6 Visible and Hidden Costs of eGift Card Fraud
eGift cards are easy to buy and easy to give, which explains their skyrocketing popularity. In fact, digital gift cards are the fastest growing segment in the $127 billion gift card industry, with $14 billion in sales projected for this year. Perhaps that’s also why 8 out of 10 of the top Internet retailers offer them.
Unfortunately, these same attributes make eGift cards and stored value cards prime targets for card-not-present (CNP) fraud.
- No shipping address, eliminating the risk of revealing the fraudster’s location.
- No physical products to warehouse, making searches for stolen goods impossible.
- Virtually untraceable when they’re resold for cash on gift card resale marketplaces.
In a few hours, a lone fraudster can quickly filch a hundred $100 eGift cards using stolen credit cards and multiple accounts. He can then turn around and sell them on gift card resale sites for as much as 80 cents on the dollar, netting $8,000 for less than a half day’s work. With that kind of fast cash, it’s easy to see why eGift cards were targeted with the most fraud attacks of all products sold in the period between Black Friday and Christmas. And why they account for $950 million in fraud.
Unfortunately, every successful fraud attack leaves the merchant who was initially robbed by the fraudster holding the bag when it comes to losses, fees, charges, and other costs.
VISIBLE COSTS. Chargebacks typically get the most attention. But there are other costs associated with fraud that exacerbate the damage.
- Fees and fines. Depending on the chargeback rate, chargeback fees and fines can range from $15 to as high as $100 per order.
- Merchandise losses. Online businesses have little choice but to honor eGift cards that fraudsters have the fraudulently acquired and then sold to innocent consumers on secondary marketplaces. Otherwise, they risk alienating customers and generating unfavorable social media reports and publicity.
- Manual reviews. As a digital product, eGift card transactions often experience higher manual review rates as merchants try to hold the line on fraud. However, this leads to higher operating expenses as human agent labor costs are typically the most expensive aspect of fraud mitigation budgets. According to Javelin, digital goods merchants employ five times as many individuals to fight fraud as physical goods merchants.
HIDDEN COSTS. These costs may not be so obvious, but still hurt margins and profitability.
- Declined & cancelled orders. Decline and cancellation rates are higher for eGift cards than the actual incidence of fraud, which represents a huge revenue loss. While data specific to eGift cards is often closely guarded, a conservative estimate of the differential between the actual fraud rate in eGift cards and decline/cancellation rates is at least 1% (some estimates of this differential reach as high as 10% or more). For a medium-sized online retailer, that could mean hundreds of thousands of dollars in foregone sales each year, not to mention the loss of lifetime customer value from those legitimate customers who never return after being offended by the refusal of their credit card. For large eCommerce operations, the lost sales impact could reach into the millions of dollars.
- Wasted labor. Resolving CNP fraud issues—investigating transactions, handling complaints from defrauded customers, conducting audits, making representments, etc.—steals time from profitable activities. What’s worse, the employees involved in working through these fraud issues are typically specialists and analysts who come at a higher hourly cost.
- Higher transaction fees and escrow accounts. If chargeback rates get too high, payment processors may react by charging higher processing fees. While an additional 0.05%/2¢ per transaction may sound fairly benign, it can add up to tens of thousands of dollars every year in additional expenses, which hurts profitability. Even worse, processors may require escrow accounts for “high-risk” accounts (they set that definition), tying up thousands of dollars of valuable cash flow.
Want to know how enterprise-class fraud prevention solutions like Kount Complete can help you minimize and even avoid these costs?
Download the eBook “eGift Card Fraud: The Gift That Keeps On Taking” and discover the 12 best practices that make it possible to sell more eGift cards to more people in more places, while slashing the losses from fraud and minimizing fraud mitigation expenses.