By Rafael Lourenco, EVP, ClearSale
Small e-commerce businesses face particular challenges when it comes to fighting fraud. One quarter of SMB respondents to a survey reported by Forbes in 2017 had experienced at least one chargeback, and eight percent had incurred more than 10 fraudulent transactions. Because fraudsters can rack up fraudulent charges so quickly with vulnerable merchants, because most SMBs have limited cash, and because botnet fraud can speed up the process even more, waiting to see if your business gets hit can be a costly error. By knowing how to assess your risks, how fraud can impact your business, and how to layer protective practices, you can give your small online business an edge in the fight against CNP fraud.
Understand your risk profile
According to the 2017 Lexis Nexis True Cost of Fraud survey, e-commerce businesses suffer more fraud attempts than traditional retail, with up to 43% of attempted e-commerce transactions being fraudulent during peak sales seasons. Small e-commerce firms were found to be more likely targets for CNP credit card fraud, the kind of fraud that results in chargebacks when cardholders discover the fraudulent purchases. The survey also found that online sellers often unwittingly decline good orders, which also costs them money as well as customer loyalty.
What you sell affects your risk profile, too. If your business sells digital goods such as online gift cards, it’s also more likely to be targeted by fraudsters. Lexis Nexis said that’s due to the shorter time available for transaction verification before the product is downloaded or accessed online. Sellers of luxury items and small, popular items that are easy to resell are frequent fraud targets, too.
If your business is not strict about tracking fraud, it may also be at higher than average risk. Lexis Nexis found that smaller businesses “are less vigilant in tracking fraud.” Thieves know this, too. And while mid to large businesses incur more fraud as a percentage of their total sales, smaller businesses may suffer more as a result of fraud, thanks to lower revenues and cash flows to counteract fraud losses.
Understand the consequences of fraud
Successful CNP fraud causes near-immediate problems for merchants, in the form of chargebacks from defrauded cardholders. These chargebacks result in lost revenue, shipping fees, and products, as well as chargeback fees. Disputing chargebacks can take your time away from focusing on the core business.
There are longer-term consequences to CNP fraud and chargebacks, too. When a fraud attempt succeeds, thieves may return to commit more fraud in the same online store or share the store information with criminal colleagues. Fraudsters may even deploy bots to automate the fraud process and speed it up, resulting in large losses in a very short period of time.
Multiple chargebacks can raise a merchant’s chargeback ratio (the number of charged back orders compared to total orders) to the point where the payment processor starts charging higher per-transaction rates. If the chargeback ratio rises high enough or fast enough, the processor or bank may close the account with little advance notice to prevent further losses. At that point, the merchant is in real trouble.
Reducing fraud chargebacks with tracking and layers
To avoid this worst-case scenario, it’s important to track your data to see where your fraud protection works and where it needs to improve. Lexis Nexis found that just 19% of e-commerce sellers tracked both attempted and completed fraud. Both are crucial for a realistic assessment of your fraud prevention program. The Lexis Nexis report also found that more than 70% of small e-commerce businesses weren’t tracking fraud by channel. Again, this data is important for an accurate picture of what works and what doesn’t. Data can also help you identify your false decline rate and reduce it. Small e-commerce merchants surveyed by Lexis Nexis declined 45% of their orders—and 22% of those were false positives.
Next, each business needs the right mix of layers to protect against the fraud it faces now to address new fraud patterns as they arise. These layers can include everything from basic card verification value checks to geolocation, real-time transaction scoring, and more. How many layers do small businesses need? Lexis Nexis found that e-commerce businesses that layered five to 10 identity and payment fraud prevention tools had lower fraud costs as a percentage of revenue than similar businesses that used fewer solutions.
As card-not-present fraud rates rise and fraud schemes grow more sophisticated, SMBs must know the fraud landscape and their place in it. Tracking fraud metrics, using an appropriate mix of security layers, and adjusting protection as needed can help small e-commerce businesses avoid fraud-related chargebacks and focus on their core business.
Rafael Lourenco is Executive Vice President at ClearSale, a Card-Not-Present fraud prevention operation that protects e-commerce merchants against chargebacks. The company’s flagship product, Total Guaranteed Protection, is an end-to-end outsourced fraud detection solution for online retailers. Follow on twitter at @ClearSaleUS or visit http://clear.sale/.