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How Much Are the 5 Hidden Costs of Fraud Hurting You?

posted on: Tue Mar 01 2016

Every merchant knows that chargebacks cost money. The two most obvious areas: chargeback penalties and lost or stolen merchandise. Then there also is the money you spend every month on manual reviews and do-it-yourself fraud prevention systems. Cost of doing business, right?

But how about the HIDDEN COSTS of fraud that are not so obvious?

  1. Revenue Lost to (Incorrectly) Declined Sales. Decline rates for US eCommerce merchants average 2.6%. However, the actual incidence of fraud in the US is actually about 0.9%. That means approximately 1.7% of valid orders are turned away due to the fear of fraud. And that number is even higher for international transactions. That is a huge HIDDEN COST. How huge? Try this quick experiment: multiply last year’s sales revenue last year by 1.7%:
  1. $10 million operation = $170,000 in lost revenue!
  2. $100 million operation = $1.7 million in lost revenue!
  1. cost of fraudRevenue Lost to (Incorrectly) Cancelled Orders. On average, US eCommerce merchants turn down up to twice as many manually-reviewed orders as they should. In fact, this hidden cost is a big part of the more visible expense of manual reviews overall. Here’s an example of a medium-sized merchant with annual revenue just under $25 million. They process 1,500 orders/day at $45 an order. They review 25% of their orders, which is the average for merchants their size.1 They spend about $4 per manual review and approve over 95% of reviewed orders (4.5% cancellation rate typical for merchants their size1).
  1. ANNUAL COST: $824,671.88 (includes $277, 171 in incorrectly cancelled sales)!
  1. Lost Shipping Expense. You lose money twice on fraudulent orders: first on the lost or stolen merchandise itself and second on the cost to ship it. What’s worse, shipping costs on fraudulent orders are almost certain to be higher than on valid transactions. First, the fraud rate is 10X higher for orders over $2,400 versus those under $1,500.2 Obviously, those big orders will often have higher shipping costs. And second, priority/overnight orders with the highest shipping costs are more likely to be fraudulent. Finally, there is the lost labor cost of employees who picked, packed, labelled and shipped the fraudulent order. They could have been working on good orders. And while boxes, bubble wrap, labels, and tape aren’t exorbitant expenses, they’re not free, either.
  1. Wasted Labor Time. This may not be as obvious as a very tangible chargeback penalty, but you lose money every time your employees have to take time away from revenue-producing activities to deal with fraudulent transactions. Every time a staff member has to handle complaints from non-customers whose credit cards have been fraudulently used to make purchases from your company, you lose money. Dealing with the after-effects of fraud is an even bigger money loser. Representments, investigations of chargebacks, and audits are all time-intensive, and they involve employees with the highest hourly costs.
  1. Higher Transaction Fees + Escrow Account Requirements. Excessive chargebacks and fraudulent transactions can trigger higher processing fee costs and even the costly requirement to maintain an escrow account. What’s excessive? You may get caught by surprise, as definitions vary from processor-to-processor and from merchant-to-merchant. And while slightly higher processing costs may not seem that bad—an additional 0.05%/2¢ per transaction sounds fairly benign—those added costs apply to 100% of your transactions (not just fraudulent ones). For example, the impact of these “insignificant” but HIDDEN COSTS for a merchant with $50 million in annual revenue is:
  1. Increase of 0.05%+ 2¢ = $45,000 extra costs
  2. Increase of 0.10%+ 3¢ = $80,000 extra costs
  3. Increase of 0.15%+ 4¢ = $140,000 extra costs

The bottom line? When it comes to the HIDDEN COSTS of fraud, what you don’t know CAN and DOES hurt you! Learn more about the hidden costs of fraud and what role they play in the 9 Deadly Costs of Fraud. Download the eBook “Calculating the 9 Deadly Costs of Fraud” now.

1 ONLINE FRAUD MANAGEMENT BENCHMARKS, North America Edition (CyberSource) 2 https://www.quora.com/Online-Payment-Gateways-and-Processing/What-is-the-average-chargeback-rate-in-the-US

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