how can ecommerce fraud affect your business?


June 21, 2024

It’s impossible to sell products online without encountering ecommerce fraud eventually. It’s a question of “when” not “if,” especially because there isn’t simply one thing called “fraud” that needs to be battled.

Ecommerce fraud protection

It’s impossible to sell products online without encountering fraud eventually. It’s a question of “when” not “if,” especially because there isn’t simply one thing called “fraud” that needs to be battled. 

The savviest ecommerce merchants make it a point to understand and address every single way online fraud can drain their business of time, money, and energy. Everybody knows that ecommerce companies are threatened by outright theft, but fraud has various trickle-down effects online retailers must understand so they can avoid and mitigate these hazards.

The consequences of fraud fall under three broad categories: Outright Fraud, Missed Opportunity, and higher Transactional Costs. Each category has a few specific ways fraud can drain companies, some of which may not be immediately obvious.

When the total cumulative effect of hidden fraud is pieced together, it becomes apparent why a digitally native vertical business needs modern security that is smart enough to keep up with the latest threats.

Let’s examine how the best ecommerce platforms minimize and prevent fraud from damaging online companies by offering robust automation, fully-managed anti-fraud services, and third-party integrations with industry leaders in security and beyond.

outright ecommerce fraud

stolen merchandise

This is the most flagrant and easy-to-understand example of fraud, but it’s more pernicious than you may have thought. Naturally, fraud drains money from businesses, but understanding more about this dynamic only reinforces the need for urgency.

That’s because the larger an order is, the more likely it is to be fraudulent. For example, thieves are ten times more likely to commit fraud on an order of $2,500 than on an order of $1,500. 

Surely a thief wants the reward to be in proportion to the potential risks inherent in illegal activity — why risk legal consequences for a small reward? Online merchants need to stop this in its tracks, so they can expand their operations and process large sales confidently.

The best ecommerce platforms can screen all orders in advance with leveraged data gathered from across the platform. The security is refined and updated constantly, so it stays up to date and reduces fraud more accurately.

Ecommerce fraud online

The platform can identify suspicious customers in advance, and block their profile and prevent them from making transactions before financial drain can begin. The most standard kind of fraud is still very important to stop, especially given that it often involves the largest orders. 

The biggest and the smallest online companies need to be savvy and resourceful to succeed, and leaving a gaping vulnerability in your security scheme is simply not an option.

chargeback fees and fines

Chargebacks present a double whammy for online retailers. After a customer manages to acquire a company’s product then fraudulently files a chargeback complaint, it only adds insult to injury when that company must also pay extra fees and fines as a result.

The penalties for chargebacks range from $15-115, but even the small ones can add up very quickly. Plus, if companies happen to exceed a defined chargeback threshold, they could be entered into an Excessive Chargeback Program which costs them additional fees until they get their chargeback rate under control.

The platform has Automated Alerts, which can tell online retailers in real time the instant a chargeback has been launched against them, then reverses the charge. They’ll never be caught unaware and unprepared again, and keeping on top of things is effortless and cost-effective.

The platform also has its own fully-managed chargeback protection experts, so companies can utilize highly-trained, dedicated representment specialists who know when and how to fight chargebacks. For an even thicker layer of protection, we partner up with several leading third-party experts in fraud prevention and chargeback protection:

This will dramatically increase your win-rate. Not only are there two layers of defense instead of one, but the third-party experts can also access all the information available in your profile. 

Defending companies against the harmful effect of chargebacks doesn’t have to consume employees’ time. Finally, engaging the third-party fraud experts is cost effective for customers, since they get privileged access to a negotiated rate.

manual fraud review

Now we’re getting into some of the subtler ways that fraud harms companies. Inspecting for fraud manually slows growth because it’s very inefficient. Less than 75% of manually-reviewed orders get processed.

Manual reviews are also inadequate because they don’t accommodate every payment type. For example, it’s impossible to use in situations like in-game “buy/try” offers common in online gambling, so sales get left behind so as not to expose companies to fraud. 

Whether a company uses their own staff to review fraud manually or outsources it to a third-party, it’s an inexact and inefficient method. With security that complies with all PCI-DSS Level 1 standards, the highest standard credit card companies have, online retailers can feel confident about business security and the safety of customer data.

Tokenization, advanced user permissions, and high levels of authentication keep businesses secure quickly. They will also reduce chargebacks automatically, because manual review is simply not an effective way to secure a growing online business.

reputational damage

After a company has suffered a data breach, there are multiple kinds of consequences depending on the nature of the hack. On average, the total cost of a data breach is $3.92 million, but financial damage isn’t the only toll a company experiences.

There’s an intangible cost due to reputational damage which can be hard to measure or quantify. For one thing, it results in lost business which, by definition, is impossible to know with any certainty. 

Companies can spend years painstakingly cultivating a brand, only to lose it overnight because security had a weak spot. All the money that was spent to create this brand ends up wasted, and more funds are required to re-brand the company. 

This drains finances and workplace morale. Keeping a website secure from hacks or breaches is a major way to prevent fraud-related financial and intangible disasters from occurring in the first place.

missed ecommerce opportunity

do-it-yourself fraud prevention

Online retailers know all too well that competition is fierce and never-ending, so they commonly look for ways to cut costs. The problem is, in the early days of a start-up it may seem deceptively possible to detect and prevent fraud on your own, while sales are still relatively low.

But companies who do this play a constant game of catch-up that requires ongoing investment in labor, money, and time. When sales do begin to really take off, the very last place you’ll want to be focused on is security, rather than expanding the business. 

The fully-managed anti-fraud services offers win 80% of all representments. Companies can sit back secure in the knowledge that they’re insulated from the effects of fraud without taking time and focus away from their employees.

Whether you’re a start-up or a multinational business, you don’t have to divert resources away from your company when highly-trained experts personally oversee your security.

declined orders

Wrongfully declining sales from genuine customers mistaken for fraudsters is the exact opposite of losing revenue to theft, but it can be just as damaging. Unfortunately, this happens all the time, and if the ecommerce platform you rely on is not sensitive and accurate, the numbers confirm that excessive security leads to a considerable reduction in sales.

The average ecommerce decline rate is 2.6%, while the average rate of online fraud is 0.9%. The resulting 1.7% differential here may not seem enormous, but it represents 9,000 orders to a company that does $25 million in sales annually. 

The best AI available powers results by aggregating data across the entire industry and the platform, so it can continuously adapt to ever-changing ecommerce consumer behaviors. Shrinking the gap between declined orders and wrongfully declined orders is a major way to keep revenue where it belongs — inside the business.

canceled orders

If a measure taken to reduce the impact of fraud is both ineffective and costly, the cure may be worse than the initial problem, or will at least add to it. Manual reviewers are a bad anti-fraud solution because they cancel twice as many orders as they should.

Losing money on the wrongly cancelled order itself is damaging enough, but also losing the labor and marketing dollars you’ve invested in this doomed sale is salt in the wound. 

Our anti-fraud features allow companies to set their own risk profiles for each specific campaign and product, so they can flexibly customize the balance of sales generation and security as they see fit. It may seem counter-intuitive, but security that is strong but too rigid may in fact reduce fraud to 0%, but only at the expense of also rejecting genuine sales.

Modern enterprise-grade ecommerce platforms allow companies to enjoy robust security that is both flexible and automated, delivering optimal results with maximum speed and efficiency.

transactional costs

lost shipping expense

In ecommerce, shipping is the tangible connective tissue between consumer and the online retailer. It’s extremely important that shipping problems are ironed out before they cause consumers to become frustrated or businesses to lose revenue. 

This is especially true for today’s consumers who have become accustomed to same-day or at least next-day shipping, which is a serious expense for a company even when it does go smoothly.

Money spent in shipping fraudulent transactions is gone forever, and large orders (which are usually physically heavier, and therefore more expensive to ship) are more likely to be fraudulent than lighter ones. Labor has many costs associated with it for employers besides salaries, such as:

  • Social security
  • Taxes
  • Workman’s compensation

When shipping expenses are forfeited due to fraud, these extra labor-related costs also need to be borne by the company. Also drained from the business are costs associated with packaging — boxes, bubble wrap, tape, and labels are not free.

Companies that ship products reliably enjoy higher customer loyalty, which translates into higher sales. Online retailers in today’s ecommerce landscape need to develop a reputation for reliable shipping to help them grow sales, while also sparing them extra costs.

wasted labor time

Combatting the effects of fraud wastes the time of your most expensive employees. Processes geared towards settling representments, investigations of chargebacks, and fraud audits all require expertise, which have high hourly costs.

Assigning low-level staffers to these tasks still costs money, too. But these staff members are likely paid less only because they are less effective in combatting fraud. 

Prosecuting fraudsters will dramatically reduce attacks, but it takes important employees away from where they’re most productive and where they generate the most revenue. The best ecommerce platforms have their own specialized representment experts who handle all this time-consuming paperwork, so employees can focus on their primary work tasks.

higher transaction fees and escrow accounts

Finally, fraud leads directly to higher charges that the business needs to pay just to keep their operations running. After a merchant has been deemed “high risk” they face higher transaction fees than “low risk” merchants.

Making matters worse, the online retailer won’t even necessarily know when they’ve crossed a threshold. This makes operations not only more expensive, but confusing. Navigating these murky processes takes time, which in turn costs money. 

Plus, the higher processing fees would apply to every single transaction, so even the smallest extra fee poses a major problem.

The confusion and financial drain doesn’t end there. Processors may require money stored in escrow accounts for “high risk” businesses, which results in companies losing access to thousands of dollars of their own money.

Leading ecommerce platforms are capable of preemptively preventing between 25-30% of chargebacks, lowering risk and keeping MIDS healthy. Not only is this financially an important gain, but it gives online retailers the stability to operate without having to constantly look over their shoulder for fraud.

keep ecommerce fraud at a minimum

Fraud comes in all shape and sizes, and merchants can stay informed on top fraud trends to stop chargebacks before they happen.

Ecommerce fraud is not going away anytime soon, but online retailers don’t need to struggle alone. They can get back to business and avoid all the hidden costs and trickle-down effects of fraud by opting for an enterprise-grade ecommerce platform with security features that are modern, smart and strong.

read our september 2022 subscription commerce conversion index to discover fraud trends in subscription commerce.

September 2022 Subscription Commerce Conversion Index, fraud trends in ecommerce
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