If we lived in a perfect world, e-commerce activities would be as simple as people buying and companies selling and delivering. Scammers don’t make things that simple, though, and Oxford BioChronometrics can shed some light on why – and what the true cost of e-commerce fraud is.

Scammers, fraudsters and cheaters are constantly trying to find weak spots in the e-commerce ecosystem. They use stolen identities and credit card information to get the attribution that affiliate sales networks rewards them for. Those sales won’t hold up, though, but the chargebacks don’t affect the scammers – they took the money and ran. That means that it’s the ecommerce sellers who are left paying the real price.

If you’re selling, you get classified by the type of product or service you sell. This is typically referred to as your Merchant Category Code and it assigned to you by the acquiring bank.

Banks sort sellers into high and low risk groups. High risk business examples include travel agencies, tour operators, digital goods, and online pharmacies. Their payment processing costs are going to be much higher compared to a low risk business and are therefore monitored more closely by the processing network when it comes to the amount of chargebacks. They do this because they will be on the hook for any fraud – not you. So if the number of chargebacks is considered too high, you are penalized with even higher fees.
To put it simply, the more chargebacks a seller has, the higher the risk for the payment processor, the lower the merchant’s reputation becomes, and thus the more the merchant has to pay to cover these risks.

The side effects of fraud don’t stop there. The stain of a low reputation may not only affect a seller’s good name, but but payment processors may decide you are too risky and won’t process any of your payments. When fraud remains unchecked and monitored, you may see up to 40% of your transactions declined with a “Do not honor” refusal message. That can happen even when the charge is real! That costs you a lot of business and creates a lot of disappointed customers.

But for your business operations, there’s even more fallout. If you don’t improve the rate of chargebacks, you will wind up being placed in a special monitoring program.

This will increase your fees yet again and processors may require you to enroll in a chargeback mitigation plan. This plan will be reviewed and you will have to pay for the review. This is why it is so important for you as a seller to be proactive when mitigating fraud and subsequent chargebacks.

So, why does fraud even happen? The 2020 True Cost of fraud study by LexisNexis
shows that the use of stolen identities and credit card information is the favorite tool for scammers. They either obtain lower value digital goods (gift cards, games, subscriptions, etc.) which, if successfully bought, can be traded easily for cash, or they make their money by simply being part of the ecosystem where attribution is paid to companies referring or sending new (fake) customers to merchants buying their products and services.

This paints a pretty dark picture when you really think about it, but there is a bright side and some hope for fighting the criminals out there: If you add fraud detection at the landing page and/or your checkout page, you can reduce fraud by eliminating bad actors before the transaction is even processed.

Proper fraud detection monitors how the purchase is made both technically and behaviorally in order to catch it as it is happening instead of days or weeks later.

This is important to you as a seller because all the fees and costs associated with the chargebacks add up. For example, the additional costs are between $15 – $50 per chargeback, which includes a high-risk surcharge of 1% to 2% per transaction, costs for manually reviewing transactions, etc.

To put this in perspective, according to a 2021 survey by LexisNexis, for every $1 of fraud, sellers in the US pay $3.60. This is higher than it was pre-COVID, when the cost was $3.13 for every $1. (+15%). These are additional costs on top of the usual transaction fees and the risk of losing business all together.

Preventing a fraudulent transaction from happening without having false positives is the silver bullet your e=commerce platform needs. SecureLead fraud detection gives that to you by working in real-time. It enables you to decline or park a transaction before processing, or challenge the customer with an additional security check. And this can be done at scale without the need for direct human intervention.

Ecommerce fraud detection saves you a ton of money, lowers fees, and minimizes fines. It also increases you conversion rate because having and retaining a good reputation is acknowledged by an increased acceptance rate of your transactions.