With digital sales reaching an all-time high, retail startups are cautioned to beware of rising chargeback fraud, and advises taking proactive measures to prevent losses.

Retailers must not only be experts at creating revenue opportunities, but they’re facing greater challenges in retaining customers, since many online competitors have leveraged customer service policies as a way to entice buyers.

As online and traditional card payments are on the rise, dispute mitigation and risk management firms warn that the growing proportion of online sales may be accompanied by an unexpected rise in related fraud losses due to increased chargeback activity.

Study: True Cost of Fraud

According to the LexisNexis True Cost of Fraud Study, large eCommerce merchants lost an average of 1.39% of revenue to fraud in 2015—a substantial increase over the 0.85% average fraud loss in 2014, and more than 2.5 times higher than the 2013 estimate of 0.53% average fraud loss.*

While those percentages may seem relatively small, they can translate to tens of millions in losses for large eCommerce merchants; and with the percentage of fraud loss steadily rising each year, the trend suggests that fraud will continue to account for growing financial losses.

“Managing fraud in the online channel is far more challenging than in brick-and-mortar stores, particularly since EMV cards were introduced to thwart point-of-sale credit card fraud,” explained Monica Eaton-Cardone, co-founder and Chief Operating Officer of risk management firm Chargebacks911.

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Do Customer-Friendly policies Lead To More Fraud?

“It’s the age of consumer entitlement, and there’s no going back,”Eaton-Cardone stated. “This means that retailers must not only be experts at creating revenue opportunities, but they’re facing greater challenges in retaining customers, since many online competitors have leveraged customer service policies as a way to entice buyers.”  Startups must be mindful of the potential negative impacts of such relaxed policies.  Even more established online retailers need to heed the risk of liberal customer-friendly policies.

For example, retail brands such as Zappos allow customers to return items within 365 days of purchase for a full refund, while Amazon is now facing competition from Walmart in the online environment it created. Eaton-Cardone likens the current situation to the one-upmanship of gas station wars; 24-hour delivery was followed by Saturday and Sunday service, and today consumers can receive orders at their doorstep within the hour.

“Unfortunately, the evolution of consumer behavior has changed the customer service climate for good,” she explained.  Consumers will often resort to chargebacks for a refund if they’re unsatisfied with an online retailer’s customer service.

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Fraudulent Chargebacks

Some customers have gone on to file fraudulent chargebacks as a way to obtain goods for free. In fact, Chargebacks911 has found that half of those who get away with a fraudulent chargeback will file another within 60 days, thereby multiplying each chargeback loss by a factor of 1.5.

To overcome these challenges, the risk management company advises all eCommerce merchants to provide the level of service which consumers have come to demand:

● Alternative customer support options, since today’s digital consumers may resort to chargebacks if email or online chat are not available.

● Rapid delivery options, for consumers who demand immediate gratification.

● Traceable shipments, so customers can track their packages and merchants have proof of delivery.

Effective risk mitigation and chargeback management are essential to prevent card-not-present (CNP) fraud, and have evolved to include retention analysis and policy review. To stay ahead of the increases in fraudulent claims, some startups may soon need to introduce additional policy changes to address online fraud.

 

* LexisNexis. 2015 LexisNexis True Cost of Fraud Study; September 2015. lexisnexis.com/risk/insights/true-cost-fraud.aspx