Fraud costs are increasingly hurting the bottom line for merchants, a new study from Javelin has found, but outsourcing might help bring down costs.
According to The Impact of Fraud and Chargeback Management on Operations, merchants specializing in digital good spend an average of $10.1 million every year on fraud-related costs, and that’s in addition to typical fraud costs, such as the loss of goods and chargeback fees. Nearly three in four merchants dealing in both digital and physical goods say fraud and chargebacks have a major financial impact, accounting for 13% to 20% of their operational budgets each year.
Much of the rise in fraud costs can be attributed to the increasing popularity of online shopping and digital goods, such as e-books and digital gift cards. These card-not-present (CNP) transactions require security that many existing platforms, built for point-of-sale transactions, aren’t equipped to handle. As a result, card-not-present fraud and related costs are on the rise.
Many merchants are concerned that the United States’ transition to EMV this year will make the problem worse. The chip-embedded cards make point-of-sale transactions more secure, but they don’t help with CNP transactions. Digital goods merchants especially worry that the increased security at physical transaction points will encourage fraudsters to move to less-secure CNP channels. More than half of digital goods merchants (51%) expect fraud and chargeback costs to increase over the next 12 months.
The study suggests that outsourcing could help merchants combat the problem. Personnel costs represent more than 35% of fraud/chargeback spending for all merchants, but that’s especially true for digital goods merchants. Merchants selling digital goods employ nearly five times the fraud personnel as physical goods merchants and nearly twice as many as hybrid merchants. Additionally, many merchants reported that finding qualified personnel for fraud and chargeback management is difficult.
The use of a third-party provider could help with staffing challenges while also reducing costs. Among hybrid merchants, many of whom have been outsourcing fraud operations for years, 65% said they found third-party services to be cost effective.
You can download a complimentary copy of the 25-page report here.
On behalf of Vesta Corporation, Javelin conducted an independent, online quantitative study in June 2015 of 362 merchants earning $1 million or more annually, including 118 merchants selling only digital goods, 106 merchants selling only physical goods and 138 merchants selling both types of goods.
Chris Uriarte is Chief Payments and Strategy Officer of Vesta Corporation