Fraud’s Financial Impact on the Online Retail Market

Online merchants are spending an estimated 8% of their income on measures designed to reduce fraud. This information comes from a recent large survey of online retailers conducted by Javelin Strategy and Research LLC. The survey included 497 large online retailers across the United States that have been in business for at least 12 months as of the time of the survey. Each of these retailers had at least $1 million in annual revenue.

How the Type of Retailer Impacts Fraud Expenses

In this survey, 155 of the retailers sold physical items, 142 sold digital items or services and 200 sold both physical and digital items. The median annual sales of these retailers was $136.1 million.

For the retailers only selling digital items, such as information products or cryptocurrency, fraud prevention costs were 7.7% of their annual revenue. This was an increase from 6.0% for the previous fiscal year. In cryptocurrency trading for example, this equates to around $9 million each day that is lost to fraud. A lot of this fraud comes from phishing scams. The scammers may find someone on a P2P exchange looking to sell BTC to INR. The person is sent an email with a link to a fake page that looks just like a real exchange where they’re asked to send Bitcoin for the exchange. This is why it’s crucial to use a trusted exchange for all transactions, as well as, carefully watch for suspicious emails and links.

For retailers of physical goods, the costs were much higher. They spent an average of 21% of their operational expenses on fraud prevention. That was up from 15% for the previous fiscal year.

What Drives the Costs of Fraud Management

Fraud management costs are not high because of fake purchases. Most of these costs are associated with employee wages, software and technology used in fraud prevention. The costs also include chargeback losses. Retailer errors of false positive fraud reports also accounted for a considerable amount of these fraud prevention costs. A typical retailer in this survey lost 1.5% of their annual revenue on erroneous reports of fraud. There are costs associated with credit card transaction fees and bank transfer fees.

Other Factors in High Fraud Prevention Expenses

Store-based retailers using EMV trigger more online fraud because the chip-enabled cards make it more difficult to do in-person fraud. Most online retailers (75%) just require a username and password for account access. Only 45% of retailers use two-factor authentication.

How Effective Fraud Prevention Measures Are

Since retailers are spending so much on fraud prevention, it’s important to know if their efforts are paying off. A typical merchant in the survey lost $462,355 per year as a result of unauthorized transactions. That was a 33% increase from the previous fiscal year. Other types of fraud included $284,797 to account takeover or identity theft fraud and $322,602 to friendly fraud. A “friendly fraud” is when a person says their package wasn’t delivered, an item in their order wasn’t included or they received an empty package. One marketing officer said that fraud costs will keep going up as eCommerce grows in popularity.

Cost-effective Tools for Fraud Prevention

New online retailers are more focused on sales than fraud protection. However, there are some cost-effective tools that could help. Biometrics and two-factor authentication are good options. Another is a third-party customer risk assessment tool. Using a third-party tool could save a retailer thousands of dollars or more every year. However, only about 24% of online retailers currently use a third-party fraud prevention service. Now is a good time for an online retailer to consider third-party administration of fraud prevention services.