By Patti Murphy
Merchant acquiring has always been a lot to do with payments. But not everything. Within the context of payments, however, fraud has long been a serious concern to merchants and their service providers.
Here's a look back at how this all played out in 2024, starting with fraud trends uncovered during the year. This seems appropriate, coming off one of the busiest year-end shopping seasons in recent memory.
LexisNexis Risk Solutions reported in its recent True Cost of Fraud Study that the true cost of fraud to merchants in the United States and Canada is $3 for every $1 lost in a fraud event. To put this into perspective, consider that the National Retail Federation predicted that Americans would spend nearly $1 trillion in November and December 2024 on holiday and related purchases.
If we assume that 0.1346 percent (13.46 basis points) of transaction dollars are fraudulent (which is the latest estimate from the Federal Reserve), merchants lost $13.46 million to fraud during the holiday shopping season alone.
It's important to note, however, that the Fed's data was based on 2016 reporting, long before ecommerce went into hyperdrive. With ecommerce now driving between a quarter and a third of retail sales, according to various sources, and the fact that ecommerce is a card-not-present environment, it's a safe bet that dollars lost to fraudsters by American retailers exceeded $13.46 million this past holiday season.
LNRS defines the "true cost" of fraud, in addition to goods lost/stolen, as fines and fees, as well as customer experiences. Scams drive a significant portion of fraud losses, despite ongoing efforts by government agencies, banking organizations and retail associations to educate consumers to stay clear of fraudsters.
Buy now, pay later transactions accounted for 37 percent of fraud losses, LNRS reported, but credit and debit cards contribute most to fraud losses due to their widespread use and data breaches.
Data breach costs also are reaching new highs. IBM reported that globally, the average cost of a data breach was $88 million in 2023, 10 percent higher than the year before. Lost business, and post-breach customer and third-party response needs drove the year-over-year spike in cost, the company's security arm reported.
"Businesses are caught in a continuous cycle of breaches, containment and fallout response," said Kevin Skapinetz, vice president of strategy and product design at IBM Security. "This cycle now often includes investments in strengthening security defenses and passing breach expenses on to consumers, making security the new cost of doing business."
Many merchants and service providers are integrating artificial intelligence with their fraud prevention toolboxes. Think in terms of enhanced identification, authorization and authentication, like biometric recognition and multi-factor authentication. Ditto for their breach prevention efforts.
However, as Victor Orlovski, founder and managing partner at R136 Ventures, a venture capital firm focused on business-to-business and fintech startups, noted in "AI brings new opportunities to payments," (The Green Sheet, Feb. 26, 2024), AI can also be used by fraudsters and data breachers.
Indeed, according to Visa, suspected fraudulent transactions rose significantly during the year-end holiday shopping season, due in part to the adoption of AI by fraudsters. While AI is no panacea for fighting fraud, Orlovski noted it does improve the infrastructure of payments and the merchant-customer relationship in numerous ways:
To get ahead of the breach curve, IBM's Skapinetz urged investments in AI-driven defenses. Merchants and their service providers also need to invest in new skill sets that address emerging risks and opportunities presented by generative AI.
Where AI is deployed extensively, organizations are seeing on average $2.2 million less in breach costs, vis-à-vis organizations that don't use AI defenses, according to IBM's research.
In a healthy relationship, any party can leave when they choose. But the goal is to not let that happen. How? With respect to merchants the answers are value, convenience and security. Allen Kopelman, co-founder and CEO of Nationwide Payment Systems and 2024 Street SmartsSM author, noted that the agent-merchant relationship has almost always had a value-added component. There was a time, for example, when PIN pads were a major value add. The same was true of check services. Now, software and POS solutions are in-demand value adds.
Successful agents do not sell on price or place generic countertop POS terminals, Kopelman noted. "They sell value, service and solutions, and make it harder for businesses to switch or want to switch by locking clients in with multiple services," he wrote in "Best-selling business strategies Part 4: Value-added solutions," The Green Sheet, June 24, 2024, issue 24:06:02.
"Selling value-added services can help create stickiness and long-term customer relationships, but certain rules apply," Kopelman counseled. "First and foremost, consider how the solution will specifically add value to the merchant's business and addressable market." And stay clear of anything that comes with a large price tag. Otherwise, your customers will become prime pickings for competitors.
Make it your goal to offer at least one value-added service each month, Kopelman advised. But not just any product. You need to know and play to your audience. So, customize, and remember, one size does not fit all in merchant services, Kopelman added.
Value-added services was a hot topic at TRANSACT 2024, the ETA's annual conference. Throughout the exhibit hall vendors showcased flexible, modular solutions designed to be easy to manage, customize and deploy.
"Technology providers have so many ways to add value, create loyalty and expand choice, because payments touch everything and represent the ultimate interaction with consumers," Brad Giles, senior vice president at Ingenico, told The Green Sheet.
The Consumer Financial Protection Bureau, the consumer watchdog created by the Dodd-Frank Act, made its presence known in 2024 in many ways. One of its more ambitious endeavors was to set up guardrails for open banking. Specifically, it created a personal financial data rights rule that will provide consumers with greater control over what organizations can access their critical banking information, and to what extent.
Open banking is relatively nascent in the United States, having been pioneered in Europe. The new rule set aims to govern data sharing between various financial services firms, making it easier for consumers to switch providers without incurring costs, or risking financial privacy or data security, the agency stated. It remains unclear if or when the new rule set will take effect, as it is already being challenged in federal court.
The CFPB also finalized a rule bringing big tech companies that offer digital payment apps under its oversight. The rule, which became effective at the end of 2024, applies to companies processing over 50 million transactions annually.
The CFPB itself is in a precarious position. Since its inception, it has been depicted by Republicans as a case of government interference in a free-market economy. It has also been mired in legal challenges, including challenges to its funding mechanism. The bureau is a unit of the Federal Reserve and receives funding from fees assessed financial institutions for payment and related services.
Now with Republicans about to assume control of both the White House and Congress, these actions may be the most that comes from the CFPB, at least for the next four years.
Unscrupulous lenders were put on notice in 2024 when a jury awarded $8 million to an ISO that was held "captive" by one such lender.
The jury found that Sabin Burrell, an entrepreneur and founder of several private investment firms and Boom Commerce, John Hynes, general counsel at Boom Commerce, and their companies, breached multiple portfolio agreements with Cliq, Inc., a California-based ISO and financial technology company. They also were found in breach of a loan note. The monetary award includes $3 million in punitive damages against Burrell.
James Huber, a partner in Global Legal Law Firm, and lead attorney in the lawsuit against Burrell, Hynes and their companies, said he is aware that many ISOs have had issues with Burrell, but most lacked the monetary resources needed to pursue litigation. "The electronic payments industry is a tight group and while competition is fierce, the players should be treating each other fairly," the firm said in a statement.
If there is one thing that is certain in merchant services, it's change. As Kopelman noted in an interview with The Green Sheet: beyond payments, software and partners have become critical to merchant services.
"Much has changed since we started our ISO in 2001," he said. And as 2024 proved, change continues to define the merchant services space. As we look ahead to 2025, there are apt to be many more changes, from the way payments are processed to how the government and courts look (or don't look) at this vibrant industry.
Patti Murphy, self-described payments maven of the fourth estate, is senior editor at the Green Sheet. She also co-hosts the Merchant Sales Podcast, and is president of ProScribes Ink.
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