The ‘Nine Deadly Costs Of Fraud’

Online merchants know very well that fraud costs them in many ways – in chargebacks, in false positives, in the friction that’s introduced at checkout that can cost a sale.

But there’s nothing like putting the cost of fraud into the parlance that merchants know really well: units sold. Something that Kount says its data shows that merchants must make eight additional sales to make up for the cost of one fraudulent order.

Kount’s latest report “Calculating The 9 Deadly Costs Of Fraud,” does the math – and  emphasizes how not managing fraud digs heavily into profits.

Kount breaks those nine “deadly costs” into three categories: fraud mitigation expense, lost sales and transactional costs – and then further separates those costs into “visible costs” vs. “hidden costs.”

Fraud Mitigation Breakdown: The Nine Costs

First Cost: Manual Reviews

Kount’s research shows that nearly one in three (29 percent) merchants reported that mitigating fraud through automated services cost too much.  As a result, more are turning toward manual reviews In fact, 81 percent of organizations reported conducting manual reviews, with 27 percent of actual orders being manually reviewed.

But those manual reviews become costly, as merchants reported that 25 percent of their fraud prevention costs were dedicated to manual reviews.

The problems with manual reviews, of course, is that they take time. It’s not scalable unless you add people, which is expensive, there’s less room for flexibility, and in the end, Kount says, the bottom line suffers.

According to their calculations, the annual cost of manual reviews for a small merchant is roughly $378,000, while a medium-size merchant’s costs can run around $825,000.

Second Cost: Do-It-Yourself Systems

“There’s a reason people don’t build their own cars. Effective fraud prevention is a complex undertaking that requires sophisticated tools and techniques developed by technical experts,” Kount writes in its report, citing what that DIY approach actually costs — which includes added risk for taking on the process themselves since it could lead to business-ending fraud attacks.

Third Cost: Decline Orders

Kount’s research shows that fraud can sometimes get in the way of a good sale.

What the research shows is that decline rates average 2.6 percent, but the actual incidence of fraud is only around .9 percent. That points to a large fraction of good sales actually being turned away. In fact, Kount’s research shows that merchants cancel two times more orders than they should (even after manual reviews have been conducted).

While nearly 50 percent of transactions are flagged for fraud by automated systems, 46 percent of transactions flagged for fraud by automated systems are eventually manually reviewed.

That translates into an online merchant who averages 300 daily transactions declining 1,000 valid orders annually. A revenue killer, indeed.

Kount: Calculating The 9 Deadly Costs Of Fraud

Fourth Cost: Canceled Orders

This is another hidden cost of fraud, caused by the lack of implementation of proper fraud practices.

What the data show is that 24 percent of all canceled orders ended up being false positives. And of the manual reviews conducted, a majority were unnecessary since 75 percent of those ordered were eventually approved, the report indicated. Moreover, nine out of 10 manually reviewed orders were eventually approved by 50 percent of all merchants.

That adds up to a lot of time and money spent on verifying transactions that were eventually approved.

Fifth Cost: Lost and Stolen Merchandise

This is a direct blow to the bottom line. In fact, fraud losses as an overall percentage of revenue nearly doubled in 2015 as a result of lost or stolen products, according to Kount. The higher the value of the transaction, the more likely it is to be fraudulent and the bigger the cost of lost merchandise.

Although adopted by relatively few retailers, the “buy online, pickup in-store” process already accounts for 25 percent of lost and stolen merchandise for brick-and-mortar shops.

Sixth Cost: Chargeback Fees and Fines

A fraudulent transaction can also get pricy when a merchant is faced with fees and fines from processors. These fees can range between $15-$100 for each chargeback. And excessive amounts of chargebacks may eventually lead to that merchant account being terminated with the processor.

“Merchants that exceed a defined chargeback threshold for a period of time are placed in an Excessive Chargeback Program, incurring additional monthly fees,” Kount reports.

Seventh Cost: Lost Shipping Expenses

Because shipping costs on fraudulent orders tend to be higher than on valid orders, this is another “deadly” cost of fraud. Kount advises that large orders usually have the highest shipping expense and are 10 times more likely to be fraudulent. And orders with the highest shipping costs — priority/overnight — are more likely to be fraudulent, yet provide the least opportunity for merchants to review and catch fraud.

Eighth Cost: Wasted Labor Time

Time is money, as they say, and paying employees to resolve fraudulent transaction is both unproductive and frustrating. Money is lost and it takes time for those employees to track down fraudulent transactions and chargebacks. This is especially true when it involves audits, staff training and taking endless calls, along with the prosecuting of fraudsters.

Ninth Cost: Higher Transaction Fees (And Escrow Accounts)

Finally, Kount says that fraud is the tax that can keep on taxing in the form of higher processing costs that are a direct result of excessive chargebacks and fraudulent transactions. For instance, Interchange Reimbursement Fees and Assessments are assessed every time a transaction is run and represent the biggest cost of a merchant account. Merchants considered to be “high-risk” can be charged higher transaction costs than “low-risk” merchants. In addition to higher transaction costs, processors can require merchants to park $50,000 or more in an escrow account to cover what they deem “excessive chargebacks.”

What’s The ‘F’ Word Actually Costing?

$7.2 billion by 2020.

That’s the projected costs of card-not-present fraud losses, which are expected to rise $3.2 billion by 2020 to reaching a staggering $7.2 billion. This is according to LexisNexis research.

When it comes to fraud, the cost of doing nothing appears to be quite a bit costlier — at least in the long run. According to Kount’s count, the actual cost of fraud losses are $2.27 for each $1 of eCommerce fraud. For mobile that cost is a bit lower, with the actual fraud cost for every $1 of mobile commerce fraud costing $2.08.

Kount’s online calculator – What’s The “F” Word Actually Costing Merchants – is intended to help merchants assess the degree to which these “nine deadly costs” of fraud are hurting their own bottom lines.

And that’s not a risk merchants can afford to take. And as it turns out, they also can’t afford to do nothing when it comes to fraud mitigation, as doing nothing appears to cost more than actually doing something. At least that’s what the data show.

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Click here to download Kount’s full report on the costs of fraud.