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5 Direct Losses Involved in CNP Fraud

posted on: Thu Jun 01 2017

"The safest way to double your money is to fold it over and put it in your pocket."  -Kin Hubbard, early 20th Century cartoonist

Fraud Loss

According to the 2016 LexisNexis True Cost of Fraud Study, US merchants reported an 8% increase over 2015 in the cost per dollar of fraud losses. For every dollar of losses, merchants are losing $2.40 based on chargebacks, fees and merchandise replacement. In real world terms, that means:

If a $100 online transaction turns out to be fraudulent, your actual loss would be $340 total ($100 transaction loss + $240 in other costs and losses).

What are 5 of the sources of direct loss that result from card-not-present eCommerce fraud?

  1. Loss of Inventory – An online dealer in exclusive sports memorabilia receives an order for a one-of-a-kind baseball keepsake signed by Pittsburgh Pirates legend Roberto Clemente. The ball dates from the seven-game 1960 World Series with the New York Yankees. It’s the last of three the dealer has curated for years.

After receiving a web order, the dealer carefully packages the ball and its polished walnut stand. Then, he sends it to the Miami address shown on the order. Six weeks later, the dealer receives notification from his payment processor that the transaction is a chargeback. Fraud. Not only is the dealer out the money, but he can never make up for the loss. He is simply unable to order another 1960 World Series ball signed by Roberto Clemente. It was the only one he had or will ever have.

  1. Chargeback Fees – Cecilia loves buying shoes online. Trouble is, all designers and styles fit SO differently. So, Cecilia has resorted to ordering multiple pairs of new styles to ensure she gets the best size. A friend told her how to keep big purchases from showing up on the credit card she shares with her new husband. “Just call the number on the back and request a chargeback from bank,” she said. “Just tell them they never arrived. It’s as simple as that!” 

Of course, it’s the shoe merchant that takes the hit from chargeback fees from this friendly fraud. Recent stats show 40% of consumers who have filed a fraudulent chargeback will do so again in the next 60 days, indicating serial “cyber shoplifting” offenses.

  1. Loss of Shipping Expenses – When Luke Knowles launched the website FreeShipping.org back in December of 2007, his was the first website dedicated to free shipping offers and other coupons. Today, free shipping is ubiquitous and accepted almost as a necessary cost of doing business. Just recently, for example, Amazon dropped its minimum order for free shipping to $25 to compete with rival WalMart, which ships free for orders over $35.

With fraudulent transactions, merchants take the full hit for shipping costs – regardless of whether shipping was free or billed. Plus, as shown in Kount’s CFO Perspective: The Impact of Fraud eBook, shipping costs on fraudulent orders, especially large or expensive orders, are likely to be higher than on valid orders. In fact, orders greater than $2,400 are 10x more likely to be fraudulent and have much higher shipping costs due to more boxes or larger packages.

  1. Loss of Labor – Personnel costs typically comprise the largest portion of fraud prevention budgets and many operational budgets. There are the manual reviewers who review and approve orders, the warehouse workers, shipping and packing personnel, truck drivers, and all others included in the fulfillment value chain. Every fraudulent transaction robs their time and surreptitiously increases this expense line item.
  1. Loss of Revenue – Fraud costs online merchants more than 7.5% of their annual revenue, on average, according to The Financial Impact of Fraud, by Javelin Research. This report reveals the revenue impact of fraud losses is expected to grow to $19 billion in 2018.

Forbes.com offers this advice in "Holiday Online Fraud: The Grinch That Keeps on Taking":

“The solution comes down to not only knowing about your customers, but also knowing how to quickly and seamlessly apply that knowledge to the critical moment of a transaction.”

 How do you combat these direct losses from fraud?

  • Artificial Intelligence (AI) and Machine Learning. Enterprise-class fraud prevention solutions like Kount Complete collect hundreds of data points about every transaction processed. AI and machine learning possess the computing power to identify associations between these data points across millions and millions of transactions in real-time.
  • Chargeback Alerts and Representment Expertise. Enterprise-class anti-fraud solutions like Kount Complete integrate chargeback alerts from cooperative networks of merchants and card issuers—like the one founded by Ethoca. With Ethoca Alerts, card issuers send electronic alerts about chargebacks in as little as 1 hour. This helps merchants beat friendly fraud—especially repeat offenders. Further, the incorporation of chargeback services like Chargebacks911 into the platform significantly increases success with representments while reducing their cost.
  • Advanced Screening using Real-Time Data. Enterprise-class fraud prevention systems employ multiple technologies that screen multiple dimensions of every transaction in milliseconds (i.e., no delays to checkout). The more data analyzed—Device ID, Geolocation, Transaction Velocity, Order Linking, etc.—the more precise and accurate the screening. With this massive network effect, behavior or attributes that might seem inconsequential within a small data set are revealed to be critical with Big Data analysis.
  • Simple, Affordable SaaS. Software as a Service (SaaS) greatly simplifies fraud prevention and eliminates many costs to ensure scalability and profitability. With simple implementation and low-cost, SaaS anti-fraud solutions like Kount make it easy for online businesses to “quickly and seamlessly apply that knowledge to the critical moment of a transaction.”

For more insights into reducing direct loss from fraud—including the latest technologies and techniques—please download Kount’s free ebook CFO Perspective: The Impact of Fraud.

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