Merchant Fraud Practices Lead To Increased Costs

By Pete Rizzo (@pete_rizzo_)

Thirty percent of domestic merchants and 57 percent of international merchants do not conduct any form of pre-fraud screening prior to gateway authorization, a new study from fraud prevention specialist SecureBuy and eCommerce platform provider Magento revealed.

Of the merchants who reported utilizing fraud screening tactics, the report found 40 percent rely on manual reviews for at least some of their transactions, a process it cited as being prone to error and increased costs.

The 10-page study, which will be reviewed in an accompanying webinar on October 22, asked 378 Magento merchants detailed questions about their anti-fraud efforts and the strategies they employ to fight payment fraud. The study concluded that while merchants continue to struggle with fraud, they are making progress toward finding more advantageous solutions.

“Merchants are becoming aware of the technologies currently available to help reduce, and in some cases, completely remove the need for manual review,” the report authors said.

SecureBuy and Magento further detailed the challenges today’s merchants are facing, diving deep into new data that shows how merchants are combatting, and in some cases, struggling to combat, chargebacks and card-not-present (CNP) transactions.

For more on how merchants and payment processors are protecting themselves from the increasingly complex world of payment fraud, we break down the “SecureBuy-Magento 2013 Fraud Report” in this PYMNTS.com Data Point.

CNP Merchants Pay Big Fraud Costs

The report began by underlining the importance of fraud protection, finding that card-not-present (CNP) merchants are now paying $3.10 in costs for each dollar of fraud lost. Partly because of this, the study suggests these merchants are beginning to migrate away from traditional fraud screening and to payer authentication services. In total, 40 percent of all merchants now report using such services.

Payment authentication services were more common among international merchants, 64 percent of which indicated they used these solutions. Notably, only 32 percent of merchants with revenues of more than $25 million reported using payer authentication.

The following chart illustrates how merchants of all types are using pre-fraud screening tactics to reduce processing expenses.

International Merchants Lead Automation Migration

The report also took a look at which type of fraud screening solutions merchants are using. Notably, only 20 percent of merchants indicated that all of their fraud solutions were automated, compared to 30 percent of international merchants.

“The manual review of questionable transactions is costing merchants millions of dollars: there is a serious need to automate the fraud screening process,” the report authors stated.

A closer look at the data, however, suggests merchants are migrating to these more effective solutions. Sixty-one percent of merchants were found to only manually review 10 percent or less of their transactions.

Visa Users Generate Most Chargebacks

SecureBuy and Magento revealed new data on chargebacks, uncovering that the majority of chargebacks still come from credit card users.

The study found that merchants respond to only 54 percent of all chargebacks, and that nearly 50 percent of chargebacks go unanswered. This, according to the report, leads merchants to lose millions in revenue.

For more details on how merchants are handling chargeback requests, as well as how the terms and conditions they use are affecting chargebacks, download a full copy of the study and register for SecureBuy’s upcoming webinar here.