Despite being able to deliver lower prices to consumers, online merchants aren’t getting off that easily when it comes to the additional costs they have to deal with.
CNP fraud’s costs drain revenue
In addition to those direct operational costs, losses from the card, not present (CNP) fraud also bite into already thin margins. Fraudulent orders placed with stolen credit card info result in chargebacks when the real cardholder discovers the unauthorized charge on their account and disputes the charge with the issuing bank. If the customer wins the dispute (which they should in the case of CNP fraud), the charge is refunded from the merchant’s account back to the customer.
That refunded amount, however, is only part of the total cost of a chargeback. Not only do merchants get hit with fees and penalties for every chargeback, but they also have to absorb the cost of the resources used to defend themselves against the chargeback – a cost they can’t escape even if they win.
But wait, there’s more. Chargebacks also incur plenty of secondary costs: the costs associated with attempting to prevent those chargebacks. These include an in-house fraud review staff as well as subscription costs for access to third-party data sources needed to enrich the order data so that those reviewing have enough information to determine if the order was legitimate or fraudulent.
Another set of costs caused by fraud prevention is due to false declines, the legitimate orders from paying customers which are rejected because they seem too “fishy”, which is common when using inadequate solutions like blacklists which aim to screen out orders from fraudsters. These costs include the missing return on all the investment it took to get that customer to checkout, the missing revenue from that order, and the lost lifetime value of that customer since shoppers who are wrongfully turned down by a fraud filter are very unlikely to ever return.
Chargebacks in many cases are outright unnecessary
The majority of these costs can be drastically reduced when merchants utilize robust fraud prevention solutions offered by vendors such as Riskified who specialize in chargeback prevention based on machine learning. By building and adapting accurate models using the mountains of actual order data gathered from every one of their customers, these types of solutions are able to provide updated insights in real time back to each customer individually.
Leading providers also offer a chargeback guarantee, which is a promise to reimburse the merchant for any chargebacks issued from transactions their fraud tool approved. This guarantee protects those merchants from much of the financial risk of using the solution while at the same time gives the fraud prevention tool vendor the incentive to prevent chargebacks in the first place. This potent combination of the chargeback guarantee and machine learning really pays off when online merchants expand into new markets because they give retailers the confidence to grow both their customer base and their bottom line.
Other countries present their own challenges when it comes to distinguishing the fraudsters from the real customers, and thus merchants are tempted to be overly conservative when it comes to accepting orders, but they end up rejecting plenty of legitimate customers. Solutions which combine machine learning and a chargeback guarantee can take the fear of fraud out of international orders, allowing merchants to focus on winning customers and growing revenue.
By decreasing losses, boosting revenue and enabling growth into new markets, holistic fraud solutions are proving themselves to be business critical to e-commerce.