How AI is Transforming Ecommerce Fraud Prevention

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Artificial intelligence (AI) is transforming nearly every industry, and e-commerce is no exception. One of the areas where savvy online businesses are using AI to streamline their operations is fraud detection. Where merchants once employed legions of staff dedicated to reviewing transactions, algorithms can now analyze millions of data points to flag irregularities and fraudulent behavior.

Successful fraud detection requires a delicate balance and pinpoint accuracy. On the one hand, merchants must decline fraudulent transactions, which can be extremely costly. On the other hand, they cannot deny legitimate transactions, which cause churn and reputational damage.

And, of course, there's no easy way to tell right from wrong. As a result, approximately $600 billion in global e-commerce revenue was lost due to payment drop in 2020. Research by Riskified also found that 28% of customers will completely abandon a purchase after experiencing a payment drop. and 14% will buy from a competitor instead. .

Achieving this balance requires carefully calibrated AI that can predict the increasingly complex behavior of a global consumer base.

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Online payment fraud is on the rise. A recent study by Juniper Research found that cumulative merchant losses from online payment fraud will exceed $343 billion worldwide by 2027.

Traditional fraud detection methods, often based on human-created rules that determined what would trigger a declined transaction, are giving way to more efficient, AI-based fraud detection. Rules-based fraud detection relies on policies that must prospectively predict inadmissible customer behavior. It's cumbersome, inflexible, and often inaccurate.

Fraud detection AI, on the other hand, is most often based on unsupervised learning models, in which large pools of data from multiple vendors and millions of transactions are analyzed by an algorithm. The algorithm does not learn what to look for in advance; rather, the system finds patterns based on behavior patterns in the data. AI adds flexibility to fraud prevention and can detect anomalies and suspicious behavior without using pre-established rules. AI can also provide decisions instantly.

In this way, third-party fraud detection technologies also enable more merchants to compete with massive marketplaces like Amazon and Alibaba. Fraud detection technologies aggregate data from thousands of merchants and millions of transactions, putting everyone on a level playing field with the giant market...