2024 is just around the corner. Now’s a good time to reflect on the current state of the eCommerce space, and gauge how you might prepare for what’s ahead. That applies to every facet of your business; today, though, let’s focus on fraud and chargebacks.
In some ways, the self-management of fraud threats has become more feasible in recent years. The fraud detection platforms that are readily available to you can facilitate pattern recognition, for instance, as well as user authentication, analysis of transaction data, and other operations.
At the same time, fraud management has also become much more complex, as we’ll explore below.
The Impact of Fraud on eCommerce in 2024
Scammers are constantly developing new threats to try and circumvent your fraud detection mechanisms. Rudimentary identity theft attacks have given way to more sophisticated account takeover and email compromise tactics. Criminals have even begun to make use of generative AI to engage in presentation attacks by simulating users and tricking biometric tools.
There are institutional speed bumps to consider as well. For example, although they serve a valid purpose, legal frameworks like Strong Customer Authentication have added more red tape to the validation process.
This all raises the billion-dollar question: what’s the financial impact of fraud? The answer varies widely depending on how we contextualize it.
When you process an unauthorized transaction, the valid cardholder has a right to recover their money through the chargeback process. So, each fraudulent transaction which you fail to detect will mean lost revenue. The financial impact of fraud is much broader than just the cost of the initial sale, though.
When a customer files a chargeback in response to a fraudulent transaction, you lose any merchandise shipped, plus overhead costs like shipping, interchange, and other fulfillment costs. You will then get hit with a chargeback fee for every incident. Then, if fraud becomes a persistent problem over time, you may be forced into a fraud management program. You would incur other costly fees, and your banking privileges could potentially be in jeopardy.
According to LexisNexis Risk Solutions, the average eCommerce merchant in the US ultimately lost $3.75 for every $1 of fraud in 2023. So, it’s no surprise that eCommerce losses due to online payment fraud were estimated to reach $48 billion annually by the end of that year; a 17% year-over-year increase. If the trend continues, the cost of eCommerce fraud may reach $56 billion in 2024.
Is First-Party Fraud a Bigger Problem Than Third-Party Criminal Attacks?
Of course, we’re still only looking at one facet of the matter. We must also consider the problem of first-party misuse of the dispute process as well. This phenomenon is sometimes referred to as “friendly fraud.” Contrary to the name, though, it’s far from friendly.
First-party fraud happens when consumers make purchases, but later solicit chargebacks from their banks, often citing reasons that might be unfounded. The veneer of protection provided by mechanisms like fraud scoring and strong customer authentication does nothing to deter the behavior.
Friendly fraud remains widespread. And, it’s a much greater financial drain on the eCommerce space than third-party fraud attacks.
Data from the recently published 2023 Chargeback Field Report was enlightening on this matter. A staggering majority (more than 90% of respondents) indicated that the majority of their chargebacks stemmed from friendly fraud, rather than criminal fraud. Additional data from Visa echoes this sentiment, revealing that a whopping three-fourths of all chargebacks issued could be traced back to first-party misuse.
This is a hard problem to solve, as conventional fraud detection tools and tactics don’t really have any bearing on fist-party fraud. You can respond to friendly fraud through a process called representment. However, given the post-transactional nature of this threat — it doesn’t become “fraud” until long after the purchase — there’s not a lot you can do to prevent it on your own.
Dealing with friendly fraud is going to take a coordinated effort. This will involve merchants, financial institutions, and card networks working together to solve the problem.
How Should the Payments Industry Respond?
There have been some positive developments in recent years. Tools provided by Mastercard and Visa, like Consumer Clarity and Order Insight, have made it easier to respond quickly and communicate more effectively with financial institutions. Merchants can now instantly transmit transaction data to banks, providing insight into purchases and helping avoid disputes in many cases.
New updates are coming to these platforms as well, like the Compelling Evidence 3.0 initiative which Visa is putting into place. CE 3.0 will update the criteria used to dispute “fraudulent” purchases. This may eliminate many friendly fraud claims on the Visa network before they happen.
Customer education is also going to be a cornerstone of any long-term solution for first-party fraud. Although, that’s going to require substantial collaboration. In the meantime, merchants like you should start by examining internal chargeback data to determine the sources of disputes. You can then deploy solutions like fraud screening, changes to customer service policies, and optimizing fulfillment practices, just to give a few examples.
To illustrate, here are a few best practices that can help in the fight against friendly fraud in 2024:
✓ Detailed Transaction Descriptors
Use clear and recognizable merchant names and descriptions on billing statements to help customers identify transactions and reduce chargeback requests due to unrecognized charges.
✓ Transparent Return Policies
Clearly state your return and refund policies on your website and during checkout. Offering hassle-free returns can deter customers from seeking chargebacks as a route to reimbursement.
✓ Prompt Customer Service
Ensure your customer service team is easily accessible and trained to resolve disputes efficiently. Quick and courteous responses can often prevent customers from escalating issues to their banks.
✓ Proactive Communication
Regularly update customers about the status of their orders, including shipping details and delivery timelines. Promptly notify them of any delays or changes.
✓ Multi-Factor Authentication
Introduce an extra layer of security during the checkout process. This could involve sending a one-time password (OTP) to the customer’s registered mobile number or email before confirming the purchase.
✓ Clear Product Descriptions & Images
Ensure product descriptions and images on your website are accurate and clear. This can prevent chargebacks related to items not matching their descriptions.
✓ Capture Customer Consent
Always obtain and store customer consent or acknowledgment for transactions, especially for subscription-based services or recurring charges.
✓ Regularly Review Transaction Data
Use advanced analytics to monitor and review transaction data. This will help you identify any developing patterns that might indicate friendly fraud.
The Future is Now
Remember: once a dispute progresses to the chargeback stage, there’s not much you can do to salvage that relationship. This is why it’s best to do whatever one can to prevent chargebacks before they happen.
Navigating chargebacks in 2024 will demand a blend of innovation, collaboration, and vigilance. As friendly fraud continues to overshadow even cybercrime, you need to recalibrate your strategies, ensuring your efforts are not just about recovery, but primarily about prevention and education.
Solutions will vary from one business to another. As with most decisions, though, the best indicator is return on investment. You need to carefully consider how much you stand to lose, then what it will take to avert that loss. In most cases, it’s literally a question of pennies on the dollar.
