CNP fraud is growing in part due to an influx of organized criminals using sophisticated, evolving technology to defraud online sellers, which means that old-school, rules-based fraud screening is no longer enough to protect your bottom line.
If you sell online, here’s what you’re up against now and how to fight back.
What is payment fraud, and what types of payment fraud are there?
CNP fraud comes in many guises. You’ve probably heard about chargeback fraud, friendly fraud, and true fraud and you may have wondered what the differences are.
- Chargeback fraud is any fraudulent purchase that results in a chargeback. Friendly fraud and true fraud are types of chargeback fraud.
- Friendly fraud happens when a customer, or someone with access to the customer’s payment information, makes a purchase and then claims it didn’t happen. Sometimes the customers don’t remember a purchase or don’t recognize a merchant on their card statement. Sometimes they don’t realize a family member or friend used their card. Sometimes they are pulling a scam to get a refund on items they know they received.
- True fraud occurs when criminals use stolen payment data to buy merchandise for personal use or for resale. When the real cardholder discovers the fraud, he or she requests a chargeback. Most true fraud is committed by organized gangs, often using bots to commit more fraud faster than before.
What are the costs of e-commerce fraud to merchants?
However, the costs of e-commerce fraud go beyond lost revenue.
Experian and Juniper Research note that merchants also absorb the cost of shipping and insurance for fraudulent purchases, chargeback fees from payment processors, in-house manual reviews for orders, and third-party fraud detection and fraud prevention services.
What’s more, when merchants respond to fraud by deploying too-stringent, one-size-fits all fraud protection solutions, they can face hard-to-calculate short- and long-term losses.
Systems that auto-reject valid orders can lead to lost sales, higher customer churn, poor word-of-mouth marketing, and lower lifetime value per customer.
Which major economies experience the most payment fraud?
Most of the 300 million fraud bot attacks stopped by the ThreatMetrix digital authentication network during Q2 2017 “originated in the US, Germany, China, India, Vietnam, Brazil and Russia.”
Countries that are top destinations for cross-border fraud attacks are the US, the UK, Austria, Ireland, Australia, and Germany.
Japan ranked among the top target destinations for the first time in 2017, especially for attacks originating in the US, France, and Italy.
Countries with the highest rates of fraud-related chargebacks, based on recent data reported by Juniper Research, are Mexico, the Netherlands, France, Russia, and Spain, with the US ranking sixth in this category.
What products do fraudsters want most?
In recent years, fraudsters have especially targeted:
- Airline tickets and other travel products
- Digital content, such as online gaming subscriptions
- Luxury items, such as high-end designer handbags, fine jewelry, and watches
In general, fraudsters seek items they can re-sell quickly or return in-store for cash, although some focus on travel or digital items for their own use.
How many purchases result in chargebacks?
The number of chargebacks a merchant receives compared to their total orders is the merchant’s chargeback ratio.
The overall chargeback ratio for online sellers is about 0.60%.
Part of the reason that ratio is low is that card companies penalize merchants whose chargeback ratios rise above 1%.
A seller with a higher chargeback ratio can be forced to pay higher payment-processing fees or even face account closure.
What are typical chargeback ratios for different product categories?
Different verticals have different average chargeback ratios depending on how appealing they are to fraudsters. Here are a few from high to low:
- Software 0.66%
- Financial services 0.65%
- Media and digital content 0.56%
- Retail 0.50%
- Travel 0.50%
- Gaming 0.43%
Sellers in verticals at higher risk have to adopt a more comprehensive, multi-layered fraud-detection program in order to keep their chargebacks below 1%.
What are the most common reasons cardholders ask for chargebacks?
The number one reason cardholders request chargebacks is true fraud – purchases made with their stolen card data. Other common reasons, from most to least frequent, are:
- The product never arrived.
- The seller shipped the wrong product.
- The product didn’t match the seller’s online description.
- The product was unsatisfactory.
- The customer was billed twice for the same order.
Again, some of these claims are due to true fraud committed by criminals using stolen card data. The rest is deliberate or accidental friendly fraud.
What are the most effective chargeback prevention methods?
Preventing chargebacks starts with preventing fraudsters from placing orders, and experts say that’s a much bigger challenge now than ever before.
Experian and Juniper Research said in their 2016 Online Payment Fraud white paper:
Fraudsters now operate globally and need to be dealt with by means of sophisticated, real-time fraud screening solutions, supported by an understanding of the latest fraud patterns and behaviours around the world." Experian & Juniper Research
Layers and analytics are the keys to successful fraud protection.
The report recommends 2 to 3 layers of security to analyze users’ devices, browsing behaviors, credit card processing, and transactions, plus data analysis to spot fraud patterns quickly across channels.
As CNP fraud and fraud-related chargebacks continue to rise, every online seller needs to stay informed of the latest fraud trends, monitor their chargeback ratio closely, and use the most effective tools to prevent chargebacks and related fraud losses.
This is especially true for sellers in the most targeted verticals of retail, travel, luxury, digital, and electronic goods.
However, every e-commerce merchant can benefit from fewer chargebacks, fewer false declines, and comprehensive, always-evolving payment security.
E-commerce fraud protection by ClearSale
For over 15 years, ClearSale has helped retailers increase sales and eliminate chargebacks before they happen.
Our solution protects a merchant’s business by sorting orders and giving an accurate determination of fraud risk.
Our manual review process ensures that suspect transactions are never denied outright, providing the highest approval rates industry-wide and virtually eliminating false positives.
Founded in 2001 by two-time Olympic athlete Pedro Chiamulera, ClearSale has offices in Sao Paulo, Brazil and Miami, Florida.