It’s the busiest shopping period of the retail calendar but this year, ecommerce merchants are facing not only all the usual stresses of the holidays: they’re also facing a rising flood of fraud. Since the EMV liability shift, these merchants are enduring more fraud losses and higher fraud management costs than ever before, according to a new report from Vesta and Javelin Strategy & Research.
Retailers who sell digital goods – media, games, tickets and services – are hardest hit. Reasons for this include the short time window between payment and delivery, the difficulty of verifying legitimate purchasers online and the ease with which criminals can resell digital goods online.
The numbers on ecommerce fraud are eye opening. In 2016, fraud and chargeback management (including operational costs for personnel) accounted for 23% of the operational budgets for digital goods merchants, and fraud costs ate up 8.6% of their annual revenue. This reflects the fact that 49% of chargeback losses originate from online channels, which is three times the amount of in-person fraud.
Missed sales opportunities are also taking their toll. Twenty-five to 34% of all declined transactions are later determined to have been legitimate (otherwise known as false positives), causing untold damage to the customer experience and brand loyalty. The impact on merchants’ bottom line is equally damaging: roughly 3% of sales revenue is lost to false positives.
These problems, unfortunately, aren’t likely to disappear anytime soon. Ecommerce fraud is expected to continue to climb as more fraudsters move to online channels. As a result, 53% of digital goods merchants expect to increase their fraud management budgets in the next 12 months, even though this makes it more difficult for them to invest in other parts of their business, particularly revenue-generating services.
Fraud Detection and Prevention Options
Effective fraud management requires tradeoffs between not only customer convenience and security but also in the types of solutions used. Options include investments in people, technology and outsourcing. When considering any of these options, however, merchants, and especially digital goods retailers, should keep certain points in mind.
Having an internal staff dedicated to fraud mitigation is seen by many merchants as essential to the success of their company. Yet identifying and cultivating the people to identify, respond to and resolve fraud situations comes at a considerable cost. Merchants must also continually upgrade their training and procedures in response to new and evolving fraud threats.
Technology investments are critical to effectively managing fraud, connecting customer information with the payment risk and the delivery of the goods. But this is a complicated area that demands an advanced understanding of the landscape of solutions to determine which pieces of technology meet the business needs. The solutions also need to be integrated and managed over time, which requires technology resources to build out and maintain the applications.
For many merchants, managing fraud risk and its aftermath are tasks best left to third-party specialists — 37% of all merchants and 43% of digital goods merchants have brought on outsourcing services. When the costs of technology investments are considered alongside the expected growth in expenditures for fraud management staff, outsourcing some or all fraud management can be a viable alternative.
Outsourcing reduces the cost fluctuations associated with fraud management and losses. Third-party service providers can scale their technology investments and human resources in ways that are difficult for individual merchants. Service providers can also leverage the experiences of all the merchants they serve for the benefit of each — this is the power of consortium data.
With EMV closing opportunities for fraud at the point of sale, criminal activity will pose an ever-greater threat to ecommerce merchants. To detect and mitigate this threat, they will have to navigate a complex web of solutions to find the right approach — one that does not sacrifice profitability and erode customer experience for the sake of security. The goal, however, will remain simple: To free up merchants so they can focus more on their go-to-market strategies, successfully satisfy customers and build stronger businesses.
Tom Byrnes is Chief Marketing Officer of Vesta Corporation