Target’s Digital Growth May Mean Increased Chargeback and Fraud Losses

Target Corporation recently surpassed $2.5 billion in online sales during the 2015 fiscal year, and its fourth-quarter digital channel revenue also set new records, increasing 34% and crossing the $1 billion threshold for the first time.

While the growth in online revenue is undoubtedly welcome news for Target, dispute mitigation and risk management firm Chargebacks911 warns that the growing proportion of online sales may be accompanied by an unexpected rise in related fraud losses due to increased chargeback activity.

According to the LexisNexis True Cost of Fraud Study, large ecommerce merchants lost an average of 1.39% of revenue to fraud in 2015 — a substantial increase over the 0.85% average fraud loss in 2014, and more than 2.5 times higher than the 2013 estimate of 0.53% average fraud loss. While those percentages may seem relatively small, they can translate to tens of millions in losses for large eCommerce merchants; and with the percentage of fraud loss steadily rising each year, the trend suggests that fraud will continue to account for growing financial losses.

“Managing fraud in the online channel is far more challenging than in brick-and-mortar stores, particularly since EMV cards were introduced to thwart point-of-sale credit card fraud,” explained Monica Eaton-Cardone, co-founder and COO of Chargebacks911. “Target’s impressive online sales are similar to those of large ecommerce businesses; but if we assume a similar rate of fraud loss as other online merchants experience, then a portion of their digital channel growth is likely being offset by rising fraud losses.”

Eaton-Cardone notes that if LexisNexis’ average fraud loss figures for 2014 and 2015 were applied to Target’s digital sales for each of those years, it would amount to more than $16 million in 2014 and nearly $35 million in 2015, with fraud losses more than doubling in just one year. Eaton-Cardone says that today’s consumer is the catalyst for the latest fraud trajectory.

“It’s the age of consumer entitlement, and there’s no going back,” Eaton-Cardone said. “This means that retailers must not only be experts at creating revenue opportunities, but they’re facing greater challenges in retaining customers, since many online competitors have leveraged customer service policies as a way to entice buyers.”

Retail brands such as Zappos allow customers to return items within 365 days of purchase for a full refund, while Amazon is now facing competition from Walmart in the online environment it created.

Eaton-Cardone likens the current situation to the one-upmanship of gas station wars; 24-hour delivery was followed by Saturday and Sunday service, and today consumers can receive orders at their doorstep within the hour.

According to Eaton-Cardone, the Internet is turning into a commodity, where brand loyalty pales in comparison to price and options.

“Unfortunately, the evolution of consumer behavior has changed the customer service climate for good. For retailers such as Target, this means increasing costs to cope with online growth and managing two very different scenarios as determined by the sales origin,” she explained.

Her experience has shown that consumers will often resort to chargebacks for a refund if they’re unsatisfied with an online retailer’s customer service; she warns that many of them have gone on to file fraudulent chargebacks as a way to obtain goods for free. In fact, Eaton-Cardone said Chargebacks911 has found that half of those who get away with a fraudulent chargeback will file another within 60 days, thereby multiplying each chargeback loss by a factor of 1.5.

To overcome these challenges, Eaton-Cardone advises all ecommerce merchants to provide the level of service which consumers have come to demand.

That includes around-the-clock live customer support, so customers can get an immediate response at any time; Alternative customer support options, since today’s digital consumers may resort to chargebacks if email or online chat are not available; Rapid delivery options, for consumers who demand immediate gratification; Traceable shipments, so customers can track their packages and merchants have proof of delivery; and Exemplary customer service, since buyers have more options and higher expectations than ever before.

Eaton-Cardone adds that effective risk mitigation and chargeback management are essential to prevent card-not-present fraud, and have evolved to include retention analysis and policy review.

“With this type of comprehensive solution in place, retailers can stay focused on building their online business,” Eaton-Cardone said. “Target was a pioneer in modifying its refund policy after discovering loopholes that consumers were using to commit refund fraud. Given the rapid growth of Target’s digital channel, I believe this savvy corporation will soon introduce additional policy changes to address online fraud.”

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