Risk Management Strategies for Online Merchants

Data fuels today’s e-commerce landscape, from marketing to post-transaction analysis. After all, customers don’t want one-size-fits-all shopping experiences – they crave personalized attention, targeted offers, and checkouts that remember their preferences.

Although clicking, browsing, and buying have never been easier, this data-driven world also opens the door to fraud. Today’s fraudsters can easily exploit retailers by leveraging comprised data, breached financial information, malware, and other sophisticated tools. In fact, experts forecast that sellers will lose over $362 billion globally between 2023 and 2028 from online payment fraud alone.1

It’s clear: some traditional risk management strategies are failing to protect merchants. To fight fraud, businesses should consider working with partners who can leverage vast risk intelligence networks.

Online merchants struggle with fraud risk management

E-commerce has exploded in recent years – online sales are predicted to exceed $6.3 trillion in 2024.2 Unfortunately, this massive growth has also led to a rapid increase in fraud, both in terms of volume and sophistication.

Fraudsters have made significant investments in data, technology, and business models to be successful at their jobs. Today, the most common types of fraud include:

  • Promo abuse. Fraudsters exploit promotional offers by using multiple accounts or bots to repeatedly claim a single-use coupon or discount, costing businesses significant revenue loss. One study found that 52% of sellers have seen an increase in promotion abuse.3
  • Account takeover (ATO). This involves fraudsters gaining unauthorized access to a customer's account to make unauthorized purchases or steal funds, often by using stolen credentials or phishing tactics. Approximately 20% of merchants rank ATO as the most significant fraud risk.3
  • Friendly fraud. Also known as chargeback fraud, this occurs when a shopper makes an online purchase and then requests a chargeback from the issuing bank after receiving the goods, falsely claiming it was unauthorized or not received. One study estimates that sellers will pay over $100 billion in chargebacks in 2024, with friendly fraud representing 61% of all chargebacks.4

Key trends in risk management strategies

In response to these fraud risks, businesses are adapting their risk management strategies accordingly. Major trends that will shape the fraud management, digital payments, and e-commerce market over the next 36 months include:

  • Ability to balance convenience and risk. While shoppers want their information to be kept safe, they also demand rapid checkouts that take seconds, not minutes. Businesses must innovate to ensure that enhancing security measures does not compromise the user experience.
  • Card not present (CNP)-driven omnichannel commerce. The rise of CNP transactions, where a card is not physically presented during a purchase, is reshaping omnichannel commerce. Retailers are now integrating these payments across multiple platforms, from online to mobile to voice-activated devices, necessitating sophisticated fraud detection tools that can operate across various channels without disrupting the customer experience.
  • Artificial intelligence (AI). AI is becoming a cornerstone of fraud prevention strategies by using vast amounts of data to identify patterns and predict fraudulent activities before they occur. This technology not only speeds up the process of fraud detection but also increases accuracy, enabling real-time responses and minimizing false positives.
  • Regulatory shifts to protect customer data. Businesses must navigate the changing legal landscape carefully to build trust and ensure customer safety online. To do so, they need to implement systems that comply with evolving legal frameworks like the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA) , which mandate stringent data protection and privacy measures.

Benefits of using adaptive risk management planning

Adaptive risk management planning involves anticipating and reacting to the ever-changing fraud threats outlined above. This strategy is designed not just to cope with changes but to capitalize on them, ensuring that businesses are always a step ahead.

By using comprehensive fraud management solutions to bring their risk management strategies to life, sellers enjoy:

  • Fewer transaction declines. Accurately distinguishing between legitimate and fraudulent transactions means you can increase sales and improve customer satisfaction.
  • Chargeback reduction. With a system that learns to recognize new fraud patterns, you can proactively prevent disputes and fraud, preserving your bottom line and reducing the administrative burden associated with managing chargebacks.
  • Superior customer experiences. By minimizing unnecessary hurdles and streamlining transactions, adaptive risk management ensures that each customer interaction is smooth, quick, and hassle-free.
  • Transparency. Clear and comprehensive insights into your transactions and risk management efforts can build trust and guide better business decisions. Transparency isn't just about seeing what's happening; it's about understanding and acting on it effectively.
  • Enhanced decision-making. When decisions are driven by real-time data, they tend to be smarter and more effective. Adaptive risk management empowers your business to make adjustments to your fraud prevention strategies in real time.

Integrated risk management on the PayPal Commerce Platform

Our fraud risk management solutions leverage PayPal’s extensive two-sided network, combined with machine learning and analytics, to detect and block fraud more accurately in real time.

The results? It might help have fewer chargebacks, lower false positive rates, less customer friction, lower fraud losses, and improved operational efficiency.

PayPal risk offerings built for ecommerce merchants

PayPal makes standalone and integrated solutions available to e-commerce and financial services businesses of all sizes, providing scalability as businesses grow.

To support your risk management strategies, our robust fraud prevention suite includes:

  • Chargeback Protection. We instantly assess each transaction for approval, and if an approved transaction later faces a fraud or item-not-received dispute, we'll cover the PayPal chargeback fee and protect your funds for eligible transactions.
  • Fraud Protection. Fraud Protection is a fraud toolkit that provides merchants with more control over the decision process of their card transactions.
  • Fraud Protection Advanced. Want to give your team even more insights? Fraud Protection Advanced offers robust capabilities to help identify and investigate suspicious transactions, analyze patterns, and uncover key insights.
  • Fraud Protection Custom. This adaptive decision platform empowers large e-commerce retailers and financial institutions with best-in-class machine learning to make dynamic decisions across a user’s life cycle.

As more consumers opt for the convenience of digital commerce, having a robust fraud solution in place is more important than ever. Explore how PayPal can protect your business today.

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