Fraud is a serious problem for e-commerce businesses. Every time a merchant loses revenue due to fraud-related chargebacks, they're losing far more than the cost of the original transaction. The costs of acquiring the customer, marketing, and shipping the product are casualties as well, along with payment processing fees and overhead expenses.
The total amount lost is often up to two to three times the transaction amount. Fraud prevention is key to the health of any business in the e-commerce sector.
On average, online merchants are losing 8% of their annual revenue to fraud, and rates of e-commerce fraud keep on growing. It's an unfortunate fact that once a company falls victim to e-commerce fraud, they're more likely to be targeted again. Once a vulnerability has been identified, fraudsters will keep exploiting it until the company catches on to them, perpetrating the same type of fraud as many times as they can. It is therefore extremely important for companies to be smart about taking precautions against fraud.
There are two main categories of e-commerce fraud that result in chargebacks to the merchant:
Merchants may combat fraud with external tools and services provided by outside companies, or by implementing internal strategies and protocols designed to screen out and eliminate the potential for fraud to occur.
Some of the external tools merchants can use include:
The following are some of the internal protocols that can help reduce fraud:
Friendly fraud is difficult to prevent. By definition, every instance of friendly fraud arises from a legitimate transaction—there's no way to predict when it will occur. However, there are safeguards that can mitigate its impact on your bottom line.
The first and most important line of defense is your customer service. Here are three things to focus on:
These can all go a long way towards encouraging customers to work through their issues directly with your company, rather than complaining to their bank and requesting a chargeback.
It can be worthwhile to blacklist customers who perpetrate friendly fraud. A customer who uses chargebacks as a shortcut to getting their money back, and doesn't care about the disproportionate impact on the merchant they're shopping from, is rarely worth keeping as a customer.
You can look at merchant error chargebacks as fraud you accidentally perpetrate on yourself—and that should be the easiest to eliminate.
Using reliable Customer Relationship Management (CRM) software can help you sort out many of the common mistakes that result in invalid transactions.
One of the simplest things to do is monitor your incoming orders for duplicates or mismatched addresses. Duplicate orders can usually be identified and refunded immediately, but it can be worth the time to contact customers who place orders with address mismatches or other red flags to ensure that the order they've placed is correct.
Any time you identify an incorrect order, you'll want to issue a refund as promptly as possible so that the customer has no reason (or opportunity) to dispute the charge with their bank.
When the proper steps are taken, you can eliminate up to 70% of fraudulent chargebacks. This can save you significant amounts of revenue and protect your merchant account from reaching your bank's chargeback threshold.
Better yet, many of the protocols and procedures that reduce friendly fraud and merchant error also provide a better shopping and customer service experience for your customers, making fraud prevention efforts a win/win proposition for everyone involved.
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