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The $14.5+ Billion “Fear of Fraud” Gap

posted on: Thu Mar 17 2016

chargebackYou get hit with chargebacks, fraud, and fees every month. If you’re like most merchants, those costs continue to go up and up and up. In fact, as a percentage of revenue, merchant fraud losses nearly doubled last year, jumping from 0.68% in 2014 to 1.32% in 2015 for all merchants.1

But here’s the paradox:

You’re actually turning down too many questionable orders. That’s right, you should be approving MORE suspicious orders. MORE often.

What?!? If fraud is going UP, shouldn’t you be turning DOWN more suspicious orders? Nope. And that’s the paradox: you’re wrongly approving too many of the “wrong” suspicious orders and incorrectly turning down too many of the “right” suspicious orders. There’s data to back this up:

Decline rates average 2.6% for US domestic orders. Yet the actual incidence of U.S. fraud averages around 0.9%.2

This 1.7% spread between actual and perceived fraud is a huge component of the “Fear of Fraud” gap. Some quick back-of-the-envelope math indicates $14.5 billion in lost US sales over the past few years due to this “Fear of Fraud.” Using numbers from Statista.com:

$857 billion eCommerce + mCommerce sales (USA, 2013-2015 combined)3
x 1.7% “Fear of Fraud”
$14.5 billion in lost sales

But wait. That’s just one aspect of the “Fear of Fraud” gap.

Data indicates that merchants suspicious of fraud will cancel 2X more orders after manual review than they should. Let’s take an example of a typical $100 million a year eCommerce merchant with a $25 average order. They’re processing 4,000,000 orders annually, reviewing 960,000 of them (24% average manual review rate)2 and wrongly turning down about 9,120 orders each year.4 Using the average $154 lifetime value of an eCommerce customer,5 they’ve said goodbye to over $1.4 million in revenue, because those jilted buyers are not likely to buy from them again.

Which brings up yet another cost of the “Fear of Fraud.”

Marketing Sherpa calculates that merchants spend $14-$109 per customer on acquisition.5 If that $100 million merchant’s acquisition costs are on the lower end of the scale – around $20 – they spent $182,400 to bring those 9,120 wrongly rejected customers to their eCommerce site and tell them: “Thank you for ordering, please never come back!” If they’re near the higher end for customer acquisition spend ($100), they’ve wasted close to $1 million in sales and marketing budget!

What can you do to avoid losing so many sales and incurring so many costs due to the “Fear of Fraud”? Surely you can’t risk to simply start approving a bunch of questionable orders willy-nilly. You’ll blow a hole in your bottom line!

That’s where Kount can help. Kount customers rely on our best-in-class fraud prevention solution to dramatically REDUCE the number of “wrong” suspicious orders approved, and dramatically INCREASE the number of “right” suspicious orders approved. Or as one Kount customer succinctly put it:

“Overall, sales are up 50%. Before Kount, we were declining about 1.5% of transactions. Now, that number is down around 0.5%. Even so, our chargeback rate has stayed the same, while the number of fraudulent transactions has gone down by 45%.”

How would your bottom line improve if you suddenly started conquering the “Fear of Fraud” gap? It’s easy to find out. Try Kount’s WHAT’S THE “F” WORD COSTING YOU? Calculator and see what the “Fear of Fraud” is costing you in lost sales and higher costs. We’ll compare your current situation against projected improvements and actually quantify how much more you can sell with Kount…while reducing fraud at the same time.

60-Second Fraud Calculator

SOURCES: 1 The Fraud Practice, Payment Trends and Security, David Montague, 2 ONLINE FRAUD MANAGEMENT BENCHMARKS, North America Edition (CyberSource), 3 http://www.statista.com/statistics/187443/quarterly-e-commerce-sales-in-the-the-us/ and http://www.statista.com/statistics/276826/m-commerce-retail-sales-in-the-united-states-segment/, 4 960,000 reviews x 1.9% average cancellation rate divided in half, 5 https://rjmetrics.com/resources/reports/ecommerce-buyer-behavior/ 6 http://www.marketingsherpa.com/article/chart/ecommerce-acquisition-cost-per-customer