9 Deadly Costs of Fraud

Article republished with permission from Kount.com

Do you know all of the 9 Deadly Costs of Fraud? While many are apparent, others are less obvious and can escape the notice of even the most careful observers. And while some fraud costs are not as significant as others, taken together they can punch a sizable hole in your bottom line…potentially millions of dollars (!) for large eCommerce merchants.

Let’s start with the easy-to-spot costs:

1. Lost/Stolen Merchandise. The most obvious cost of fraud is lost and stolen product. In fact, fraud losses as a percentage of revenue NEARLY DOUBLED in 2015, up from 0.68% to 1.32% for all merchants.¹ What’s more, the higher the value of the transaction, the more likely it is to be a chargeback and the bigger the cost of the lost/stolen merchandise. For example, a $2,500 order is 10X more likely to incur a chargeback than a $1,500 order.²
2. Chargeback Fees and Fines. On top of lost revenue and stolen merchandise, you also get dinged with fees and fines by processors. Penalties can range from $15 – $100 per chargeback…the higher your chargeback rate, the higher your fees and penalties.³ And if you exceed a defined chargeback threshold for a period of time, you can wind up in an Excessive Chargeback Program, incurring additional monthly fees (sometimes thousands of dollars until your chargeback rate is under control).
3. Manual Reviews. Last year, nearly 1 in 3 merchants complained that fraud prevention was too costly, up from 1 in 5 merchants in 2014.⁴ This dissatisfaction is driven by four consequences of the “average” manual review process. First, there’s wasted time. On average, 75% of manually-reviewed orders ultimately get approved.⁵ If 3 out of 4 of your manual reviews turn out be unnecessary, you’re paying for a lot for unneeded headcount. Second is slower growth. If you’re holding back on entering new markets because you can’t justify the cost of adding reviewers to handle the projected increase in manual reviews, you’re losing sales to competitors who aren’t held back. Third: reduced flexibility. Manual reviews are not feasible on all transaction types. For example, online gaming websites can’t manually review in-game “buy/try” offers. So they forgo the potential sales to avoid exposing themselves to fraud costs. If you’re saying “no” to orders because manual reviews just aren’t possible, you’re missing out on sales. And finally, there’s reduced profits. All the factors above drive down your profitability.
4. Do-It-Yourself Fraud Prevention. If you’re like most merchants, fraud prevention was probably near the bottom of the budget list when you first started out, so the systems you put in place were lowest cost and just “good enough.” But as you grew, you had to keep adding new applications, new software, and new resources to fend off fraud. Not to mention trying to keep up-to-date with fast-moving developments in fraud (for example, the recent, dramatic migration of fraudsters to CNP fraud due to the October 2015 implementation of EMV/Chip-and-PIN⁶). Now you’re on a treadmill, continuously upgrading hardware, software and integrations that requires constant attention, investment and manpower. In other words, you’re paying for a hole surrounded by network cables into which money is poured.

These first four costs are fairly obvious. But what about the not so easy-to-spot costs? For example, turning down orders on suspicion of fraud certainly avoids the costs of chargebacks and lost/stolen merchandise. But if you’re turning down orders that look suspicious yet are actually valid, the loss of this foregone revenue can be more costly than fraud itself.

5. Declined Orders.The decline rate for US eCommerce merchants averages 2.6%. Yet the actual incidence of fraud in the US averages 0.9%.⁵ Turning away that many good sales for fear of fraud is a huge hidden cost. If you apply this 1.7% “fear of fraud” sales gap to all the US eCommerce and mobile sales over the past few years, you get $14.5 billion on lost US sales!⁷ Or stated another way, the average $25 million/year eCommerce merchant will turn away more than 9,000 valid orders every year that they shouldn’t.⁸
6. Cancelled Orders. If you’re a typical eCommerce merchant, your manual reviewers will cancel approximately two times more orders than they should.⁵ On top of that, consider the fact that you invested $14-$109 to bring those jilted buyers to your eCommerce website.⁹ That constitutes a double whammy: 1) loss of revenue from the cancelled sale and 2) loss of the marketing dollars you spent to win the order. To add insult to injury, you will most likely lose the lifetime value of that customer, as he or she probably won’t want to purchase from you again.

In addition to these huge, hidden costs of missed sales, there are the transactional costs of fraud:

7. Lost Shipping Expense. As noted earlier, the larger the order, the more likely it is to be fraudulent. Well, larger orders almost always have higher shipping costs. In addition, orders with priority/overnight shipping—again higher shipping costs—are more likely to be fraudulent (yet provide the least opportunity for you to review and catch the fraud). And don’t forget all the hidden costs that go into shipping lost and stolen merchandise. For example, fully-burdened wages for warehouse workers (including Social Security, taxes, Workmen’s Comp, etc.) range from $12 to $20 an hour. And what about boxes, bubble wrap, labels, and tape? None of that is free.
8. Wasted Labor Time. You often end up paying your most expensive employees to resolve the fallout from fraudulent transactions. For example, representments, investigations of chargebacks, and audits to uncover potential fraudulent activity all require the expertise of employees with the highest hourly costs. And even if you assign low-level staffers to handle complaint phone calls from non-customers whose credit cards have been fraudulently used to make purchases from you, you’re still losing money. Finally, prosecuting fraudsters—while a proven way to dramatically reduce attacks—takes your employees away from productive, revenue-generating activities.
9. Higher Transaction Fees + Escrow Accounts. Merchants considered “high-risk” can be charged higher transaction costs than “low-risk” merchants. But what constitutes “high-risk” varies from processor-to-processor and merchant-to-merchant, so it’s difficult to know if you’re approaching the danger zone. And while an additional 0.05%/2¢ per transaction may seem fairly insignificant, those costs apply to 100% of your transactions, not just fraudulent ones. Merchants with $50 million in revenue could lose $45,000, $80,000, $140,000 or more each and every year due to higher costs caused by fraud. Further, processors may require escrow accounts for “high-risk” accounts, tying up thousands of dollars of your money.

The best way to get a handle on the 9 Deadly Costs of Fraud is to first identify your current costs and expenses. That’s where the WHAT’S THE “F” WORD [FRAUD] COSTING YOU? Calculator comes in. It provides detailed breakouts of the deadly costs of fraud — based on your actual numbers. You can see exactly where the holes are (or are not) in your fraud prevention efforts. And you’ll also see solid projections about how those costs and expenses might look if you were using Kount.

Even if you decide you don’t want to learn more about Kount, you’ll still have actionable insights that you can use to improve your fraud prevention operations. We’re more than happy to provide this valuable information completely free of charge and with no obligation, because our mission has always been and will always be: “Boost Sales, Beat Fraud.”

SOURCES:

1 The Fraud Practice, Payment Trends and Security, David Montague

2 https://www.quora.com/Online-Payment-Gateways-and-Processing/What-is-the-average-chargeback-rate-in-the-US

3 http://www.fraudpractice.com/fl-paychargeback.html

4 2015 LexisNexis® Risk Solutions True Cost of Fraud^SM Study

5 ONLINE FRAUD MANAGEMENT BENCHMARKS, North America Edition (CyberSource)

6 A PERFECT STORM OF FRAUD: THREE MAJOR TRENDS CONVERGE TO UNLEASH A TSUNAMI OF CNP FRAUD, Kount eBook

7 http://www.statista.com/statistics/187443/quarterly-e-commerce-sales-in-the-the-us/ andhttp://www.statista.com/statistics/276826/m-commerce-retail-sales-in-the-united-states-segment/($857 billion total, Q1 2013 – Q5 2015)

8 $45 average order x 1,522 daily transactions = $25 million annual sales

9 http://www.marketingsherpa.com/article/chart/ecommerce-acquisition-cost-per-customer

About Kount

Kount helps businesses boost sales by reducing fraud. Our all-in-one, SaaS platform simplifies fraud detection and helps online businesses accept more orders. Kount’s turnkey fraud platform is easy-to-implement and easy-to-use. Kount’s proprietary technology has reviewed billions of transactions and provides maximum protection for some of the world’s best-known brands. Merchants using Kount can accept more orders from more people in more places than ever before. For more information about Kount, please visit www.kount.com.