive profiling can proceed with their transaction without 3D Secure.

For more on 3D Secure read our post: 3D Secure: Fraud Prevention Mechanism or Point of Friction?