In a recent white paper by
Retail Decisions, a payment card issuer and a fraud prevention
specialist, CEO Carl Clump puts forward the argument for examining
and combating fraud on a much wider global basis than it currently
is by many in the payments industry. John Hill reports.


Fraud is a booming business. Perhaps
no other group understands this better than retailers, for whom the
true cost of fraud exceeds $191 billion a year in the US alone.

The fraud challenge is especially
pronounced for retailers in card-not-present (CNP) environments,
namely the internet, mail order and telephone sales.

In concept, identifying and preventing
fraudulent payments can seem straightforward, but in practice a
successful in-house risk management programme is distracting and
resource-intensive. Fraud management is also an expensive diversion
from retailers’ core activities, such as sales and customer

For many years, retail businesses have been
confronted with billions of dollars in losses to cheque fraud. In
the late 1980s, retailers came to understand that individually they
lacked the experience and technological resources to keep this
damaging fraud under control. Many realised that by pooling
together information on cheques and cheque writers they could more
accurately identify and protect against fraudulent payments of this

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Retail Decisions CEO Carl Clump thinks this is
becoming the only way many retailers can look at fraud in the
payments market.

“The important thing when combating fraud is
that we pool the data on behalf of our clients,” Clump says.

“For example, a fraud scheme being perpetrated
against Retailer A in North America was shut down as soon as it was
spotted, only for it to appear two days later in Europe with
Retailer B. The fraud has essentially jumped from one continent to
another and one retailer to another.

“With pooled data, customers can be protected
all over the world, a very clear advantage that no-one else can
offer, and why it is important to have that international reach and
work on a sort of consortium model.

“Furthermore we can also learn from our
experiences on a global basis, so the knowledge that we acquire on
one continent we can then transfer to all our other customers on
other continents.”

Froud and Security

Economies of scale

Using data mining risk analytics and
card fraud experts, managed services providers (MSPs) are used to
identify potential fraud within the retail industry.

The scale economies MSPs bring to
the payments fraud sphere support continued investment in the
technology and human expertise that enable companies to hone in on
risk factors across vertical markets and regions. Plus, they can
take as much, or as little, risk management as any one merchant
decides to outsource.

Despite this, Clump finds there are certain
sectors geographies where fraud detection services are more in

Carl Clump“North American
and UK companies are currently very keen on the idea of outsourcing
fraud detection and risk prevention to an MSP,” he says.

“Customers also tend to come from high-end
retailers, aggregators of transactions such as payment service
providers, the travel sector and telecommunications. In fact we
have found that prepaid mobile telephony is a very fraud-prone
industry. Also at the moment we are having lots of success in terms
of recruiting customers in the Far East as e-commerce starts to
take off over there.”

A retailer’s approach to fraud management can
mean the difference between success and failure. As a result of
this, managing and preventing payments fraud can be a monumental
undertaking, requiring a deep understanding of the company’s
products, channels, markets and customers. This is in addition to
ongoing investments in technologies, tools and processes to
implement an effective fraud strategy.

Although it means a change for many retailers
from their legacy systems, Clump thinks there has been little
resistance to outsourcing to an MSP.

“We have seen very little reluctance,” he
insists. “People are very happy we use the pooled data in order to
give them better decision-making capabilities.

“They know they will benefit from a customer
who has been subject to a similar type of fraud in a completely
different geography on a completely different vertical, so you know
there is a high level of co-operation.”

Payment fraudsters have a tendency to attack
the weakest link in the market, i.e. exposed retailers who are
insufficiently protected.

This is why most businesses consider
outsourcing fraud risk management at one time or another. MSPs
offer extended resource pools that allow these firms to offload or
retain as much fraud management as they require.

“It changes, and is something that is
constantly morphing,” Clump says. “Fraudsters find a way of
exploiting CNP transactions, we stop their attempted fraud in that
manner and then they change and do something else.

“For example, there was a time that high-level
electronic goods were the most popular items for fraud, then you
see it change, and there was even an occasion when we saw
children’s disposable nappies as highly prone to fraud. That is
then knowledge we can transfer around the world.

“The thing about fraud is that it is
ever-evolving. There is no silver bullet for it, it is very
difficult to be ahead of it, and at best you can be half a step
behind it, there is no way to predict where fraudsters may go

History has shown that payment fraud follows a
typical path of evolution. Merchants are able to control fraud to
acceptable levels with available tools and staff expertise, but as
their businesses grow, these methods may not be economically

The next stop for these merchants has been to
look for longer term solutions that will grow with their business
needs; and this includes consideration of MSPs. Over time many
large, established merchants have come to realise that a complete
outsourcing solution is the way to proceed with fraud

Fraud and security

UK payment fraud

Card fraud type on UK-issued credit and
debit cards

Jan-Jun 2006


Jan- Jun 2007


Jan-Jun 2008


Jan-Jun 2009


% change


Phone, internet and mail order fraud (CNP






Counterfeit fraud (skimmed, cloned)






Fraud on lost and stolen cards






Card ID theft






Mail non-receipt












Contained with this total

UK retail face-to-face transactions






UK cash machine fraud






Domestic/international split of total

UK fraud






Fraud abroad






Source: Financial Fraud Action UK

Partnering with an MSP

The move to an MSP need not be an
all-or-nothing decision. It should, however, be undertaken with a
provider that shares the merchant’s vision for growth and brings
best-in-class resources that can readily integrate with existing
business processes.

MSP offerings can be grouped into four types
of solutions that address specific client needs: point, hybrid,
back-office and end-to-end. Each has benefits and limitations to be
considered depending on an individual merchant’s needs.

What distinguishes an individual MSP from the
pack will depend on its depth of experience across functional areas
and vertical markets, and the ease with which its solutions and
expertise can be tailored to each client’s exact needs.

Although outsourcing payment risk management
isn’t for every business, the changing face of payments fraud make
it a practical step for many. Not all MSPs are alike, however, and
understanding how to match a company’s needs with available options
can mean the difference between success and failure. Yet, the
selection process can seem daunting, especially for businesses
trying to cope with CNP fraud.

Clump says: “If you, as a retailer, are doing
fraud prevention by yourself, you only see your own transactions
from other merchants, from other verticals. So you can’t learn from

“In our case we transfer the knowledge from
one geography, from one merchant, from one vertical to another, and
therefore it is a far more efficient solution than trying to either
do fraud prevention for yourself or buying software that does it
for you.

“It is important for people when they are
choosing fraud prevention suppliers to know that they already have
a solution deployed and are not just talking in hypotheticals.

“Those brands looking to open their sales
channels to new regions should think ahead and choose a payment
fraud prevention expert who can offer a proven, scalable, fully
managed service that evolves and matches their geographical