The 10 Deadly Costs Of Fraud [INFOGRAPHIC]

An 80% increase in CNP fraud projected. In the US alone, CNP fraud losses are projected to soar $3.2 billion to a record $7.2 billion by 2020 (up from $4 billion in 2016). The associated costs of fraud continue to be high, too.

Manual Reviews: Too much expense for too little impact? Nearly 1 in 3 merchants (29%) complained that combatting fraud cost too much in 2015, up from 1 in 5 merchants in 2014.

81% of organizations conduct manual reviews, with 27% of orders manually reviewed
25% of fraud prevention costs dedicated to manual reviews
Four problems with the “typical” manual review process:
- Lost time. Unneeded manual reviews drive unnecessary headcount costs.
- Slower growth. Why avoid new markets/channels due to the cost of adding more staff to handle more manual reviews?
- Less flexibility. Manual reviews are not feasible for certain features, like in-game “buy/try” offers, stifling potential sales.
- Reduced profits. All the factors above drive down profitability.

DIY Fraud Prevention: There’s a reason you don’t build your own car. Effective fraud prevention is a complex undertaking that requires sophisticated tools and techniques developed by technical experts. Do-it-yourselfer’s may think they’re saving money, but they actually:

Incur needless costs developing/buying, integrating, and supporting ad hoc software tools and expensive hardware
Lose time that could be spent building their business instead of trying to invent their own fraud prevention technology
Risk exposing their business to profit-reducing or even business-ending fraud attacks

Declined Orders: Just say no to perfectly good orders? Turning away good sales for fear of fraud is a huge cost. Decline rates typically average 2.6% for domestic orders and range even higher for international transactions. Yet the actual incidence of U.S. fraud averages around 0.9%.

Put another way, an eCommerce merchant averaging 300 daily transactions declines nearly 1,000 valid orders every year that they shouldn’t. Just think of all the marketing dollars spent to get those 1,000 people to buy…only to (wrongly) turn them away.

Nearly 50% of transactions are flagged for fraud by automated systems
46% of the transactions flagged for fraud by automated systems end up being manually reviewed2

Cancelled Orders: “Thank you for ordering, please never come back.” Delays from manual reviews cause customers to cancel or abandon their orders. What’s worse, merchants will cancel approximately two times more orders after manual review than they should. As you can imagine, those jilted buyers are likely to take their business to competitors.

24% of all cancelled transactions turned out to be false positives
Vast majority of manual reviews are unnecessary, with 75% of manually-reviewed orders approved (average)
9 out of 10 manually-reviewed orders are ultimately approved by half of all merchant

Lost and Stolen Merchandise: Lost and stolen product is a direct hit to your bottom line. Fraud losses as a percentage of revenue NEARLY DOUBLED in 2015, up from 0.68% to 1.32% for all merchants

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, pick up in store” process already accounts for 25% of brick-and-mortar lost and stolen merchandise

Chargeback Fees and Fines: Adding insult to injury. With fraudulent transactions, not only do you lose revenue and merchandise, you also get dinged with fees and fines by processors.

Merchants that exceed a defined chargeback threshold for a period of time are placed in an Excessive Chargeback Program, incurring additional monthly fees (sometimes thousands of dollars until their chargeback rate is under control)
Penalties can range from $15 – $100 per chargeback…the higher your chargeback rate, the higher your fees and penalties
Excessive chargebacks can eventually lead to termination of a merchant account, possibly causing you to go out of business

Lost Shipping Expense: To ship or not to ship. You invest a lot money shipping lost and stolen product. What’s worse, shipping costs on fraudulent orders are almost certain to be higher than on valid orders.

Large orders (>$2,400) usually have the highest shipping expense and are 10X more likely to be fraudulent
Orders with the highest shipping costs—priority/overnight—are more likely to be fraudulent, yet provide the least opportunity for you to review and catch fraud
Other costs go into shipping lost 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 boxes, bubble wrap, labels, and tape are not free.

Wasted Labor Time: Paying employees to resolve fraudulent transactions is non-productive and frustrating. You lose money every time your employees have to deal with fraudulent transactions and chargebacks:

Representatives, investigations of chargebacks, and audits to uncover potential fraudulent activity are time-intensive and typically involve employees with the highest hourly costs
When your staff has to handle complaint phone calls from non-customers whose credit cards have been fraudulently used to make purchases from you, you lose money
Prosecuting fraudsters—while a proven way to dramatically reduce attacks by fraudsters—takes your employees away from productive, revenue-generating activities

Higher Transaction Fees + Escrow Accounts: Guilty unless proven otherwise. Higher processing costs and the costly requirement to maintain an escrow account are direct results of excessive chargebacks and fraudulent transactions:

Interchange Reimbursement Fees and Assessments are assessed every time you run a transaction (e.g., 2.5% + .10) and represent the biggest cost of a merchant account
Merchants considered “high-risk”can be charged higher transaction costs than “low-risk” merchants
What constitutes “high-risk” varies processor-to-processor and merchant-to-merchant, so it’s difficult to know if you’re approaching the danger zone
Processors may require escrow accounts for “high-risk” accounts, tying up thousands of dollars of your money