Let’s say you have an excellent online business. People love buying your products and your marketing campaigns are hitting all the right notes. What’s more, your analytics are lighting up like a Christmas tree. Then, all of a sudden, your profits start leaking like a punctured water balloon. What’s going on? Fraud.
Well, there is a solution to that problem too. There are a lot of fraud management programs, and last year two thirds of online businesses said they’re using generative AI in e-commerce fraud management. Also, 39% of merchants were using positive behavior models and 37% vendor-provided solutions.
As you can see, Artificial Intelligence (AI) is already in a forefront when it comes to battling fraud. Do you want to know how preventing fraud with AI-driven programs can help your marketing get better? Let’s find out.
The unfriendly side of friendly fraud
Have you ever heard about a friendly fraud? For the uninitiated, it happens when a customer disputes a legitimate charge on their credit card. Sometimes it’s an honest mistake–’Wait, I didn’t know my teenager bought 400 dollars worth of in-game currency!’ Other times, it’s deliberate: a savvy scammer gets a service or a product, disputes the charge, and pockets the refund while the merchant takes the hit. It’s like that scene from Ocean’s 8 where a woman comes to the store, takes expensive perfume from the shelf and tries to refund it. But–guess what?–no refund without the receipt so the woman gets to take her perfume and bring it home. Neat, right?
So, as it turns out, there’s nothing friendly about friendly fraud, despite the name as such. This deceptive practice is far from amicable. It costs online retailers over 130 billion dollars per year–and that’s not even counting the losses from refunded goods and services. Alarmingly, a recent survey revealed that nearly three quarters of merchants reported an average 18% increase in friendly fraud over the past three years.
And it’s not all about the financial loss that stings–there are other effects too. Chargebacks damage your relationship with payment processors, hurt your bottom line, and stain your ability to reinvest in areas like marketing. Is there a solution to all these troubles? Well of course! You can read more here about friendly fraud and how AI fraud prevention can help you and save your business.
How AI revolutionizes fraud prevention
It’s been a long time since AI was just a part of sci-fi movies or tech conferences. AI is now a practical, game-changing tool that shapes industries a bit differently than what we used to see them. In fraud prevention specifically, AI excels at detecting patterns we could never catch, no matter how many cups of coffee we consume.
You could think of AI as the Sherlock Holmes of fraud detection, with magnifying glasses made of algorithms and data (minus not so virtuous habits).
How does it work?
AI learns what ‘normal’ looks like for your customers. If someone suddenly buys 10 high-ticket items from an IP address in another country, the system waves a red flag. That is called behavioral analysis.
When it comes to pattern recognition, AI identifies suspicious trends across transactions. For instance, if many customers in the same zip code are disputing charges from your store, that’s a breadcrumb trail of fraud.
AI doesn’t need a coffee break, unlike weak human use. It works around a clock to assess transactions in real-time, approving legitimate ones while flagging potential risks. Once AI learns what to look after, it doesn’t need your approval nor to wait for you. This advantage is called real-time decisions.
As you can see, AI is great in protecting your business from fraud, but it also fuels better marketing.
From fraud defense to marketing offense
At first sight, marketing and fraud prevention seem like they’re meant for different departments. One is about enticing customers, and the other is about keeping out the bad apples. But this is where the catch is: effective fraud prevention actually amplifies your marketing success. Want to know how?
It goes without saying that customers want to shop where they feel safe. When they know your business takes fraud seriously, they’re more likely to trust you with their money. Trust is the cornerstone of loyalty, and loyalty is a golden ticket to repeat business. So, AI fraud prevention helps you deliver that peace of mind by making sure your customers’ data is safe and secure, transactions are legitimate, and shady characters are kept at bay.
When it comes to customer data, you want it clean. Or as clean as it gets. Dirty data is a marketer’s worst nightmare. Fraudulent transactions, fake accounts, and bots distort your metrics make it merely impossible to segment audiences effectively or measure campaign performance. But once you weed out fraud, AI can make sure that your data stays clean, so you can have smarter and data-driven marketing decisions.
Budget efficiency is very important for every business, so why shouldn’t you look after that aspect as well? Every dollar spent on fraud recovery is a dollar less that could’ve been spent on marketing. When you reduce fraud losses, you free up resources to invest in customer acquisition, high-impact campaigns, and retention strategies. It’s like plugging a leak in your marketing budget pipeline.
AI-powered marketing innovations
Yes, AI can stop fraud and be majestic about it. But it’s also a catalyst for marketing innovation. AI has already changed so many fields (for the better we hope) and marketing and protection are the ones that strive the most.
How do these two fields collide in the best possible way?
First of all, with fraud-free customer data, AI can help you with hyper-personalized campaigns that resonate with individual buyers. Just imagine you need to send a tailored email that lands at the precise time a customer is browsing your website. Or you can offer personalized discounts based on purchase history (everyone likes discounts, and if you make it personal–yay! so special!) The best part is, fraudulent data can’t throw a wrench into these efforts when AI has your back.
Next, AI-driven fraud prevention enables dynamic pricing strategies in a way that makes sure promotional offers are targeted at real customers, not bots or scammers. This means you can confidently roll out flash sales, loyalty rewards, or offers with limited time without worrying about being exploited. Of course, there are always people who only aim at discounts and coupons, but they are few, even if they compensate for the few numbers with great passion. Still, a huge majority will be happy and much obliged knowing your company thinks of them.
Finally, you should know that fraud doesn’t only happen in your store–it also happens in your advertising. For example, bots can drain your ad budget by clicking on PPC campaigns without ever converting. AI fraud prevention tools help identify and block these bad characters, so your ad dollars go where they’re supposed to go–reaching genuine prospects who are more likely to become loyal customers.
The role of education in combating fraud
AI is great in battling fraud, but it works best when paired with education. Now, who should you educate, AI tools or yourself? Well, let’s just say that AI tools already know what they need to do. Let’s take a look at what we can do best.
As a start, you need to understand the nuances of fraud–especially friendly fraud–and how it impacts your strategy. Similarly, customers need awareness about how disputes work and why abusing them isn’t a victimless crime.
So, when it comes to you and your company, you can invest in training your team to spot potential fraud indicators. You also need to stay updated on the latest fraud trends and how AI solutions can counteract them. You don’t want to be clueless in the face of new fraud like the first Bram Stoker’s Van Helsing upon seeing the works of a vampire (that’s called inexperience and insecurity, which works great for plot development but those traits do nothing when it comes to leading a company).
As for your customers, tell them about clear policies you have when it comes to refunds and disputes. That’s surely going to minimize misunderstandings and following anger. People might appreciate it if you educate them on the long-term impact of friendly fraud, not just on your business but also on pricing and availability of goods.
A holistic approach
You’re not fighting werewolves, so don’t think of AI fraud prevention as a silver bullet. It is an important piece of a large arsenal. Think about adopting a holistic approach, but not like Dirk Gently does in Douglas Adams’s novels, but with a combination of technology, education, and customer-centric policies.
For example, you can pair AI with strong authentication methods like two-factor authentication (2FA). That’s always a popular choice. You can collaborate with payment processors and industry organizations to share insights and strategies. Also, it might be a good idea to regularly audit and update your fraud prevention measures to stay ahead of evolving threats.
A formidable opponent
As you can see, fraud is a formidable opponent. However, it’s not invincible. With AI fraud prevention, businesses can turn the tables and protect their bottom line while enhancing customer trust and improving marketing efficiency.
So, the next time you see the line, ‘There’s nothing friendly about friendly fraud’, you’ll know that’s true–but you’ll also know there’s a powerful ally in AI ready to fight back.