How Merchants Can Mitigate their Ecommerce Fraud Risk

ecommerce fraud

Ecommerce is booming—sales are expected to jump to $480 billion by 2019 and mobile purchases are expected to grow to $142 billion this year. While sales growth through online channels is a great revenue-generator for retailers, rising operational costs are required to manage ecommerce fraud and chargebacks effectively. 

Trends in Focus

Consumers are more apt to use their debit cards when purchasing items at brick-and-mortar stores, but much more likely to use credit cards when shopping virtually due to its security with credit card companies allowing customers to refute charges and request chargebacks. So, as the volume of e- and m-commerce transactions escalate, the volume of chargebacks will rise.

Additionally, the new EMV standard will push opportunistic fraudsters to card-not-present (CNP) transactions. CNP fraud in the U.S. alone is expected to skyrocket more than 100% to $6.4 billion in 2018, from an estimated $3.1 billion in 2015. The increase in CNP fraud, including legitimate and fraudulent chargebacks, costs merchants greatly—the cost of goods sold, associated shipping and handling fees or even fines if certain thresholds are exceeded.

Mounting Costs

In recent independent research, Javelin estimated that combined chargeback management and fraud-prevention costs account for between 13%-20% percent of a merchant’s overall operational budget. Meaning that about one out of every five dollars is spent on these necessary but non-revenue generating efforts.

The same study found that hiring and training staff to be fluent in chargebacks and fraud prevention accounts for between 36%-41% of all related expenses. Consequently, staffing and training costs weigh heavily on a company’s resources and impact the bottom line. As sales volume increases, additional personnel will likely be required, adding to expenses and making it difficult for merchants to scale quickly. What’s more, these dollars cannot easily be redirected toward revenue-generating initiatives.

Digital goods merchants can often suffer the most. The Javelin study found that digital goods merchants employ nearly five times the dedicated fraud-prevention personnel that physical goods merchants do.

The Risks of Fraud Management 

To stop potential fraud, many merchants and solution providers increase their transaction denial rate. That may prevent some fraudulent transactions, but it will also inadvertently reject legitimate consumers. Other merchants require additional personal information from customers who may abandon sales due to the excess friction created.

Customer loyalty is extremely important and retaining existing customers costs significantly less than acquiring new ones. Millennials, for example, are much more likely to shop on a mobile device, but will abandon if an online transaction isn’t instantaneous.

The Starting Point 

So what can merchants do to ease the pain? Start by assessing costs, resources and goals:

Do a five-year review: Determine costs directly related to chargebacks and fraud prevention initiatives. Have they stayed about the same year-over-year, or increased? This will provide valuable insights as to cost trends.

Examine your five-year growth plan: What’s your company’s growth plan? Are you working to grow your online digital goods business quickly, conservatively, or not at all? The greater your growth initiatives, the more you will likely need to scale up your chargeback and fraud mitigation.

Take stock of your current (and future) resources: Determine current and anticipated chargeback and fraud-related costs, and the resources expected to deploy in the future. Will you need a larger budget to manage more legitimate and fraudulent chargebacks? Can you take the financial hit if a large and fraudulent transaction sneaks through? Project what your operational budget will be, what cost efficiencies you’ll need and how dedicated headcount growth will affect your bottom line.

Consider your DIY process vs. outsourcing: Explore the implications of continuing to build an in-house fraud prevention team versus outsourcing. In the Javelin study, nearly two-thirds (63%) of physical goods merchants believed that outsourcing their fraud mitigation and chargeback management is cost effective. In addition to the benefits of lower headcount and reduced operational costs, the best outside vendors monitor fraud patterns across numerous clients, allowing them to adapt risk strategies and quickly implement new, proactive security measures.

Turning to a third-party vendor with the expertise and personnel to manage the growing risk of fraud and chargebacks can shift the operational burden from a cost center to a revenue generator by eliminating chargebacks and increasing conversion and acceptance.

Navigating the ever-changing online sales world can be both exciting and excruciating. But tackling anticipated challenges head on can facilitate your business’ growth and make the fraud prevention and chargeback management process less painful, more efficient and cost-effective.

Tom Byrnes is the Chief Marketing Officer of Vesta Corporation

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