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What Does eCommerce Fraud Really Cost Your Business?

Merchants who sell online are concerned about credit card fraud, and rightfully so. Not only can it damage sales, but it can also negatively impact reputations, customer relationships and revenue.

Fraud — including fraud losses, false positives and fraud management — costs merchants on average more than 7.5% of their annual revenue. And with many merchants having profit margins in just the 4%-8% range, fraud could be taking a bigger bite out of merchants’ profits than they think. If that’s not enough to give merchants pause, consider this: each dollar of e-commerce fraud costs merchants $2.94 in lost merchandise, shipping fees, and more. Merchants selling digital goods have it even worse, losing an average of $3.29 for each dollar of fraud.

No matter what the industry, merchants selling goods online need to be aware of the damage that e-commerce fraud can do.

The Impact of Chargebacks

While not every chargeback represents a fraudulent transaction, it’s safe to say that most fraudulent transactions end up becoming a chargeback for the merchant. This can be a devastating scenario.

Chargeback fees can run as high as $100 per dispute. In total, chargebacks cost U.S. merchants close to $7 billion every year. This is because the cost of each chargeback is far more than just the cost of the product itself. The losses also include:

  • Credit card processing fees. Includes a fee for every transaction that’s processed, including the wholesale cost of the transaction and the processor’s rate markup.
  • Acquiring bank fees. These fees can reach $100 and are used to cover the costs an acquirer incurs during the chargeback process.
  • Operational expenses. These costs include the manpower needed to research and respond to chargebacks, the costs associated with processing and shipping orders, and even the costs incurred to implement fraud prevention solutions.

Chargeback levels by merchant are challenging to predict and can vary widely. In 2018, 16% of merchants had a chargeback rate of more than 1% and nearly 30% of retailers in high-risk industries had chargeback rates of 2% or higher, putting them all at risk of having their merchant accounts revoked.

Surprisingly, nearly 16% of merchants surveyed don’t even know what their chargeback rate is — which could lead to an unpleasant surprise.

Merchants with a chargeback rate of 1% or more often are penalized as “high risk merchants.” Their chargeback fees will be higher, and they may be required to enroll in costly chargeback management programs or forced to apply for expensive high-risk merchant accounts. Even worse, if a merchant’s chargeback rate grows too high, the merchant risks losing their merchant services account. Without the ability to process credit card payments, it becomes impossible to do business online.

The Costs of False Declines

However, often merchants react to fraud by going too far in the other direction. The rationale usually looks something like this: “I can’t be hit by fraud if I decline any order that I even remotely suspect is fraudulent.”

This strategy actually does more harm than good.

Not every suspicious order actually is fraud. Sometimes, perfectly good orders can look like fraud. So if a merchant is automatically declining every suspicious order, chances are high the merchant is accidentally declining good orders – which means the merchant is losing revenue and probably frustrating perfectly good customers.

Falsely declined orders are a big problem for e-commerce merchants – bigger, in fact, than fraud. Customers don’t like it when their orders are declined. And because in the world of e-commerce the competition is just a mouse click away, a falsely declined customer will likely take their business to another online store – and may never return. Eight of 10 consumers report they’d switch to a competitor after being on the receiving end of poor customer service.

These lost relationships are extremely expensive. False declines caused merchants to lose a whopping $330 billion in 2018 and, for some merchants, as much as 5.5% of their annual revenue.

How to Minimize the Effects of Fraud

With the busy holiday shopping season on the horizon, merchants may be thinking about the risk that fraud poses to their bottom line – while also wondering how they can safely approve every good order, without letting the fraudulent orders sneak in.

The best approach is to implement a strategic view on fraud management, including:

  • Manually review any orders that look suspicious to verify whether the order is legitimate or fraudulent.
  • Outsource these manual reviews during peak sales periods.
  • Integrate a third-party fraud protection solution that offers guaranteed protection against chargebacks.

Because managing fraud is expensive – but losing good customer relationships is even more so, businesses need to be doing everything they can to avoid being a victim of e-commerce fraud but also to make sure they deliver the best possible online shopping experience. Choosing to work with a proven fraud partner may be just what’s needed to protect sales and profits and encourage customer trust and loyalty.

Topics: payment, Payment Processors, conversions, fraud, holiday, General

Written by Rafael Lourenco