How the PayPal 2-Sided Network Optimizes Fraud Prevention

Aug 10 2021 | PayPal Editor

Learn how machine learning and the PayPal 2-Sided Network work together for powerful fraud mitigation.
Today’s digital businesses face both opportunity and threat. On the one hand, as consumers flood online during government-mandated lockdowns, there is a commercial advantage for merchants who can offer a compelling eCommerce experience. Yet there are also risks: online fraud continues to grow and threaten not only the bottom line for internet retailers, but also the hard-won trust of customers.
 

The world online

The direction of travel for global retail even before the pandemic was online. However, strict social distancing rules, long queues, store closures and government lockdowns have made shopping in bricks and mortar stores less and less appealing over the past year. As a result, global eCommerce sales are predicted to surge by over 17% in 2021 to exceed $4.9 trillion by the end of the year, and to grow even faster to top $6.5 trillion by 2023.1

At PayPal, we’ve also noticed a change in buying behavior over the past year. Transactions made with PayPal Checkout increased by more than 35% early in 20202 and we saw an 82% increase in recurring payments.

Yet where there are people and money, fraud will usually follow. An August 2020 survey of global fraud examiners revealed that a quarter (24%) of them had seen a major jump in payment fraud risk. Nearly half (47%) said they expected to see a “significant increase” over the coming year.4 Most commonly, they’ll either use stolen card details to make fraudulent purchases, or hijack existing user accounts to make purchases using stored cards. However, so-called “friendly fraud” (aka first-party fraud) is known to rise during recessions. Here, legitimate customers may claim that a product was never received, in order to keep the item and get a refund. 

Such schemes can have a serious financial and reputational impact on merchants, especially SMBs. Legacy fraud prevention tools can even make things worse, by forcing excessive customer checks and manual reviews, which can increase the rate of shopping cart dropouts and operational costs.

The power of the PayPal 2-Sided Network

You may have heard PayPal talk about its 2-Sided Network before. But what does it actually mean? 
 
As PayPal is both a payments processor and a payment method (PayPal Wallet), we see both the consumer and merchant sides of a transaction. With over 330 million active consumers globally using PayPal wallet to seamlessly pay for goods and services online and more than 25 million merchants processing billions of payments each year with PayPal, the PayPal network is a trove of intelligence. The data we get from our digital wallets powers and informs payment processing efforts globally, and in the other direction, helps us to notice anomalies or suspicious patterns across our merchant portfolios, enabling us to take action to adjust our wallet operations. To be clear, these are aggregated, anonymized insights and patterns we’re identifying—but they’re still incredibly powerful in helping to stop fraud.
 

The bottom line

The bottom line is that fraud detection algorithms are only as good as the data you start with. So, begin with data on billions of transactions, tens of millions of merchants and hundreds of millions of customers and you’re off to a good start. But then what happens? This is where the power of our advanced machine learning algorithms comes into play.

Our capabilities work to stitch together a 360-degree view of each and every customer using multiple data feeds and intelligence. The application of machine learning models helps to pick out unusual activity that human eyes are likely to miss, to help automatically detect and block payment fraud, account takeovers, and more. Machine learning is also used to continually optimize fraud filters, helping to ensure they are as efficient as possible in detecting scams, even as fraudsters change their tactics.
 

Making fraud prevention simple

Machine Learning is a powerful tool to help mitigate fraud. PayPal helps make it easy for merchants to leverage these tools; for example, PayPal Fraud Protection is integrated into the PayPal Commerce Platform. Through an intuitive dashboard UI, users are offered customized fraud filters based on their unique business metrics provided at onboarding. Merchants can test the impact of these filters on historical data prior to activating, and changes are continuously suggested to optimize their efficacy.
 
It all adds up to powerful fraud prevention leveraging a vast global network of two-sided intelligence. With these tools in hand your business can:
 
  • Minimize third- and first-party fraud losses 
  • Reduce false positives and customer friction
  • Streamline the shopping experience for customers
  • Empower users with simple-to-use tools so they can spend more time growing the business
  • Reduce operational costs associated with fraud prevention
These aren’t the only benefits to merchants of joining the PayPal network. New marketing opportunities, higher conversion and authorization rates, and the value of decades-long relationships with leading banks and card companies could all be major wins for your business. But the potential damage caused by persistent fraud makes our features in this area particularly compelling. 
 
Find out how your business can grow and mitigate fraud with PayPal.


 
1. Statista, (November 30, 2020) https://www.statista.com/statistics/379046/worldwide-retail-e-commerce-sales/ 
2. PayPal, Q1 2020 earnings
3. PayPal Global Consumer Dashboard, GTM team analysis. Scope includes Customer branded (“core”) business globally, March 19-Apr 12, 2020
4. Statista, (January 25, 2021) https://www.statista.com/statistics/1175651/increase-payment-fraud-coronavirus-outbreak/


The contents of this site are provided for informational purposes only. You should always obtain independent, professional accounting, financial, and legal advice before making any business decision.

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