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4 Factors That Impact CNP Fraud Prevention for Digital Products

posted on: Thu Nov 30 2017

The vast majority of digital products are purchased through card-not-present (CNP) transactions, whether from a handheld tablet, smart TV, game console, laptop computer, smartphone, or voice-controlled personal assistant.

CNP fraud jumped 40% in 2016 and is projected to cost online businesses $7.2 billion in fraud losses by 2020.

If anyone is going to get hurt by this surge in CNP fraud, it’s merchants selling digital goods. What’s more, selling and fulfilling digital goods brings some unique challenges when it comes to fighting CNP fraud.

  1. Expectation of Immediate Fulfillment. Sellers of physical goods have the luxury of holding orders for review before deciding to ship/not ship. Not so with digital goods. Consumers want their song, game, subscription, movie, etc. right now. That means the merchant must approve/decline in real-time. Fraudsters exploit this highly-condensed decisioning window to improve their chances of escaping detection. This leads to further issues:
    • Susceptibility to automated fraud. Fraudsters using bots, automated tools, and mobile wallets can place hundreds of orders in just minutes. Before fraud can be detected, thousands of dollars in digital goods may be stolen.
    • No manual review. An online game merchant wouldn’t dream of pausing a first-person shooter for an hour while the in-game purchase of an enhanced weapon makes its way through a manual review queue. These same time constraints apply to a majority of digital goods purchases.
    • False positives. A Javelin study found that at least 15% of all cardholders have had at least one transaction incorrectly declined (the true fraud rate is approximately 1-2%). Digital goods merchants that tighten their fraud screening too much risk forfeiting revenue, angering customers, and hurting their brand.
  2. Less Data Available for Fraud Screening. Data is a fraud prevention analyst’s best friend. But digital goods orders usually include fewer data points for screening or decisioning than physical goods orders.
    • Limited transactional data. For some digital goods orders, an email address may be the only information provided other than card/billing data. Contrast that with physical goods that typically require billing addresses, shipping addresses, and other informational cues to assist fraud screening decisions.
    • Siloed information. Payment and fraud teams in digital products companies can be siloed. Fraudsters can execute hundreds of orders in minutes, before slow or inefficient communication can connect the dots on fraud activity.
  3. Higher Incidence of Mobile Transactions. U.S. mobile commerce sales are projected to soar nearly 260% by 2020. This growth is likely to be even more pronounced in the digital goods industry, with many digital products intended specifically for mobile devices (mobile apps, music downloads, electronic tickets, etc.)
  4. Balancing User Experience with Risk. Friction is deadly for digital goods transactions, especially in mobile orders.

Fortunately, there are a number of steps that online businesses selling digital products can take to beat fraudsters. Download the eBook “Fraud in a Digital World” to read about the 12 best practices to fight digital product fraud.