TLDR: A new PYMNTS Intelligence report, in collaboration with Worldpay, indicates that over half of retailers are now deploying AI models for fraud detection. This surge in AI adoption comes as businesses face a dual challenge: combating increasingly sophisticated AI-driven scams and managing a rise in ‘friendly fraud’ and chargeback abuse, particularly after the holiday season. While AI is proving effective in real-time anomaly detection and reducing false positives, a significant gap remains in the adoption of generative AI for fraud protection.
A recent PYMNTS Intelligence report, developed in collaboration with Worldpay and titled ‘Securing the Season: Fighting Fraud Without Losing Customers,’ highlights a significant shift in how retailers are combating fraud. The study reveals that more than half (52%) of retailers are now actively rolling out new AI models specifically for fraud detection. This widespread adoption underscores the growing urgency within the retail sector to counter evolving fraudulent activities.
The report emphasizes that the challenge for merchants extends beyond merely preventing fraud during peak shopping periods like the fourth-quarter rush. A critical aspect is addressing the post-holiday surge in ‘friendly fraud’ and chargeback abuse. This type of fraud, where customers dispute legitimate purchases, accounts for a staggering 75% of digital goods merchants’ fraud losses. Many consumers bypass retailers entirely, going straight to their banks to trigger automatic chargebacks, often driven by ‘post-holiday remorse or budget pressure.’
Retailers are grappling with a dual threat: the increasing sophistication of AI-driven scams and the need to maintain a frictionless shopping experience for legitimate customers. The study found that 88% of consumers believe AI has made online scams more advanced, with deepfake technology and cloned brand identities successfully deceiving even digitally savvy shoppers. A notable generational gap exists, with one in three consumers aged 18-34 falling victim to deepfake scams, compared to just 5% of those 55 and older.
In response, businesses are leveraging adaptive machine learning systems to identify anomalies in real time. These AI tools have demonstrated considerable success, cutting false positives by up to 85% and doubling the detection rate of compromised cards. However, despite the clear benefits, there’s a significant lag in the adoption of more advanced AI. Only 37% of retailers currently utilize generative AI for fraud protection, even as a substantial 72% anticipate AI-driven fraud to be their primary challenge by 2026.
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The report also points out that anti-fraud tools are crucial for enhancing the overall customer experience, provided they do not impede the checkout process. A remarkable 93% of eCommerce businesses agree with this sentiment. The integration of AI-powered detection, two-factor authentication, and responsive customer service is forming a ‘layered security’ model, recognizing the intricate relationship between technology and customer trust. The research indicates that if merchants fail to respond promptly to customer complaints, 85% of consumers are likely to resort to filing a chargeback, further highlighting the importance of robust and responsive fraud prevention strategies.
