COMMENTARY: Tired of Payments Fraud? Maybe It’s Time to Give Blockchain a Try

On the heels of a robust holiday shopping season come some sobering statistics. The recently released 2018 “True Cost of Fraud” study by LexisNexis Risk Solutions shows a 35% increase in fraud for midsize to large e-retailers over 2017. In the retail sector, the monthly average of fraudulent transactions jumped to 306 from 257 per merchant in 2017, the study found. And mobile commerce merchants selling digital goods face the highest cost of fraud, averaging $3.29 for every dollar of fraud, up from $2.65.

Clearly, merchants are on the front lines of the battle to improve digital-transaction security. The report’s dramatic year-over-year increases only confirm the scope of the challenge. While the industry is becoming more successful at preventing fraud, we should look to enhanced technology for ways to further mitigate losses.

Nine in 10 companies say they were a victim of organized retail crime in the past year—a new record, according to the National Retail Federation. Two categories of fraud are driving the numbers: data breaches and chargebacks.

Data breaches are astoundingly common. According to a Thales Security report, 75% of U.S. retailers have been the victim of a data breach at some point, and half had been breached in the past year. Consumer data provided as part of the payment process is increasingly at risk when entrusted to systems with cybersecurity vulnerabilities.

The other growing problem is so-called friendly fraud from buyers denying having made a purchase or making fraudulent returns. And because legislation favors the consumer over the merchant, merchants are taking the financial hit more than 70% of the time, according to loss-recovery firm Chargebacks911.

This happened to a client of ours who owned a small café and decided to expand his hours to take advantage of nightlife in the area. Unfortunately, he experienced an uptick of fraud in the form of disputed charges. Large groups would come in, order bottle service, and run up big bar tabs. The next day, they would dispute the charge on their credit card, leaving our client to eat the cost.

Sure, legislation protecting merchants should certainly be part of the solution to help deter fraud—and 73% of merchants favor enacting a federal law to combat organized retail crime, according to the National Retail Federation—but laws alone will never prevent theft. Instead, we should look to enhanced technology, specifically blockchain, to take the lead.

Blockchain technology essentially removes the emotional element from the system, replacing it with completely digital payment delivery. Using blockchain, goods and services move from sellers to buyers through a cryptographic payment ecosystem.

For merchants, cryptography offers a more precise, identifiable, and permanent record of payment processing, which makes disputed charges—like those our café-owner client experienced—much more difficult. This extra layer of protection, which also guards against potential data breaches, works across traditional retail, e-commerce, and mobile payments. To take advantage of blockchain, merchants won’t need to make major changes to their point-of-sale processes. They simply need to work with payment providers that use it.

Blockchain technology also introduces smart contracts to the payment process, disincentivizing consumers to dispute charges. Should a dispute move forward, blockchain makes purchases more difficult to deny, especially when merchants use delivery confirmations.

Today’s retailers are fighting fraud, with 84% planning increased IT security budgets last year, according to Thales Security. But it may not be enough. Blockchain technology offers merchants a solution to graduate beyond current options by creating a new payment ecosystem where consumers and merchants share the power as well as the responsibilities.

—Jared McClure is the cofounder and chief operating officer of CrayPay.